Professor Elam

The giant U.S. arm is “falling short” of its revenue and profit targets, executives said on an internal call, one of many in recent days that captured the gloom hanging over the 390,000-person firm. Cost cuts are coming and bonuses likely will be lower was the message on another call, according to recordings reviewed by The Wall Street Journal.

“Right now, what’s really important is stability,” U.S. Chair Julie Boland told her staff. “Remember that we are an amazing place to work,” she said, adding that she recognized there was a “lot of emotion in the system.”

Growth at the U.S. operation, which accounts for some 40% of EY’s $45 billion in revenue, has slowed every month since December. The problem has worsened since the failure of two regional banks last month, according to an internal webcast.

Rising interest rates and sluggish deal markets soured the financial math underpinning EY’s planned split, the company’s U.S. leaders said. Those same factors are also hammering EY’s highly profitable work of advising on private-equity deals, a “growth engine for the last 10 years,” executives said.

“Transactions in the private-equity market have pretty much stalled…[and] that is hurting our performance,” Steve Payne, Americas deputy managing principal, told staff this week. “Private equity [firms] pay very well, they pay great rates.”

“We need to do a much better job…in billing every hour we can get our hands on,” Mr. Payne said. 

EY is still achieving double-digit revenue growth and strong profit margins, both globally and within the U.S., a spokeswoman said. But the slowing of that growth, expected to continue for months to come, has spurred executives to look for significant cost savings.

EY’s U.S. arm is cutting 3,000 jobs, some 5% of its 60,000 workforce, executives said. They told employees to expect lower bonuses than last year. In the U.K., the firm’s second-biggest arm, executives are also working on reducing costs, according to the webcasts. 

EY’s leaders tried to separate the firm’s current woes from the $600 million spent on the failed plan to split the firm, known as Project Everest.

“This has nothing to do with Everest costs, it’s based upon the underlying performance of our business,” Ms. Boland, the head of EY’s U.S. arm, said on the internal webcast. Employees reacted skeptically to this assertion in messages on online forums.

Global leaders of the company sought to reassure partners that they are working to cushion the financial impact from the abandoned project. That cost mostly fell on EY’s U.S. and U.K. partnerships, which did the lion’s share of the work on the breakup.

Executives at EY’s global unit said on an internal call that they plan to use a combination of bank borrowing and accounting maneuvers to ensure that the dead-deal costs have “minimal” impact on partner earnings.

The global unit is funded by the scores of national firms that make up EY’s worldwide network. Under the plan, the global unit would borrow to repay around $300 million of costs incurred by the U.S. and U.K. firms. 

 

The plan is dependent on EY getting the bank financing, Carmine Di Sibio, EY’s global leader and architect of the failed plan, told partners on one call. 

 “The new funding facility will provide additional flexibility to manage fund flows within our business and navigate the current market environment,” an EY spokeswoman said.

The $600 million of total costs of the deal, about half of which are internal, are offset by some $400 million of savings from projects that were deferred because of the planned split, according to executives. 

EY also intends to reduce the impact of the costs by writing them down over several years, rather than take them as a single hit to earnings, EY’s global managing partner, Steve Krouskos, said on the same call. 

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Accounting rules for public companies would typically allow costs to be capitalized in this way only when they are tied to a future benefit, rather than a dead deal. EY’s member firms are private partnerships, not public companies. 

“There’s generally a strong accounting case for these types of costs for a deal to be expensed as incurred,” said Jeffrey Johanns, accounting professor at the University of Texas at Austin. He added that he couldn’t comment on EY’s approach without knowing more of the specifics of the deal. 

EY’s U.S. leaders this week emphasized the need for the firm to “stay close” to its clients, worried about the impact of the high-profile failure of the breakup project.

The appeal for unity from EY’s leaders didn’t convince some staff members. Many partners at EY’s U.S. arm remain furious that their hopes of a multimillion-dollar payout from the deal were thwarted by a handful of senior auditors, according to people familiar with the matter. 

Relations in EY’s leadership ranks between the U.S. and the rest of the world remain strained, according to people familiar with the matter. One source of fresh irritation was Ms. Boland’s decision to announce the 3,000-person job cuts on an all-hands webcast, so soon after Project Everest was killed. Some of the proposed cuts, which will take place over months, are performance-related rather than layoffs, a person close to the firm said.

A spokesman for EY’s U.S. operation declined to make additional comments on the job cuts, referring to an earlier statement that the firm will offer comprehensive support to those who are affected.