EY Failed Split Gives Break to US Law Firms Fearing Competition

Ernst & Young’s scuttling of a plan to spin off its consulting business and much of its tax practice gives breathing room to US law firms who fear new competition from big accounting operations.

The spin-off would have allowed EY to more aggressively pursue the legal services side of its business, said Mark Vorsatz, chief executive officer of consulting firm Andersen.

“The split would have unleashed the capabilities of an international firm with few peers in terms of platform,” Vorsatz said. The opportunities for a slimmer legal and tax advisory group “would have been endless,” he said.

Law firms have long fretted about the scale of competition they’d face should accounting firms plunge into the US legal practice, as they have done in Asia and South America. EY collected $45.4 billion in revenue in fiscal 2022, compared with $6.5 billion by the largest law firm, Kirkland & Ellis, that calendar year.

“Think about the resources they can bring to bear,” Marcie Borgal Shunk, president of the Tilt Institute law firm consultancy, said of accounting operations. “They have a big advantage.”

EY shelved the breakup after partners, particularly in the US, disagreed on the compensation and resources needed for the audit practice left behind after the consulting and tax businesses would be split off. Firm leaders told partners they’d keep working for a possible split some future day.

Meanwhile, EY’s legal unit remains an integral, fast-growing part of the firm’s business and a “core focus,” the firm’s global law leader, Cornelius Grossmann, said in a statement.

“EY Law is committed to continue investing as we have over the past decade in hiring, acquisitions and strategic alliances,” he said. EY’s law operation has maintained a “growth trajectory” since 2020, Grossmann said, though he declined to be more specific.

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Regulations in most states require lawyers to own law firms, thus preventing the Big Four accounting firms—EY, PwC, Deloitte, and KPMG—from competing directly with firms.

The Sarbanes-Oxley Act of 2002 also helps to bar accounting firms from giving legal advice. The law restricts auditing companies from consulting for the same clients, said James Jones, a senior fellow at Georgetown University Law Center and a former Arnold & Porter managing partner.

The Big Four has been blocked “from participating in a huge percentage of the market,” Jones said. “That’s one of the big reasons for splitting it up,” he said, referring to the fewer conflicts EY likely would have faced with separate auditing and consulting businesses.

In lieu of broadly practicing law in the US, the accounting firms have offered tech-focused “legal managed services” to corporate law departments to help them streamline and automate processes like contract formation and review.

Deloitte and EY in 2020 each bolstered their tech-focused legal managed services campaigns in the US.

“Such investments will expand the meaningful benefits we provide to our clients including improved risk management, actionable insights and operational and cost efficiencies,” Grossmann said.

In the 95 jurisdictions outside the US where EY can practice law, the company has concentrated on advisory services in “emerging and growing” areas for law departments, including transactions, sustainability/ESG, and technology law, he said.

Big Law leaders said they watched EY’s plans with interest.

“They have incredible client bases, they have scale and size, and their investment in tech is significant,” said McGuireWoods Chairman Jonathan Harmon.

McGuireWoods reported nearly $1 billion in gross revenue last year, leaving it just outside the country’s 50 largest law firms, according to data compiled by The American Lawyer.

The firm hasn’t been impacted by the Big Four in areas such as M&A, immigration, or labor and employment law—yet, Harmon said. But if more states make moves like Arizona and Utah to allow non-lawyers to own law firms, “it could be a different game,” he said.

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