In 2002, the Sarbanes-Oxley Act (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 .
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 (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 .
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.
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
Objectives and Research Focus
This paper aims to define the market position of Ernst & Young by analyzing its competitive environment, particularly in light of regulatory frameworks such as the Sarbanes-Oxley Act, and to empirically measure its market structure relative to its major competitors.
- Impact of the Sarbanes-Oxley Act (SOX) on auditing firm operations
- Competitive dynamics among the Big Four accounting firms
- Market structure analysis using the concentration ratio (CRn)
- Application of the Herfindahl-Hirschman Index (HHI) for market assessment
- Strategic shift and positioning of Ernst & Young within the global market
Excerpt from the Book
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. They all make revenues over US$ 13 billion. KPMG, PwC and DTT also provide services like audit, tax and advisory services for the same industries and they all have an equal reputation compared to Ernst & Young. Thus they are in the same market like Ernst & Young. There is only a small difference between the industries, for eaxample PwC also defines aerospace and defence as an industry. Ernst & Young sees these three firms as its main competitors and defines its competitive position in comparison to KPMG, PwC and DTT. Because Ernst & Young, KPMG, PwC and DTT audit two thirds of the 500 biggest companies and dominate the auditing market, they are also called the Big Four.
The question is how there can be a competition among the Big Four under all the restrictions for the professionals. Since rules like the § 52 WPO regulate the advertising of auditing firms, where no negative or persuasive advertising is allowed. Even stronger is the § 55a WPO, which regulates the salary of a professional. Thus there is only a limited price competition among the auditing firms by cutting their costs. The result is that the Big Four have their regular customers and a continuous demand for audit services, because laws like the PublG forces public firms to audit their annual statements. The only chance to expand is acquiring new customers. Ernst & Young, for example, entered new markets with innovations like “Ernie”, an online consulting service for small businesses. Another example is the Ernst & Young Middle Market Consulting group. This innovation was introduced in 2000 for medium sized businesses.
Summary of Chapters
1. Introduction: Discusses the impact of major accounting scandals on public trust and introduces the Sarbanes-Oxley Act as a regulatory response affecting the audit profession.
2. The history of Ernst & Young: Outlines the formation, mergers, and strategic developments of the firm from its origins to its current global stature.
3. The relevant market: Defines the competitive landscape, covering service offerings, the dominance of the "Big Four," and secondary competitors in the market.
4. Measuring the market structure of Ernst & Young: Applies quantitative economic models, specifically the concentration ratio and the Herfindahl-Hirschman Index, to evaluate market dominance.
5. Conclusion: Summarizes the current competitive state and speculates on future market shifts driven by regulation and strategic focus.
Keywords
Ernst & Young, Big Four, Sarbanes-Oxley Act, SOX, Auditing, Market Structure, Concentration Ratio, CR4, Herfindahl-Hirschman Index, HHI, Industrial Organization, Audit Services, Corporate Governance, Financial Reporting, Market Competition.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the market structure and competitive positioning of the auditing firm Ernst & Young, particularly focusing on the influence of new corporate regulations.
What are the central themes of the research?
The study covers the history of Ernst & Young, the competitive dynamics of the global audit market, and quantitative methods for measuring market concentration.
What is the main goal of this study?
The objective is to define the market of Ernst & Young by analyzing its relationship with competitors under legal restrictions like the Sarbanes-Oxley Act and measuring its market structure.
Which scientific methods are used to analyze the market?
The author uses industrial organization metrics, specifically the four-firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI).
What topics are discussed in the main body of the paper?
The main body details the historical growth of the firm, the services provided to clients, competition among the "Big Four," and the financial analysis of the auditing market.
What are the key terms that describe this work?
The work is characterized by terms such as market structure, audit industry, Big Four, corporate governance, and quantitative economic metrics.
Why are small and medium-sized firms not considered major competitors for Ernst & Young?
According to the text, smaller firms lack the global reach, the specific expertise for large-scale corporate audits, and the reputation necessary to compete for the clients served by the Big Four.
How does the Sarbanes-Oxley Act influence the competitive landscape?
The act imposes restrictions that force firms to separate consulting and auditing activities, which encourages some shift in the market as firms reassess their primary business focus.
- Arbeit zitieren
- M.A. Timo Duits (Autor:in), 2005, Ernst & Young - The firm's market, München, GRIN Verlag, https://www.grin.com/document/61409
