November 29, 2022

Donalds Hobby

World Finance Reviews

Boss of UK accounting watchdog says EY split would bring benefits

The boss of the UK’s accounting regulator has backed EY’s plan to split its audit and consulting businesses, saying the break-up would bring “distinct benefits”.

Sir Jon Thompson, chief executive of the Financial Reporting Council, told the Financial Times he supported the idea of a split that would build on his watchdog’s agreement with the largest accounting firms to “operationally separate” their audit and advisory arms in the UK by 2024.

EY’s proposed break-up is likely to raise questions from regulators about the impact on the audit firm’s financial ability to withstand future legal claims as well as those relating to previous alleged audit failures at companies such as Wirecard and NMC Health.

But a global split by EY “removes significant conflicts of interest with the rest of the business . . . which actually means that they might be in a position to grow further, whilst also producing quality [audits]”, Thompson said. “So we can see the distinct benefits of that formal separation of the audit and assurance business from the rest of it.”

To go ahead with the split, EY would need to win over regulators around the world, including in the UK, its second-largest member firm by revenue.

However, EY will first need to win support from its own global leaders and then in partner votes at its member firms in the 150 countries where it operates. The firm has yet to secure the agreement of its most senior partners globally to a split and potential listing of its advisory arm.

The process is taking longer than the accounting firm’s bosses expected, having first hoped to reach an initial decision before the July 4 holiday in the US. Some staff were told earlier this month to expect an update by the end of July.

EY is grappling with a host of obstacles, including which part of the business should be responsible for significant pension liabilities of about $10bn, mostly in the US, according to people familiar with the matter.

Finding a deal structure that will be accepted by US partners is critical to the success of any split because the country accounts for 40 per cent of EY’s global revenues. A person briefed on the talks said the pensions issue was “very addressable”.

The Big Four firm’s global leaders are being advised by Goldman Sachs and JPMorgan but financial advisers from Rothschild, Lazard and Evercore have been counselling individual member firms on the implications of split for their partners, according to a person with direct knowledge of the matter.

Rothschild, Lazard and Evercore had been involved from early in the planning because the local firms have fiduciary duties to their own partners, that person said.

Staff were told on Thursday that advisers from the consultancy Mercer had been called in to advise on how payouts should be split between partners, said another person at EY. The distribution of payouts between partners based on country, business line and seniority is seen in the industry as one of the most difficult aspects of winning support for the break-up.

Rothschild and Evercore declined to comment. Lazard and Mercer did not respond to requests for comment.

In total, about 2,000 people at EY and its advisers, which also include at least three law firms, were working on the preparation for a possible split, said people with direct knowledge of the talks.

“We’re incurring a lot of costs, we are investing a lot of time, a lot of opportunity cost,” said one of those people. “We wouldn’t be doing that if we thought there was a massive risk that something was going to fall over tomorrow or the next day.”

The FT reported on Thursday that EY was drawing up bespoke plans for how the split would work in its Chinese business in an effort to win regulatory approval in the country. Parts of its legal and tax businesses in other countries may have to be sold to the partners who work in those divisions because of rules restricting them from being owned by a company.