Ernst & Young's top leaders called off a planned breakup of the firm's consulting and audit practices after the U.S. affiliate decided not to take part, disrupting a nearly year-long struggle to build consensus for the historic shakeup of the Big Four accounting firm.
Leaders told partners Tuesday that they planned to continue laying the ground for a possible split, but that more time and investments were needed to make that a reality.
The firm intended to spin off its consulting business and much of its tax practice into a stand-alone public company. But the plan, known as Project Everest, suffered repeated setbacks as partners disagreed over compensation and the resources needed to staff the remaining audit practice — a key sticking point for leaders of EY's US affiliate.
"Given the strategic importance of the U.S. member firm to Project Everest, we are stopping work on the project," the firm said in a statement.
The breakup plan had long been on shaky ground, but its demise came quickly.
Just two weeks ago U.S. and global leaders said they were still working to resolve differences over key aspects of the deal,including how to staff the audit practice and how to divide the tax practice. The impasse pitted Julie Boland, chair of EY US and who was picked to run the legacy audit practice, against Carmine Di Sibio, who chairs EY's global arm and was set to run the stand-alone consulting business.
The thorny logistics of divvying up assets and legal liabilities and shoring up pension payments added to the challenge of separating the $45 billion operation across 75 different jurisdictions.
Roughly 13,000 partners were originally expected to vote on the deal late last year, but the timeline was pushed back several times. Promises to those partners of millions of dollars in one-time payouts and the chance for an equity stake in any IPO are now off the table.
Firm leaders have long argued that the consulting and audit practices would be more profitable and successful once untethered from one another.
"This really is not about the financial economics," Steve Krouskos, EY Global Managing Partner said in September. "It's about what we think is right for the profession and right for the growth of both business and right for the employee opportunities and job creation across both businesses."
In the memo to partners, firm leaders said that the rationale behind the carve-out plan remains strong and that EY is still committed to "creating two world-class organizations that further advance audit quality, independence and client choice."
Close observers of the firm's travails also expect the split will still happen, even if it takes a different form.
"They just realized that however this structure was, it didn't work. And now they have to find a better structure," said Mathieu Shapiro, managing partner with Obermayer Rebmann Maxwell & Hippel LLP who specializes in business divorces. "I take this as just a longer break, not a stop."
Fiona Czerniawska, CEO of Source Global Research, which tracks the professional services industry, agreed with EY's strategy to push forward.
"Clients are still looking for different delivery models, and EY's specific constraint — the extent to which the firm can partner with big technology firms — remains just as urgent an issue to resolve," Czerniawska said in a statement. "We should therefore expect to see alternative, perhaps smaller-scale options being floated in the future."
