Ernst & Young - Company Profile, Information, Business ...

History of Ernst & Young. Ernst & Young is the fourth largest public accounting firm in the world. The firm was formed in 1989 when the third ... Togglenavigation Encyclopedia EncyclopediaofSmallBusiness EncyclopediaofBusiness EncyclopediaofAmericanIndustries EncyclopediaofManagement Other BusinessPlans TrademarkEncyclopedia History BusinessBiographies CompanyHistories CompanyHistoriesPart2 LeadingAmericanBusinesses Forum ReferenceforBusiness CompanyHistoryIndex Accounting Ernst&Young-CompanyProfile,Information,BusinessDescription,History,BackgroundInformationonErnst&Young 787SeventhAvenueNewYork,NewYork10019U.S.A. CompanyPerspectives: Ernst&Young,oneoftheworld'sleadingprofessionalservicesorganizations,helpscompaniesacrosstheglobetoidentifyandcapitalizeonbusinessopportunities.Wedeliverthevaluethatclientscareabout;weprovideideasandsolutionstailoredtomeetclients'needs;andweproducetangibleresults.Ernst&Young'sdepthandbreadthofserviceandourglobalreachmeanthatwehavetheresourcestoserveanyclient,anywhereintheworld. HistoryofErnst&Young Ernst&Youngisthefourthlargestpublicaccountingfirmintheworld.Thefirmwasformedin1989whenthethirdlargestaccountingfirmatthetime,Ernst&Whinney(basedinCleveland,Ohio),mergedwiththesixthlargestfirm,ArthurYoung(headquarteredinNewYork),formingwhat,atthetime,wastheworld'slargestaccountingfirm.Asof1999Ernst&Youngstoodasoneofthe"BigFive"accountingfirmsthatdominatedtheaccountingbusiness.Aprivatepartnership,Ernst&Youngwasownedbyitsseniorpartners.Ernst&Youngprovidedauditingservicesprimarilytotheworld'slargestcorporations.Inaddition,itspecializedintaxadviceformultinationalfirms.Inrecentyears,thefirmincreasinglymovedintothebusinessofmanagementconsulting,providingguidancetoclientsinsuchareasasriskmanagement,mergersandacquisitions,andrecenttrendsinworker-managementrelations.Otherserviceareasincludedconsultingoninformationtechnologyandlegalservices. CompanyOrigins TherootsofErnst&Youngcanbetracedbackwellover100yearstotheformationoftheauditingbusinessandthedevelopmentofgenerallyacceptedaccountingpractices,rulesthatbecameincreasinglynecessarywiththeriseofthemultinationalcorporationandtheintrusionofcomplicatedtaxesintoprivatebusiness.Priortothe1989merger,eachofthetwofirmshadenjoyedrichhistories.Bothrosefromverysmallbeginningsbycapitalizingontheenterprisepotentialofaccountinginitsearlyyears.PioneerArthurYoungfoundedandheadedtheoriginalArthurYoungfirmbackin1895inKansasCityafterbreakingfromanearlierunionofthefirmofStuartandYounginChicago.In1896YoungformedthefirmofArthurYoungandCompanywithhisbrotherStanley,butby1906YounghadcompletelyterminatedhisunsatisfactorypartnershipwithStuart.ArthurYoungandCompanyflourishedformanyyears,slowlydevelopingitsreputationas"oldreliable"forauditing,addingmoreandmorepartnersthroughouttheyears. Theotherhalfofthemarriage,Ernst&Whinney,canbetracedbackto1906,whenErnst&ErnstwasfoundedinCleveland,Ohio,asapartnershipbetweenAlwinC.Ernstandhisolderbrother,TheodoreC.Ernst.Thefirmtookonitsfirstadditionalpartnersin1910andfromtherethefamilytreeexpandedbyimmenseandunforeseenproportions.By1913,whenincometaxesbegantobeleviedintheUnitedStates,theneedforaccountantsswelleddramatically.Bythe1980sthefirmhadbecomeoneofthelargestmembersoftheBigEight.Inoneofitsmorepublicizedactions,Ernst&Whinney'sauditpavedthewayforthe1979governmentbailoutoftheChryslerCorporation. Meanwhile,theArthurYoungfirmenduredarockydecadeinthe1980s.Longknownforitsreliableauditingpracticeandaclean,conservativeinterpretationoftaxlaw,thecompanyimagewastarnishedbyeventsofthe1980s,manyintheareaofthenationalsavingsandloanscandal.Forinstance,ArthurYoungwassuedfor$560millionforallegedlyallowingWesternSavingsAssociationofDallastooverstateitsnetworthbymorethan$400million.In1988theBankofEnglandsuedArthurYoungandcollected$44millionafterabankthatYoungauditedcollapsed. IncontrasttothestrugglesofArthurYoungpriortothemerger,Ernst&Whinney'sbusinesshadthrived,withitsmanagementconsultingpracticegrowingfasterthanitsauditandtaxpractice.Infact,atthetimeofthemerger,consultingfeesaccountedfor24percentofErnst&Whinney'srevenues,whereasonly17percentofArthurYoung'srevenuescamefromconsulting. 1989Merger Ingeneral,bothfirmsthoughtthatamergerrepresentedacomparativeadvantageforeach.Althoughbothhadheavyhittersforclients,ArthurYoung'sclientsweremostlyinvestmentbanksandhigh-techfirmsontheEastandWestCoasts,whileErnst&WhinneyhadmorehealthcareandmanufacturingindustryclientsconcentratedintheMidwestandSouth.Internationally,ArthurYounghadmoreclientsinEurope,whileErnst&WhinneyhadestablishedapresenceinthePacificRimcountries.ArthurYoung'sclientsincludedAmericanExpress,Mobil,andTexasInstruments,whileErnst&WhinneyhadBankAmerica,Time,Inc.,andEliLilly. Althoughtoutedasamerger,theevidencesuggeststhatthe1989transactionthatcreatedthefirmErnst&Youngwas,infact,anacquisitionindisguise,withthestrongerErnst&WhinneyswallowinguptheflounderingArthurYoungpractice.ArthurYounghadestablishedastrongreputationovermanyyears,althoughitwasgenerallyseenasacautiousandstodgypractice.Butbythe1980s,aftermuchofitstraditionalauditpracticestartedtocollapseandmassiveleveragedbuyoutsbecameanincreasinglycommonpracticeinthebusinessworld,ArthurYounghaddifficultycompetinginthecutthroatenvironmentoftheaccountingarena. Historically,theaccountingbusinesshasseenincreasingnumbersofpartnersconcentratedinadecreasingnumberoffirms.Inthisrespect,thebirthofErnst&Youngin1989wasthenaturaloutcomeofthecycleofcompetitionthatbreedsconcentrationandexpansion,thusleadingtofurtherroundsofcompetition.ButforoverhalfacenturyprevioustothecreationofErnst&Young,eightfirmshaddominatedtheaccountingbusiness.Theelitegroupwasdubbedthe"BigEight"byFortunemagazine. Followingtwomajormergersinthe1980s(theErnst&YoungdealandthemergerthesameyearbetweenDeloitte,Haskins&SellsandToucheRoss),theBigEightbecametheBigSix.AlloftheBigSixwereprivatepartnerships,meaningthatallwereownedbythefirm'sseniorexecutives,whichalsomeantthatnoneofthefirmswererequiredtoreporttheirprofits. TheErnst&Youngmergercreatedafirmwith6,100partnersandtwochiefexecutiveofficers,RayGrovesfromErnst&WhinneyandWilliamGladstonefromArthurYoung.Thenewlyformedfirmhadworldrevenuesin1989of$4.27billion,anditstotalsaleseclipsedthatestablishedbyamergerin1987ofPeatMarwickandKMGMainHurdman. Theactualmergerin1989wasessentiallyviewedasasmartcompetitivemove,althoughsomeobserversthoughtthemergermightbedifficultduetoperceiveddifferencesinmanagementstyles,withErnst&WhinneygovernedfromthetopandArthurYoungfavoringamoredecentralizedmanagementsystem.AtthetimeofthemergerErnst&Whinneyhad1,276partnersand14,739totalpersonnelin118U.S.officesaswellas3,159partnersand35,600totalpersonnelin89countries.ThesmallerArthurYounghad829U.S.-basedpartnersand10,652totalU.S.personnelin93offices;worldwidetheyhad2,900partnersand33,000totalpersonnelin74countries. Therewasaconflictatthetimeofthemergerovereachfirm's"cola"clients.AconflictofinterestexistedinthatPepsiCohadbeenanArthurYoungclientsince1965,whileCoca-ColahadbeenanErnst&Whinneyclientsince1924.Coca-ColaforcedthefirmtodumpPepsiCo,asErnst&YoungnotedthatCoca-ColahadbeenaclientforalongertimeandthatCoke'sannualauditfeewas$14million,amuchhigherfigurethanPepsi's$8.8millionauditfee. Inoneofitsfirstbusinessdecisionsfollowingthemerger,Ernst&Youngbegantomoveintocomputer-aidedsoftwareengineering.ThisstepreflectedErnst&Young'sdiversificationintomanagementsystemsandstrategicplanningservicesforbusinesses.UnderthegeneralheadingofDevelopmentEffectiveness,theseservicescappedastringofmovesintocomputer-aidedsoftwareengineering.Thegeneralthrustoftheprojectincorporatedmanagementconsulting,TotalQualityManagement,andprocessinnovation.Theprocessinnovationservicesweresoldworldwide,primarilytotheinsuranceandbankingindustries. PayingfortheS&LScandal However,asthenewlyformedfirmfacedthe1990s,itwassteepedinthecontroversysurroundingthecrisisofthesavingsandloanindustry.Ernst&Young'sauditsof23failedsavingsandloanswereinvestigatedbytheOfficeofThriftSupervision(OTS)underasubpoenaissuedinJune1991.OTSwasformedbythefederalgovernmenttorecoverlossesfromaccountingfirmsthatshouldhavediscoveredimproprietiesduringS&Lauditsandtoimposefinesonauditorsforviolationsofaccountingrules.SomeofthethriftsthatErnst&YoungauditedincludedCharlesKeating'sfailedLincolnSavings&Loan(Irvine,California),SilveradoBanking(Denver,Colorado),VernonSavings&Loan(Vernon,Texas),andWesternFederalSavings&Loan(Dallas,Texas),allofwhichexperiencedtotallossesofover$5.5billion.TheOTSsubpoenarequiredthatErnst&Youngsurrenderonemilliondocumentsfromitsworkforthe23failedS&Ls. SeveraljudgmentswererenderedagainstErnst&Younginconnectionwiththeinvestigation.InJuly1992,forinstance,thefirmpaidafineof$1.66milliontosettleaccusationsthatithelpedCharlesH.Keating,Jr.,deceivethefederalgovernmentaboutthehealthofhisfailingS&L.Moreover,formerErnst&YoungpartnerJackD.Atchison'slicensewassuspendedforfouryearsbytheaccountingboardofArizona.HewasaccusedofhelpingpersuadefiveU.S.senatorstointervenewithfederalregulatorsonKeating'sbehalf.Inconnectionwiththissettlement,Ernst&Youngpaid$63milliontosettlechargesofwrongdoingintheKeatingaffair.Ernst&Youngdidnotadmitguilt,however,andtheclaimwaspaidlargelybyinsurance.Intotal,some$204millioninfineswerepaidinthiscivilsuit. Inanothersettlement,Ernst&Youngpaid$400milliontothefederalgovernmentincompliancewithafederalrulingagainstthecompany.Thesettlementsecuredrecoveryoflossesattributabletoauditfailures.Inaddition,thesettlementavoidedhugelitigationcostsandassuredthatfutureauditsofinsuredinstitutionswouldbeconductedaccordingtothehighestprofessionalstandards.Withpotentialclaimsthatcouldhavemountedtoanestimated$1billion,therulingrelievedErnst&YoungofconcernsregardingfuturepenaltiesinvolvingS&Lauditingimproprieties.Ernst&Youngalsoagreedtochangeitsaccountingpracticesandensurethatitspartnersmeetfederalguidelinesforworkingwithfederallyinsuredfinancialinstitutions.SomeofErnst&Young'spartnerswerebarredfromdoingsuchworkandchangesinbankinglawsrequiredaccountingfirmstobelegallyresponsibleforsharingwithregulatorsreportspreparedforbankmanagement. Expansioninthe1990s Despitethesetroubles,Ernst&Youngdefiedtherumorsthatitwouldfold.Toeliminateoverlapcreatedbythemergerandtoreduceitspayrollexpenses,thefirmcutitsstaffin1991andeliminatedmanypartnerpositions.Althoughrevenueshadfallenslightlyinthelate1980s,bytheearly1990srevenuesweremodestlybutsteadilyrising.SalesfromErnst&Young'sriskmanagementandactuarialservicesgrouprose7.4percentfrom1990to1991,from$9.5millionto$10.2million.Overallrevenuesrosefrom$5billionin1990to$5.4billionin1991and$5.7billionin1992. Thecompanygarneredanincreasingnumberofclients,andtheirinvolvementinsuchlargeprojectsasmunicipalinsuranceandenvironmentalriskmanagementconsultingcontinuedtogrow.Revenuesinriskmanagementconsultingwentfrom$10.3millionin1991to$10.9millionin1992.Thisincreasereflectedagrowingmarketforthesekindsofservices.Moreover,majorrestructuringwastakingplaceinhospitalsandinthehealthcareindustryingeneral,creatinganeedforconsultants.ThetraditionalErnst&Youngmainstay,auditing,stillfaredquitewellinthenewfirm'searlyyears.By1992,infact,Ernst&Youngperformedthemostauditsoflargepubliclyheldmultinationalcompanies.Itaudited3,231companieswithatotalvalueauditedof$10.228trillion(basedonassetfiguresforfinancialcompaniesandsalesforallotherfirmsaudited). Ernst&Young'scostlylegalbattlesencouragedseveralchangesinthemid-1990s.First,thefirmhiredanewgenerallegalcounsel,KathrynOberly,whoreputedlymadekeepingcostsdownahigherprioritythanbattlingonprinciple.Second,thefirmsteppedupitsexpansionintoconsulting,anareamuchlessfraughtwithlegalresponsibilitiesandtheirconcomitantlawsuitsthanauditing.Inadditiontoincreasingitsconsultinginriskmanagement,thecompanymovedintoinformationsoftwareproducts. Ernst&Youngalsoenterednewbusinessareasinthemid-1990sbydevelopingalliancesandbyacquiringsmallercompanies.In1996thefirmforgedanalliancewithTataConsulting,headquarteredinIndia.Thesameyear,itsalliancewithISD/Shawgavethefirmanentreeintobankingindustryconsulting.Thefirmmovedintothepetroleumandpetrochemicalconsultingbusinessin1996whenitpurchasedWrightKellen&Co.Ernst&YoungcreatedanewsubsidiarywiththeHouston-basedcompany,whichtheynamedErnst&YoungWrightKillen. FailedMergerwithKPMG In1997Ernst&YoungforgedanagreementtomergewithKPMGInternational,anotherBigSixaccountingfirm.TheagreementcameonlyweeksaftertheannouncementofamergerbetweenPriceWaterhouseandCoopers&Lybrand,whichwouldhavecreatedtheworld'sbiggestaccountingfirm,with$12billioninrevenuesandastaffof135,000.However,theErnst&Young-KPMGInternationalmergerovershadowedthat,withcombinedrevenuesof$16billionand160,000people.AccordingtoErnst&Young,thedealwasdesignedtosatisfymultinationalclientswhowantedanauditorandconsultantwithofficesineverycityinwhichtheclienthadoffices.Inaddition,themergerwouldhavelimitedtheriskofaliabilitysuitseverelydamagingearningsandwouldhavemadegreatereconomiesofscalefordevelopingnewproductsorservices. Combiningthetwohugecompaniespresentedaformidabletask,particularlybecausetheywereintensecompetitors.Between1991and1997KPMGhadlostapproximately60ofitsauditingclientsintheUnitedStatestoErnst&Young.Alargerproblemthanovercominghistoricrivalries,however,wasgainingregulatoryapproval.TheErnst&Young-KPMGInternationalmergerandthePriceWaterhouse-Coopers&LybrandmergerwouldhavefurtheredtheconsolidationofthemajoraccountingfirmsintotheBigFour,anoutcomedisturbingtomanyindustryanalysts.Alongwithfearsthattherelativelackofchoicewouldencourageariseinprices,therewerefearsamongclientsthatthecombinedfirmswouldmakecompanysecretsvulnerabletorivalsusingthesamefirm. Citingthehighcostofpursuingthemergerandtheuncertainregulatoryoutcome,Ernst&Youngsuggestedinearly1998thatthetwofirmsabandontheirmergerplans.Someanalyststhoughtthatthemoneyandattentionrequiredtointegratethefirms,atatimewhenallBigSixfirmswereexpandingrapidly,alsodiscouragedthemerger. Ernst&Youngexperiencedsubstantialgrowthin1997,despitebeinghitbya$4billionlawsuitallegingthefirmmishandledtherestructuringofMerry-Go-RoundEnterprisesin1993.Overallrevenuesrosefrom$7.8billionin1996to$9.1billionin1997.Asubstantialamountofthisgrowthwasfueledbya30percentsurgeintaxadvicerevenuesandan18percentincreaseinworldwidetaxrevenues,anareainwhichErnst&YoungledtheBigSix.Thefirmalsoboosteditsefficiencyin1997,raisingitsrevenueperemployeetenpercentthatyear,to$238,360.Revenuescontinuedtorisespectacularlyin1998,reaching$10.9billion,ajumpofalmost20percent. TheBigFive,astheywerecalledwiththecompletionofthePriceWaterhouse-Coopers&Lybrandmergerin1998,continuedtodiversifytheirservicesinthelate1990s.Revenuesfromconsultingontaxissues,personnel,management,property,andpersonalfinanceswampedrevenuesfromauditingforErnst&Young.In1999thefirmhadplanstoaddaworldwidelawpracticetoitsstableofservices.Ernst&Youngalreadyhadassociatedlawpracticesinseveralcountriesbytheendofthecenturyandplannedtobuildaglobalstaffof4,000bytheyear2005. AdditionalDetails PrivateCompany Incorporated:1989 Employees:85,000 Sales:$10.9billion(1998) NAIC:541211OfficesofCertifiedPublicAccountants FurtherReference "Bean-CountersUnite,"Economist,October25,1997,pp.67--68.Berton,Lee,"ArthurYoung,andErnstFirmPlantoMerge,"WallStreetJournal,May19,1989.Burton,J.C.,ed.,ArthurYoungandtheBusinessHeFounded,NewYork:ArthurYoung&Company,1948.Cannon,Phillippa,"Ernst&YoungTaxBreaks$2BillionBarrier,"InternationalTaxReview,February1998,p.9."EntrepreneurialServices:Ernst&Young'sTerritory,"Emerson'sProfessionalServicesReview,November1991."E&W,AY,DH&S,andTRFinancialDataCreatesPublicStir,"Emerson'sProfessionalServicesReview,March,1990."E&Y:TheMastersofTotalQualityManagement,"Emerson'sProfessionalServicesReview,March1992.Ernst&Ernst:AHistoryoftheFirm,Cleveland:Ernst&Ernst,1960."Ernst&Young:DrivingforSpecializationandServiceIntegrationLeadership,"Emerson'sProfessionalServicesReview,March1990."Ernst&YoungSettlesLincolnSavingsCase,"NewYorkTimes,July15,1992."FinanceandEconomics:DisciplinaryMeasures,"Economist,March6,1999,pp.68--69.Jones,Edgar,AccountancyandtheBritishEconomy1840-1980:TheEvolutionofErnst&Whinney,London:B.T.Batsford,Ltd.,1981.Labaton,Stephen,"$400MillionBargainforErnst,"NewYorkTimes,November25,1992.Law,DonaldM.,"BusinessTycoonArthurYoungLovedLifeinAikenatCrossways,"AikenStandard,April19,1987.Moskowitz,Milton,etal.,Everybody'sBusiness:AFieldGuidetothe400LeadingCompaniesinAmerica,NewYork:Doubleday,1990.Stevens,Mark,TheAccountingWars,NewYork:Macmillan,1985.----,TheBigEight,NewYork:Macmillan,1981.----,TheBigSix:TheSellingOutofAmerica'sTopAccountingFirms,NewYork:Simon&Schuster,1991.Willis,Clint,"HowWinnersDoIt,"Forbes,August24,1998,pp.88--92. 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