Table of contents

1.  Introduction  

2.  The history of Ernst Young  

3.  The relevant market  

3.1.  Services and clients of Ernst Young  

3.2.  Competition among the Big Four  

3.3.  Other competitors  

4.  Measuring the market structure of Ernst Young  

4.1.  With the concentration ratio  

4.2.  With the Herfindahl-Hirschman Index  

4.3.  With financial results  

5.  Conclusion  

6.  Appendix  

7.  References  

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1. Introduction

In 2002, the Sarbanes-Oxley Act ¹ (SOX) was passed in response to a number of major corporate and accounting scandals involving prominent companies in the United States like Enron, Arthur Andersen, and WorldCom. These scandals resulted in a loss of public trust in accounting and reporting practices ² .

It is now the goal of the Sarbanes-Oxley law to restore public trust in the corporate world for shareholders and all other stakeholders like banks, employees, tax authorities, etc. In the slipstream of this vast legislation in all these jurisdictions, audit firms are facing certain restrictions. For example, providing legal services to Security and Exchange Commission ³ (SEC)-registered companies and all their subsidiaries and affiliates wherever in the world is now prescribed if you are the auditor of one of those entities. Tax advisory services for SEC audit clients are allowed, provided you follow certain procedures ⁴ . These regulations and the increased awareness of corporate governance issues have affected the profession of auditors. It has in many cases forced the auditing firm Ernst & Young to redefine its relationship with clients and reestablish its expectations and its deliverables. In most countries you see an increase of demand for audit and tax services. But the market shows some shifting. There is not only a competition amongst the Big Four (Ernst & Young, KPMG, PricewaterhouseCoopers, Deloitte Touche Tohmatsu), but also with a few other companies. The goal of this paper is to define the market of Ernst & Young through describing its relationship to the competitors in terms of restrictions like the SOX and to measure its market structure.

¹ The Sarbanes-Oxley law contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties and was sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley.

2 Techlistings and Sixsigmatutorial (Sarbanes Oxley) 1 ^st page

³ The primary mission of the U.S. Securities and Exchange Commission is to protect investors and maintain the integrity of the securities markets. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment.

⁴ U.S. Securities and Exchange Commission (what we do) 1 ^st page

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2. The history of Ernst & Young

But first of all it is necessary to describe the history of Ernst & Young. Arthur Young, born in 1863 in Scotland, was a graduate of the Glasgow University. 1906 he migrated to the United States and founded Arthur Young & Co. in Chicago.Alvin Ernst was born in the United States in 1881 and worked as a bookkeeper after the high school. In 1903 he established Ernst & Ernst with his brother Theodore.The establishment of a federal income tax in 1913 leads each firm to set up tax departments. Eight years later, 1921, Arthur Young & Co. formed a national partnership to unite its five offices and its headquarters in New York. In 1924 Ernst & Ernst formed an affiliation with the British auditing firm of Whinney, Smith and Whinney. In the 1930s Arthur Young & Co. began recruiting canditates on college campuses because of a growing labor shortage among qualified accountants. 1948 Arthur Young dies at age 84 and a few months later Alvin Ernst passes away at the age of 66. Ernst & Ernst formalized in 1979 its relationship with the British firm Murray & Company to form the worldwide organization Ernst & Whinney. In 1989 Arthur Young and Ernst & Whinney merged to form Ernst & Young. Six years later, 1995, Ernst & Young merged with Kenneth Leventhal & Company to enlarge its professional services to the real estate industry ⁵ .

1998 Ernst & Young tried to merge with its competitor KPMG Peat Marwick (as the currently-named KPMG was then called). But the planned merger failed because of the European regulatory concerns ⁶ .

In 2000 Ernst & Young sold its consultancy to Cap Gemini, a French IT consulting firm, in response to regulatory scrutiny of possible conflicts of interest implicit in auditing. The result is Cap Gemini Ernst & Young (CGE&Y) and a growth in the firm’s IT and management consulting services ⁷ . Two years later, 2002, Ernst & Young merged with Arthur Andersen, an international auditing firm ⁸ . Because of that Ernst & Young is nowadays one of the world’s largest auditing firms with 106,650 employees in 700 offices in 140 countries ⁹ .

⁵ Ernst & Young International (history) 1 ^st page

⁶ iWon (Ernst & Young) 1 ^st page

⁷ Vault (CGE&Y) 1 ^st page

⁸ Computerworld (Ernst & Young and Arthur Andersen merge) 1 ^st page

⁹ Hoovers (Ernst & Young) 1 ^st page

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3. The relevant market

3.1 Services and clients of Ernst & Young

To start with Ernst & Young offers assurance & advisory business services. That’s the first core business of Ernst & Young covering identification of information technology vulnerabilities, internal audit, risk management, corporate governance, and internal control reporting services. Furthermore the firm has one of the world’s largest tax practices. That’s the second core business including global corporate compliance, indirect tax, international tax, tax accounting, transaction tax, and risk advisory services. But Ernst & Young also provides legal services like corporate restructuring, due dilligence, employment risk management, IP value management and corporate governance. Moreover the firm offers services relating to emerging growth companies, human ressources issues, and corporate transactions (like mergers and acquisitions) ¹⁰ .

All these services are provided to the financial services, technology communication and entertainment, energy chemicals and utilities, health sciences, industrial products, real estate hospitality and construction, and retail and consumer products industries ¹¹ . However, the auditing market and thus the competition among the Big Four are characterized by public trust. Public trust associated with reputation affects the auditing market and is therefore one of the most important competitive advantages.

3.2 Competition among the Big Four

KPMG, PricewaterhouseCoopers (PwC) and Deloitte Touche Tohmatsu (DTT) are all international auditing firms with over 90,000 employees in about 140 countries ¹² . They all make revenues over US$ 13 billion ¹³ . KPMG, PwC and DTT also provide services like audit, tax and advisory services for the same industries ¹⁴ and they all have an equal reputation compared to

¹⁰ Ernst & Young International (services & solutions) 1 ^st page

¹¹ Ernst & Young International (industries) 1 ^st page

¹² KPMG International (Annual Report) 17 ^th page, PwC International (Annual Review) 49 ^th page, DTT International (Review) 6 ^th page

¹³ KPMG International (Annual Report) 50 ^th page, PwC International (Annual Review) 46 ^th page, DTT International (Review) 29 ^th page

¹⁴ KPMG International, PwC International, DTT International (services and industries) 1 ^st page

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