EY leaders approve audit and advisory split, but hurdles remain

The leaders of 14 of EY’s 15 biggest member firms – accounting for 80% of its $45 billion in global revenue – on September 8 approved putting the split of its audit and advisory businesses to a partner vote. Getting every country firm and audit partner to buy in may prove difficult.

News that EY was examining the potential split of its business broke in May. The strategic move is being driven by increasing regulatory pressure related to conflict of interest in providing audit and advisory services to the same client, which is technically barred. Splitting the two businesses would mitigate compliance risk while giving the consulting business unfettered access to the entire market.

EY Global CEO Carmine Di Sibio said a worldwide split could bring in an extra $10 billion for its consulting arm.

The consulting arm – which would likely be spun off as a public company – would be a much more valuable company than its audit counterpart, at $24 billion in revenue compared to $18 million. Critically, the consulting business would retain its much higher growth rate, as demand for technology and transformation work booms and audit revenues stagnate.

This means that audit partners will have to be adequately compensated for trading their current shares in a more valuable audit/consulting firm for stock in a less valuable audit pure-play. Getting the valuation right may be difficult, though the payout is reportedly approximately $2 million cash per audit partner, according to The Guardian.

The 13,000 partners across EY’s member firms will vote on the split later this year on a country-by-country basis. Some of the local polls require a simple majority, while other need two-thirds. Some member firms give every partner one vote, while others allocate voting power by the amount of capital owned.

One notable practice – EY China – has decided not to divide up its business. The firm – which has 22,000 people across mainland China, Hong Kong, Macau, Taiwan, and Mongolia – will continue to be a part of the EY global network (which ejected its Russian member firm earlier this year).

“Based on factors such as the business environment and development stage in the region, all member firms of EY greater China…will not participate in the EY global spin-off plan,” the practice said on Friday.

EY expects to finalize the decision by early 2023.