“Frustration and chaos”: EY fights to save Project Everest after the US rebellion

After EY embarked on its plan to spin off its consulting business last year, the partners boasted that it had worked on three-quarters of recent US company spin-offs, 19 were underway at the time, and “Project Everest.” the plan was called was only number 20.

So it was an old hand on paper, so the problems with Everest that became apparent this week are worrying the Big Four company. The threat is not only to the reputation of EY’s transaction advisors, but also to the broader business, which advises governments and corporations around the world on strategy and governance.

The next few weeks will be crucial in deciding whether Everest will survive. EY’s US chief Julie Boland surprised global leadership when she announced in a webcast to US partners on Wednesday that the plan would be put on “pause” to resolve an international dispute over how much of the tax practice’s core audit business should be handled EY would stay.

Boland was not speaking off the cuff, the company’s employees said. Her words were prepared, and one person who saw the webcast said she appeared to be using a teleprompter.

But the magnitude of the consequences does not seem to have been foreseen. Partners and employees across the company expressed shock, confusion and anger. “Chaos” was one of the most used words. Others called it a “shit show”.

“The frustration is great [and] Embarrassment on the ground given the state everything is in,” said a person at the UK EY store.

Boland’s comments “created confusion and contained contradictions,” said a US partner. She “wasn’t clear” about the problems that caused the impasse or what she meant when she called for a “pause” on the deal.

Another person who saw a transcript of the webcast said Boland wanted to “take a break to ultimately move forward.”

But her difficulty in juggling factions on the US Executive Committee and the intensity of feelings on both sides of the split have cast doubt on the deal for the entire global deal.

Can EY make it up the mountain?

Ahead of this week’s row, an internal poll of partners in 15 countries found about 70 percent supported the plan, 6 percent opposed it, and the rest awaited more information, according to two people familiar with the findings.

But the overall international balance is not the key to whether Everest will make it through. Like the other Big Four accounting firms, EY is not a typical firm with a single board of directors, one CEO and a tight chain of command. It is an alliance of locally owned companies that share a brand, technology and common standards, all overseen by a global organization to which each country pays a fee.

Each national company must balance its own internal factions and then assert its interests at global headquarters. Each national company participating in Everest must separately approve the deal according to its own rules.

Global headquarters’ design and execution of the deal is “tail wagging the dog,” said a UK partner. “The US and UK companies are the real power base, but Global is pushing that and trying to tell them what to do.”

Others countered that global business did a good job of brokering consensus among countries outside the US and helping them negotiate.

A tax problem

For the split to be approved in the US, two-thirds of partners overall must find support, but also two-thirds of partners who are professional accountants and make up the bulk of the accounting and tax practice.

Everest expects most of EY’s tax advisors to move to the advisory side of the business, but there is a segment of its US partners who have concerns about splitting up the tax practice, firm officials said.

“Tax practices and audit practices are inextricably linked,” said Jeffrey Johanns, a former PwC partner who teaches accounting at the University of Texas at Austin. “Every financial transaction has tax implications. It makes no sense to separate them from an audit quality perspective.”

U.S. regulations allow firms to sell more tax advice to accounting clients than in many other countries, prompting Boland to push for more tax professionals to remain on the accounting side of the firm she is expected to head if the split goes through .

The proposal called for taxes to account for about 30 percent of accounting business in the US, versus 14 percent globally, but the US also wants a bigger share in other countries to do tax work for multinationals. There are also other questions, such as which experts should be consulted for the valuation of assets on the auditor’s side, two people explained the details.

Up until the impasse in recent days, executives in most of EY’s major countries were on track to specify exactly which parts of the business should be retained by the accounting firm, according to several EY officials.

UK partners were told in a phone call Thursday night that there had been “progress” in talks with global headquarters and US partners by Friday March 3 to resolve remaining issues. Then it became clear that “a new approach” was needed.

EY is cashing in on its advisory business after a year of record growth. Chart showing revenue by company. Advisory and advisory revenue increased by $16 billion in 2021 to nearly $20 billion in 2022

Boland’s post-split role as head of all US operations and proposed head of global accounting firm is viewed by some at EY as a conflict of interest.

Others doubt she has the political capital to sell the deal internally. Elected to lead the US last year after the acrimonious departure of her predecessor Kelly Grier, she has insisted on trying to win unanimous support for Everest from the US executive board, according to two people familiar with the matter.

Everest advocates hope backlash from some US partners who want the deal could embolden Boland to go ahead, even if objections from other US partners remain.

British leaders told their partners on Thursday night there was “no doubt” the US firm and global bosses still intend to complete Everest.

“The minority is holding it back, challenging, not posing any real problems and moving the target,” said a US partner.

EY top bosses say they are now planning a “sprint” of intensive negotiation sessions to try to resolve the issues within weeks. But the start date and the number of rounds of talks have not yet been determined, said a person close to the details.

Make or break in the US

The deal now depends on EY’s global executives being able to negotiate a deal for which Boland can enlist support from US partners.

Customers, competitors and the service industry are watching carefully. Johanns, of the University of Texas at Austin, said EY’s customers may focus less on the messy settlement process and more on the risk that the final deal will diminish the quality of service they receive. “Planning and strategy go hand in hand,” he said. “Is it all really worth it?”

A senior partner at a competing Big Four firm said the deal “needs to be landed or killed quickly or it will do tremendous damage because of the uncertainty.”

People familiar with EY’s planning and partners at competitors said the chaos may also embolden individual partners, practices and private equity firms to start discussing alternatives.

That could include teams migrating to rival firms — a partner at one competitor said he was approached this week by a team of EY advisers in the US — or private-equity-backed acquisitions of individual practice streams. This could be similar to deals made by Deloitte and KPMG in the UK in recent years, and by PwC, which will buy $2.2 billion for its global mobility practice from private equity firm Clayton, Dubilier & Rice in 2021 had received.

The stakes are high for global CEO Carmine Di Sibio, the driving force behind Everest, and Boland and other senior partners who have been instrumental in shaping it.

“Anybody for a riot?” asked a person in the EY partners group on Fishbowl, a social media site used by many in the industry. “It’s time for a coup,” said another. Another asked colleagues to say if they would support a “motion of no confidence calling for the resignation of our most senior leaders” in the US and at global headquarters, to which several replied “yes.”

However, not all. One said: “Come on, this is a complicated transaction.”

https://www.ft.com/content/5a084b56-6d1e-4982-b5f7-ab98161fad01 “Frustration and chaos”: EY fights to save Project Everest after the US rebellion

Brian Ashcraft

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