A $27 billion data center project has not been consolidated! EY issues Meta warning

Meta received a rare warning from its auditing firm in its latest annual report, as Ernst & Young flagged the accounting treatment of its $27 billion data center project as a "critical audit matter," highlighting the complexity and risk involved in its judgment.

According to a Wall Street Journal report on Thursday, although Ernst & Young ultimately approved Meta's accounting method, this warning label is extremely rare for specific high-profile transactions among large audit clients. The project, named Hyperion, was separated from Meta's balance sheet through a joint venture formed with Blue Owl Capital.

Ernst & Young noted in its report that auditing Meta's conclusion "was particularly challenging because significant judgment was required" to determine that Meta is not the "primary beneficiary" of the joint venture. This accounting arrangement has drawn scrutiny from investors and lawmakers.

Four Democratic senators, including Elizabeth Warren, sent a letter on January 22 to Treasury Secretary Janet Yellen, who leads the Financial Stability Oversight Council, calling for an investigation into the risks posed to the financial system by AI-related debt, and specifically singled out the Meta-Blue Owl joint venture as "exemplifying typical features of such arrangements."

Off-balance Sheet Treatment of the $27 Billion Project

According to The Information, last October Meta transferred the Hyperion data center project to a new joint venture with Blue Owl Capital. Meta holds a 20% stake in the venture, while funds managed by Blue Owl hold the remaining 80%. A holding company named Beignet Investor owns part of Blue Owl's stake and issued a record $27.3 billion bond to investors.

Under accounting standards, the joint venture is classified as a "variable interest entity." Meta determined that it is not the "primary beneficiary" of the entity, and therefore does not need to include the joint venture’s assets and liabilities in its own balance sheet. The so-called "primary beneficiary" refers to the party who has the authority to direct activities that most significantly impact the joint venture’s economic performance.

Meta previously obtained approval from the U.S. Securities and Exchange Commission for this accounting treatment.

Rare Warning from the Auditing Firm

Ernst & Young marked this matter as a "critical audit matter," meaning it is one of the most difficult and highest-risk judgments that auditors must make. E&Y stated that auditing Meta’s conclusion that it is not the primary beneficiary "was particularly challenging," because it required significant judgment to determine which activities most significantly impact the economic performance of the variable interest entity.

Although E&Y did not disagree with Meta's approach, this notation indicates it was among the most complex aspects of their audit. For specific high-profile transactions among large audit clients, such a warning label is truly rare.

Meta’s claim that it lacks control over the joint venture has sparked controversy and caught the attention of investors and lawmakers. As a hyperscale cloud services provider, Meta possesses specialized expertise in operating AI data centers, while Blue Owl is a financial firm. The economic success of the joint venture will depend on Meta’s decision-making and professional capabilities.

The senators pointed out in their letter: "An increasing portion of these financing arrangements are complex and opaque—making it easier for companies to obscure the true nature of their balance sheets." They believe the Meta-Blue Owl joint venture "exemplifies the typical features of such arrangements" and have called for the Financial Stability Oversight Council to investigate the risks that AI-related debt poses to the financial system.

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