EY Faces Knotty Splitting of Its Lucrative Tax Business

Ernst & Young’s tax experts bring in plenty of cash and are highly valued by the firm’s clients. Many members of the 70,000-strong group do not know where they will work next year or whether they will be competing against each other.

The proposed split of EY into a stable firm focused on audit firms and a faster-growing consultancy has reached the bare bones stage after its top executives approved the split.

More than any other large group in the firm, the tax team will be divided in the division. Carving out that unit “will probably be the most difficult part” of EY’s breakup, according to Mark O’Connor, managing director of Monadnock Research, which analyzes the consulting industry.

SHARE YOUR THOUGHTS

Do you think it will pay to split the audit and advisory part of EY’s business? Why or why not? Join the conversation below.

Getting the tax split right is critical to the success of the breakup. The tax group employs nearly a quarter of the firm’s employees and generated $11.4 billion of the company’s $45 billion in revenue in the fiscal year that ended in June. Each EY tax professional generated, on average, about a fifth more revenue than the typical audit professional for the 2021 financial year, according to Monadnock’s data.

Arguing over the split of the tax department was one of the reasons EY’s breakup plan was delayed this summer, people familiar with the matter said.

For the tax professionals, the split will mean either working for a traditional, slow-growing accounting firm or for a consulting firm that will compete in the open market against powerful rivals. Partners at the accounting firm are likely to get a multi-million dollar windfall, while employees could see pay increases. On the consulting side, the upside could be much greater, but the risk is also higher.

EY executives are also haggling over whether and how the two firms will compete for the same tax work, people familiar with the matter said. A so-called non-compete clause stipulating areas where the audit-focused firm will agree to stay away from the consulting firm’s turf for an initial period is still under negotiation, the people said.

EY faces this difficulty because it is not planning a clean division. The audit-focused firm will still get about a third of its original $20 billion in revenue from tax and other non-audit functions, according to people familiar with the matter.

EY plans to ship about a quarter of its tax practice to the audit-focused firm, although the proportions will vary significantly between different countries, according to the people familiar with the matter.

These specialists are needed to help with complicated tax, valuation and other issues that affect audits of many large companies. Carmine Di Sibio, EY’s global chairman and chief executive, said regulators examining the deal “want to ensure that [the mostly audit firm] will have the right qualifications to carry out high quality audits.”

Some of EY’s 70,000 tax professionals perform both audit-related work, such as checking that companies comply with tax rules, and consulting work, such as advising on tax avoidance. Tax specialists are also involved in the firm’s fast-growing technology side, helping companies outsource routine tax matters.

Rival firms are ready to poach any disgruntled EY tax specialist, said Isaac Heller, chief executive of accounting software firm Trullion. “Those guys are all over the place.”

The restructuring is complicated, but it’s the type of thing EY does for clients all the time, according to a person familiar with the matter, who said the firm’s tax professionals are positive about the split.

‘We don’t see this as a big risk.’


— EY Global Chairman Carmine Di Sibio on both new firms competing for tax business

EY’s draft non-competes will allow some areas of tax advice to be targeted by both new firms from day one, according to one of the people familiar with the matter. But Mr Di Sibio played down the prospect of a serious fight, saying “we don’t see this as a big risk.”

Despite the inevitable risks of disruption from the impending breakup, the firm’s tax partners have been told they need to continue to grow revenue in the run-up to the split, which is set for late 2023, according to people with knowledge of the case.

A thriving tax practice is also built into EY’s ambitious post-split targets of around 21% revenue growth per year for the new consulting firm in its first three years and 7% to 8% per year for the audit-focused business.

Regulations in many countries limit the tax advice that accounting firms can give to companies whose books they audit. In the United States, “the tax advice that the big accounting firms give to audit clients is a big problem with a lot of conflicts of interest,” said Monte Jackel, a tax adviser who teaches at Catholic University Law School and has worked at three of the Big Four accounting firms, the tax authorities and the Ministry of Finance.

The US audit watchdog, the Public Company Accounting Oversight Board, appears to have limited internal tax expertise, Mr. Jackel, and may well just be a rubber stamp on the audit firms’ approach. A PCAOB spokesman said the regulator monitors firms carefully and “will not hesitate to take action when rules are violated.”

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published. Required fields are marked *