The head of the UK accounting regulator backed EY’s plan to split its audit and consultancy business, saying the split would bring “distinct benefits”.
Sir Jon Thompson, chief executive of the Financial Reporting Council, told the Financial Times he backs the idea of a split that would build on its watchdog’s deal with the biggest accountancy firms to “operationally separate their audit and consultancy branches in the UK by 2024. .
EY’s proposed breakup is likely to raise questions from regulators about the impact on the audit firm’s financial ability to meet future legal claims as well as those related to audit failures alleged priors at companies such as Wirecard and NMC Health.
But a global spin-off from EY “removes significant conflicts of interest with the rest of the business. . . which actually means they might be able to expand further, while still producing quality products [audits]”Thompson said. “So we can see the distinct benefits of this formal separation of audit and assurance activities from the rest.”
To go ahead with the split, EY would need to convince regulators around the world, including in the UK, its second-largest member firm by revenue.
However, EY will first need to win the support of its own global leaders and then the votes of its member company partners in the 150 countries where it operates. The company has yet to secure approval from its most important partners globally for a spin-off and potential listing of its consulting arm.
The process is taking longer than expected by the bosses of the accounting firm, who had initially hoped to reach a first decision before the July 4 holiday in the United States. Some staff were told earlier this month to expect an update by the end of July.
EY is wrestling with a host of hurdles, including which part of the business should be responsible for large pension liabilities of about $10 billion, mostly in the United States, 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 spin-off, as the country accounts for 40% of EY’s global revenue. A person briefed on the talks said the issue of pensions was “very addressable”.
The Big Four company’s global executives are being advised by Goldman Sachs and JPMorgan, but financial advisors to Rothschild, Lazard and Evercore have advised individual member firms on the implications of the split for their partners, according to a person with direct knowledge of the question.
Rothschild, Lazard and Evercore were involved early in the planning because local companies have fiduciary duties to their own partners, the person said.
Staff were told on Thursday that advisers from consultancy Mercer had been called in to advise on how payments should be split between partners, another EY person said. The distribution of payouts between partners based on country, industry and seniority is seen in the industry as one of the most difficult aspects of gaining breakout support.
Rothschild and Evercore declined to comment. Lazard and Mercer did not respond to requests for comment.
A total of about 2,000 people at EY and its advisers, which also include at least three law firms, were working to prepare for a possible split, people with direct knowledge of the talks said.
“We incur a lot of costs, we invest a lot of time, a lot of opportunity costs,” one such person said. “We wouldn’t do this if we thought there was a huge risk of something going down tomorrow or the day after.”
The FT reported on Thursday that EY was drawing up bespoke plans for how the split would work in its China business in a bid to gain regulatory approval in the country. Parts of its legal and tax business in other countries may need to be sold to partners who work in those divisions due to rules preventing them from being owned by one company.