Carmine Di Sibio: EY boss plans most radical Big Four split in a generation

Carmine Di Sibio: EY boss plans most radical Big Four split in a generation

When EY moved into its new headquarters at Hudson Yards in New York last year, staff looking for a publicity stunt tried to convince global boss Carmine Di Sibio to star in a video scaling the outside of a skyscraper nearby. But the prospect of hanging from a rope more than 1,200 feet above the ground was too much for Di Sibio, who smiled as he remembered refusing to follow the plan.

A year later, Di Sibio embarked on a bold venture of a different kind, plotting a spinoff of the Big Four audit and consulting business that would reshape the accountancy industry. The plan, dubbed Everest, surprised people at EY and its competitors.

“I was shocked!” said a person who worked with Di Sibio, 59. “He is a listener, both by his training and by his temperament. . . I didn’t see Carmine as a likely instigator of such a huge change. After moving from near Naples in Italy to New York at the age of three, he became the first in his family to graduate from college and would help his parents translate mortgage documents and tax forms.

Now Di Sibio is plotting a spinoff that would take his industry “back to the future”, says a senior auditor at a rival firm, recalling the rush of four of the Big Five to spin off their consultancy businesses at the turn of the century. The wave of divestitures came as accountants faced pressure to resolve conflicts of interest between their audit and advisory divisions that were starkly exposed by the collapse of Enron and the group’s auditor. American energy, Arthur Andersen.

The surviving Big Four rebuilt their consulting practices over the next two decades, but tighter restrictions on selling advice to audit clients stifled growth and burdened their consultants with part of the audit bill. regulatory fines and legal claims for audit failures.

“We’ve invested a lot of money in technology to manage conflicts, but as these companies get bigger and bigger, they become harder and harder to manage,” says Di Sibio. This “stunt opportunity,” he says.

The separation, still being debated by EY’s top executives, would reduce the firm’s audit activity to its core functions and free up its consultants to win work for audit clients. It would also distance consultants from the steady stream of scandals that have emanated from the audit division, including Wirecard and NMC Health.

A spin-off would likely involve an IPO of the consulting business, but that’s unlikely to happen before fall 2023. Any listing would “most likely” be in the United States, Di Sibio says.

The consultancy company, dubbed “NewCo” for the moment, would be 70% owned by the partners. It is reported to be around $25 billion in revenue and is targeting strong double-digit percentage growth, Di Sibio says.

A split is “not a defensive move” because EY doesn’t need more capital, says Di Sibio. But as a corporate entity rather than a partnership, NewCo would be able to raise funds to compete with Accenture for technology consulting and managed services contracts for companies that want to outsource part of their operations, adds he.

The new company would compete with McKinsey, BCG and Bain on strategy and management consulting as well as mid-level tax and transactional advisers who “were only born because of the conflicts the Big Four had.” , explains Di Sibio.

EY Manhattan offices: Rivals say a spinoff would leave behind a low-growth ‘boring’ audit firm © Richard Levine/Sipa USA via Reuters Connect

Disruptive plans incorporate $1.5 billion in cost reductions, including the removal of “middle layers” of management as the consulting business shifts from a network of national partnerships to a single firm, says Di Sibio . “We don’t see a lot of job cuts,” he says, adding that some partners in leadership positions would be pushed back into client work.

Di Sibio says he wants to emulate Goldman Sachs, a former client and now adviser to EY on its separation plan, by keeping a culture of partnership in the consulting industry. Like Goldman, he wants to continue promoting partners, but perhaps every two years instead of the current annual process.

A spin-off would bring windfall gains of several million dollars to the partners – money for the auditor and shares in the new company for the consultants.

Competitors refuse to follow suit. KPMG boss Bill Thomas told his partners that the sale of his consulting business “would monetize the goodwill of our firm, which has been in existence for over a hundred years, to the detriment of the next generation”.

“It’s happened before, so it’s not 100 years,” Di Sibio says, his voice rising when asked for his reaction. “There will be more and more opportunities to partner over the next couple of years,” he says, pointing to the demand for new partners to win new business previously stalled by disputes.

Alternatives to an IPO are still on the table — including a “strategic buyer” who could use a deal to become “a major player” in professional services, Di Sibio says. Private equity firms are also interested in taking a stake, but EY’s size means “it would have to be a consortium”, he adds.

Rivals say a split would leave behind a ‘boring’, low-growth audit firm that lacks the expertise to audit the accounts of complex multinationals, but Di Sibio disagrees . Initially, audit would make up about 70% of the business, with the rest made up of tax and accounting advisers as well as EY’s fast-growing sustainability practice.

The audit business, dubbed “AssureCo” in EY’s plans, will start with revenues of $18 billion and have “very aggressive growth projections” of 7% per year, he says. Revenue for EY’s audit arm grew 27% overall in the nine years to 2021, compared to 93% growth in tax and advisory.

Di Sibio says the audit business would increase its market share if it didn’t have to worry about consulting disputes. Rebuilding the firm’s advisory capabilities will also drive growth after non-competition restrictions expire, he says.

Competitors combining audit and consultancy are crucial to attract staff. Di Sibio counters that the opportunity to create new advisory divisions will make the independent audit industry more attractive, recalling that he built a regulatory advisory unit after the $11 billion divestiture of the advisory practice. EY at Capgemini in 2000.

When he was named chairman and chief executive of EY in 2019, some colleagues saw Di Sibio as a “gatekeeper”.

Current and former colleagues say Di Sibio, though rarely excitable, is a master at building consensus. One of them remembers the “enormous games of rock-paper-scissors” he used as an icebreaker during a meeting of some 120 of EY’s most important partners.

But her graceful exterior masks a fierce work ethic and tenacity, the colleagues add. “You need balls of steel to do this job,” says a former colleague.

Before Di Sibio can try to convince EY’s 13,000 partners to support the split, he must first get the agreement of his executives, a process he hopes to complete in “a few weeks”.

If he pulls off the biggest overhaul of a Big Four company in a generation, the goalkeeper moniker will be dropped for good.

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