E&Y

Ernst & Young International

Company Profile

Publication Date: 17 Mar 2010

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Ernst & Young International

TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts...............................................................................................................4

SWOT Analysis.....................................................................................................5


Ernst & Young InternationalTABLE OF CONTENTS

COMPANY OVERVIEW

Ernst & Young (E&Y) is a privately held provider of accounting and auditing, tax reporting andoperations, tax advisory, and business consulting services. The company operates in around 140countries in Americas, Europe, Asia and Africa. Ernst & Young is headquartered in New York City,New York and employs 144,441 people.

The company recorded revenues of $21,440 million during the financial year (FY) ended June 2009,a decrease of 6.8% over FY2008.

KEY FACTS

Ernst & Young InternationalHead Office5 Times SquareNew York CityNew York 10036USA

1 212 773 3000Phone

1 212 773 6350Fax

http://www.ey.comWeb Address

21,440.0Revenue / turnover(USD Mn)

JuneFinancial Year End

144,441Employees


Ernst & Young InternationalCompany Overview

SWOT ANALYSIS

Ernst & Young (E&Y) is a global firm that provides a range of services, such as accounting andauditing, tax advisory, tax reporting and operations, technology and security risk, human capital,business risk, and transaction advisory services. A vital strength of the company is the global reachof its member firms. The company has 700 office locations in 140 countries and is one of the BigFour global audit companies around the world. A strong global reach enables the company to takeadvantage of regional opportunities at the same time reducing the impact of regional threats. However,increasing competition could adversely affect margins of the company.

WeaknessesStrengths

Higher dependence on Fortune 500 andother quasi government clients affectingaudit fee income

New organizational structure strengtheningcompetitive edgeExtensive global reach and wide range ofservices sustaining momentum revenue Regulatory fines may tarnish imageGood liaison with the US government helpsin winning repeat business

ThreatsOpportunities

Easing regulatory restrictions could fostercompetition

Global economic recovery could increasedemand for consulting services

Increasing incidence of accounting scandalslikely to shift the demand away from BigFour

Addition of Mitchell & Titus firm likely togenerate higher business in the USAdoption of IFRS standards could spursustain demand for E&Y’s services

Strengths

New organizational structure strengthening competitive edge

Ernst & Young's organizational structure has strengthened in recent months. In 2008, Ernst & Youngbrought 87 practices together to create Europe, Middle East, India and Africa Area, and 15 practicestogether to create Far East Area. As a result of these efforts, the company is more global in itsoutlook, more integrated in its thinking and more inclusive in its approach. Moreover, the new structurehas helped the company improved its capacity to invest. The company is expected to generate costsavings as its operational effectiveness is streamlined and more efficient. The other benefits of thenew structure include continued strong quality and risk management across the organization throughbetter consistency, and accelerated decision-making through the operation of streamlined parallel


Ernst & Young InternationalSWOT Analysis

structures right across the organization, from Global, to Area, to business unit. More importantly,the new structure is expected to help the company compete well against its competitors.

Extensive global reach and wide range of services sustaining momentum revenue

Companies with extensive global reach and wide range of services generally tend to exhibit asustainable positive momentum in revenue. Ernst & Young is one such firm. Ernst & Young haspresence in 700 locations in 140 countries and is one of the Big Four global audit companies aroundthe world. Extensive global reach has helped the company generate significant revenues fromdifferent parts of the world. On one hand, the company is able to sustain revenue base in matureregions such as Americas and Japan, and on the other hand it is able to increase revenue growthmomentum in emerging areas such as Middle East, India and Africa. At the end of FY2009, thecompany’s revenue mix by geography was as follows: Europe, Middle East, India and Africa (44.9%),Americas (40.3%), Japan (5.6%), Far East (5.3%), and Oceania (3.8%). Ernst & Young provides arange of services (accounting and auditing, tax reporting and operations, tax advisory, business riskservices, technology and security risk services, transaction advisory, and human capital services)to clients in different industries. Globally, Ernst & Young supports 26 industry sectors, and operatesGlobal Industry Centers for half the industries that it serves. As a result, the company’s revenue mixby business division was as follows: assurance (47.3%), tax services (27.2%), advisory services(16.7%), and transaction advisory services (8.8%)*.The company’s focus on emerging geographiesand industries is expected to help it sustain revenue run-rate.

Good liaison with the US government helps in winning repeat business

Ernst & Young maintains good liaison with the US government which helps it win large governmentmandates. For instance, in October 2008, Ernst & Young was hired by the Treasury Department ofthe US Government to help the government implement the $700 billion bailout program aimed atWall Street and the economy. As a part of the $700 billion bailout program, the US government, USTreasury Department and the US Federal Reserve launched their Troubled Asset Relief Program(TARP) to help inject liquidity and stability into the US banking system. Around $250 billion of thisis used to buy preferred stock from several large commercial banks and a variety of regional banks.Ernst & Young was hired to provide general accounting support to implement TARP, and will initiallyget $492,000 from the Treasury. Ernst & Young’s positive relationship with the US governmentstrengthens its government services practices besides helping the firm stay ahead of competitors.

Weaknesses

Higher dependence on Fortune 500 and other quasi government clients affecting audit fee income

Though Ernst & Young doesn’t disclose client concentration risk, it is believed that it generatessubstantial audit fee income from Fortune 500 and other quasi government clients.The dependenceon these clients is likely to be weak spot going forward. The current financial crisis in the US hastaken a big toll on some of the Fortune 500 and other quasi government clients in the recent few



months, with unimaginable consequences for the entire financial sector. FannieMae and FreddieMacare now under US government conservatorship, Bear Stearns was acquired by JP Morgan, MerrillLynch was acquired Bank of America, and Lehman Brothers filed for chapter 11.The list of distressedcompanies among the Fortune 500 is likely to get bigger as weeks roll by. All these were publiccompanies traded on the stock exchange and being regularly audited by the Big Four firms includingErnst & Young. Now with the loss of these firms, the firms have lost big audit fees, not counting anycontinuations of audit under US government conservatorship or their buying companies, or eventualwork from these events. For instance, Ernst and Young is expected to have lost an opportunity worth$30 million at 2007 levels due to the change of ownership of: Lehman Brothers (2007 total fees:$30.1 million, 2006 total fees: $29.5 million). In FY2008 and FY2009, around 27%-29% of S&P 1200clients served by Ernst & Young were related to audit services. Similarly 26%-28% of Fortune 500clients served by Ernst & Young were related to audit services. Higher dependence on large clientsis likely to affect Ernst & Young’s audit fee income in the coming accounting periods.

Regulatory fines may tarnish image

In August 2008, Ernst & Young was ordered to pay disgorgement of $2,381,965 and prejudgmentinterest of $537,022.79 to the Securities and Exchange Commission (SEC). Ernst & Young wasfound to have violated Exchange Act § 4C and Rule 102(e) of the SEC’s Rules of Practice. Theseviolations relate to relationship between Ernst & Young and Mark C. Thompson, during whichThompson was a Board of Directors member of three Ernst & Young audit clients. Ernst & Youngand Thompson collaborated to create a series of audio CDs called The Ernst & Young ThoughtLeaders Series between October 2002 through early May 2004. Apparently, Ernst & Young paidThompson over the course of the relationship, $377,500, for co-producing seven completed CDs infive separate audiobooks, and unbeknownst to Ernst & Young, this sum was approximately half ofMr. Thompson’s net income at the time. It appears that Ernst & Young did not adequately disclosethe relationship to Ernst & Young audit clients. By doing so, Ernst & Young violated its auditorindependence. SEC’s order asking Ernst & Young to pay a sum of approximately $2.9 million forviolation of the above cited rules is likely to tarnish the image of the company among its client base.

Opportunities

Global economic recovery could increase demand for consulting services

According to the International Monetary Fund (IMF), the global economy registered a contraction of0.8% in 2009, compared to a growth of 3%. In 2010, IMF expects the global economy to register agrowth of 3.9%. Economies across Ernst & Young's key markets are likely to see a spur in economicgrowth. For instance, GDP growth in the US, the UK, Euro area, Japan, and Emerging and developingeconomies are likely to be 2.7%, 1.3%, 1%, 1.7%, and 6% respectively.The global economic recoverycould increase the demand for the company’s services especially consulting services.

Addition of Mitchell & Titus firm likely to generate higher business in the US



Mitchell & Titus joined as a member of the Ernst & Young's global organization of accounting firmsin early 2007. Founded in 1974, Mitchell & Titus is ranked among the 100 largest accounting firmsin the US. It has a staff of around 125 people providing auditing, tax and advisory services for Fortune1000 companies, entrepreneurial enterprises, non-profit organizations, government entities, andhigh net-worth individuals. Mitchell & Titus is the US' largest minority-owned accounting firm. Theglobal Ernst & Young organization consists of separate member firms in 140 countries, includingErnst & Young in the US. As a member firm of the global Ernst & Young organization, Mitchell &Titus would follow the organization's quality and risk management and independence proceduresand also have access to leading technological resources and the collective knowledge base of theother member firms around the world. As the two client-serving members of the global Ernst & Youngorganization in the US, Mitchell & Titus and Ernst & Young would work on some client engagementsjointly, in addition to providing business referrals, where appropriate. Mitchell & Titus would furtherstrengthen the company's operations and add skilled staff in the US.

Adoption of IFRS standards could sustain demand for E&Y’s services

According to a November 2008 survey, an increasing number of company finance professionalswould consider adopting International Financial Reporting Standards (IFRS) sooner than the pathrecently outlined by the Securities and Exchange Commission in its proposed IFRS roadmap. About42% of more than 200 finance professionals who responded to the survey indicated they wouldconsider implementation of IFRS sooner than 2014, if that were permitted under the mandatedadoption date proposed by the SEC.This represents a significant increase from a similar IFRS studyperformed earlier in 2008 that showed 30% of respondents would consider adopting IFRS, if givena choice. Among the leading factors driving companies’ interest in considering adopting IFRS soonerwas simplified financial accounting and reporting and, separately, improved financial reporting andtransparency. Both of these factors were cited by 37% of the companies surveyed that would considerearlier adoption. Companies in the survey that would consider adopting IFRS at an earlier date arepredominantly in the technology, media and telecommunications (TMT), manufacturing and financialservices industries. Fifty-seven percent of respondents from companies operating in the TMT industrywould consider adopting before 2014. For financial services, 42% percent of respondents wouldconsider early adoption. Ernst & Young’s strong presence in these industries allows it to benefit fromthe demand for IFRS adoption.

Threats

Easing regulatory restrictions could foster competition

Ernst & Young operates in a highly competitive industry. The company faces competition from largeplayers such as Deloitte, McKinsey & Company, PricewaterhouseCoopers, KPMG and BostonConsulting Group. It also competes with management consulting firms in the strategy implementationand system integration services. Other competitors of the company include Bain & Company, BDOInternational B.V., BearingPoint, Mercer International, Accenture and Capgemini. If the changes inregulations across geographies become laws then competition could increase leading to an adverseimpact on the company’s market share.



Increasing incidence of accounting scandals likely to shift the demand away from Big Four

Ernst & Young, in the wake of Andersen's infringements, would be subject to amplified scrutiny, andare potentially at risk from any allegations, which could have a more immediate impact upon businessthan was the case pre-Enron. Enron and WorldCom collapsed in the two biggest bankruptcies inUS history. Enron's decline wiped out $68 billion of market value and at least $1 billion in retirementfunds. WorldCom's $11 billion accounting fraud prompted investors in 110 countries to file 450,000claims.The government increased scrutiny of the reports and audits after the collapse.The SarbanesOxley Act was introduced after the fall of Enron and WorldCom in order to govern audit, providemanagement reports on internal controls over financial reporting and have outside auditors issueformal opinions on those reports. Recent Internal Revenue Service (IRS) steps may limit serviceofferings. The IRS has singled out various companies for their tax sheltering strategies (by way ofwhich they allegedly misreported clients' financials minimize their tax obligations). In 2007, fivebusinessmen have sued Ernst & Young, accusing it of roping them into an illegitimate tax shelterwhich resulted in millions of dollars in IRS penalties, interest and professional fees. The companymay have to pay penalties and bear unpaid taxes and interest for their participation in the shelters,which may tarnish the global image of the company. Moreover, recent Satyam Computers accountingscandal in India is believed to affect business volume of Big Four.



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