After EY launched its plan to separate out its consulting business last year, partners boasted it had worked on three-quarters of recent US corporate spinouts, had 19 under way at the time and that “Project Everest”, as the plan was known, was just number 20.
On paper then, it was an old hand, so the problems with Everest that exploded into the open this week are a worry for the Big Four firm. The threat is not just to the reputation of EY’s deal advisers but to that of the wider business, which advises governments and companies around the world on strategy and governance.
The next few weeks will be critical in deciding whether Everest will survive. EY’s US boss Julie Boland blindsided the global leadership when she announced in a webcast to US partners on Wednesday that the plan would be put on “pause” to resolve an international row over how much of the tax practice would stay with EY’s core audit business.
Boland was not talking off the cuff, people at the firm said. Her words were pre-prepared and one person who watched the webcast said she appeared to be using a teleprompter.
But the extent of the fallout seems not to have been anticipated. Partners and staff across the firm’s operations expressed shock, confusion and anger. “Chaos” was one of the words used most frequently. Others called it a “shitshow”.
“There’s huge frustration [and] embarrassment locally at the state it’s all in,” said a person in EY’s UK business.
Boland’s comments have “caused confusion and contained contradictions”, said one US partner. She “was not clear” on the problems that had caused the impasse or what she meant by calling a “pause” to the deal.
Another person who saw a transcript of the webcast said Boland wanted to “pause to ultimately move forward”.
But her difficulty in juggling factions on the US executive committee and the intensity of feeling on both sides of the split has left the deal in doubt for the entire global business.
Can EY make it up the mountain?
Before this week’s row, internal polling of partners in 15 countries found that some 70 per cent supported the plan, 6 per cent were against and the rest were waiting for more information, according to two people familiar with the results.
But the overall international tally is not the key to whether Everest goes through. Like the other Big Four accounting firms, EY is not a typical company with a single board, chief executive and streamlined chain of command. It is an alliance of locally owned firms that share a brand, technology and common standards, all of which are overseen by a global organisation to which each country pays a fee.
Each national firm must balance its own internal factions and then push for their interests with global HQ. Each national firm taking part in Everest will have to approve the deal separately under its own rules.
The design and implementation of the deal by global HQ is “the tail wagging the dog”, said one UK partner. “The US and UK firms are the real power base but Global is driving this and trying to tell them what to do.”
Others countered that the global business had done a good job of brokering consensus among the countries outside the US and helping them negotiate.
A taxing problem
For the split to be approved in the US, there must be support among two-thirds of partners as a whole, but also two-thirds of the partners who are professional accountants and who make up the bulk of the audit and tax practices.
Everest envisions most of EY’s tax advisers will go to the consulting side of the business, but there is a section of US partners that is uneasy about splitting the tax practice, said people at the firm.
“The tax practices and audit practices are inextricably linked,” said Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas at Austin. “Every financial transaction has a tax impact. It doesn’t make sense to split them from an audit quality perspective.”
US rules allow firms to sell more tax advice to audit clients than in many other countries, leading Boland to push for more tax experts to be retained in the audit side of the business, which she is expected to run if the split goes ahead.
The proposal had been for tax to make up about 30 per cent of the audit business in the US, versus 14 per cent globally, but the US wants a bigger share in other countries too, to allow it to do tax work for multinationals. There are also other questions, such as which asset valuation experts should be retained on the audit side, said two people briefed on the details.
Until the impasse in recent days, leaders of most of EY’s large countries were on track to finalise exactly which parts of the business should be retained by the audit firm, according to several people at EY.
UK partners were told in a call on Thursday night that until Friday March 3, there had been “progress” in talks with global HQ and US partners to resolve the remaining issues. It then became clear “a new approach” would be needed.
Boland’s role as head of the entire US business and proposed boss of the global audit firm after the split is seen by some at EY as a conflict of interest.
Others question whether she has the political capital to sell the deal internally. She was elected to lead the US last year after the acrimonious exit of her predecessor Kelly Grier and has insisted on trying to win unanimous support for Everest from the US board, according to two people familiar with the matter.
Supporters of Everest hope that the backlash from some US partners who want the deal to happen might embolden Boland to press ahead even if objections from other US partners remain.
UK leaders told their partners on Thursday night that there was “no doubt” that the US firm and global bosses still intend to get Everest done.
“The minority are holding it back, being challenging, not throwing out real issues and moving the target,” said one US partner.
EY’s top bosses say they are now planning a “sprint” of intense negotiation sessions to try to resolve the issues within weeks. But the start date and number of rounds of talks have not yet not been set, said one person close to the details.
Make or break in the US
The deal now hangs on whether EY’s global leaders can broker a deal that Boland can win support for from US partners.
Clients, rival firms and the professional services industry are all looking on intently. Johanns from the University of Texas at Austin said that EY’s clients may be less focused on the messy process of getting agreement than on the risk that the final deal diminishes the quality of service they receive. “The planning and the strategy goes hand in hand,” he said. “Is all this really worth it?”
A senior partner at a rival Big Four firm said the deal “needs to be landed or be killed quickly or it will cause enormous damage because of the uncertainty”.
People familiar with EY’s planning, and partners at rivals, said the chaos could also embolden individual partners, practices and private equity firms to start discussing alternatives.
These could include teams defecting to rival firms — a partner at one competitor said he was approached this week by a team of EY advisers in the US — or private equity-backed buyouts of individual practice streams. This could be similar to deals done by Deloitte and KPMG in the UK in recent years and by PwC, which in 2021 was paid $2.2bn for its global mobility practice by private equity firm Clayton, Dubilier & Rice.
For global chief executive Carmine Di Sibio, the driving force behind Everest, and Boland and other senior partners who have been integral to shaping it, there is much at stake.
“Anyone for an insurrection?” asked one person in the EY partner group on Fishbowl, a social media site used by many in the industry. “It’s time for a coup,” said another. Yet another asked colleagues to say whether they would support a “petition of no confidence asking for the resignation of our most senior leaders” in the US and at global HQ, to which several said “yes”.
Not everyone, though. One said: “Come on, this is a complicated transaction.”
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