Professional Services Monitor: Today

The Financial Times calls Ernst & Young’s announcement today “biggest shake-up of the professional services industry since the collapse of Arthur Andersen,” and BDO Stoy Hayward managing partner Jeremy Newman says he is “impressed.”

Ernst & Young announced that 87 country practices in Western and Eastern Europe, the Middle East, India and Africa have proposed merging into a single unit, and 700 partners in 15 Far East countries have announced similar plans for another integrated entity.

Ernst & Young today announces that its Global Executive and the Global Advisory Council approved the proposed integration of all of its 87 country practices in Western and Eastern Europe, the Middle East, India and Africa into a new EMEIA Area. It also confirmed that more than 700 partners in the Far East had supported a similar integration across 15 countries and territories.

The EMEIA Area will operate as a single unit, led by a single executive team and, where allowed by laws and regulations, be underscored by formal combinations of practices. The new Area will be a US$11.2 billion organization with more than 60,000 people. The 3,300 partners of EMEIA will vote on the integration by the end of May. The new EMEIA Area will be effective from 1 July 2008.

The integration of the Far East Area creates a US$1.2 billion organization, with more than 20,000 people. The new structure will also be effective from 1 July 2008.

Mark Otty, currently the head of our UK practice, has been nominated to be the EMEIA Area Managing Partner, while David Sun and Jim Hassett were confirmed as Far East co-Area Managing Partners.

This is unquestionably the proverbial “big deal.”  To those outside the business of following the global audit industry, this might come as surprise, presuming that E&Y is E&Y, whether in the UK, UAE or USA.  The true, of course, is that global Big Four are more unified as brands than as legal, corporate business entities. Ernst & Young’s move here puts nearly (estimated) 95% of its fiscal 2007 global revenues into three entities: EMEIA, 53%; US, 36%; and Far East, 6%.  Along with all the other questions specific to E&Y’s challenge—integration issues, risk management, liability—is how the other Big Four will respond.

For those of us who track such things as “professional fees paid to auditors,” February, March and April are hectic months as December fiscal year end companies file their latest proxy statements.  Ames Research Group tracked about 1300 proxy statements and 20F filings during March 2008, and we will probably double that number during April.

Below are some preliminary findings from what we tracked during March.  All summaries are based on companies with $500 million in revenue and greater.

10 Largest Gains in Total Fees (Companies over $500 million) 

Full Chart
 

10 Largest Drops in Total Fees (Companies over $500 million)

Full Chart
 

Average Fees Change, FY06 to FY07 (Companies over $500 million)

Ernst & Young this week took the digital wraps off a new look for its website.  The firm retains the “Quality in Everything We Do” tagline while modernizing its look.  

‘Ernst & Young has strengthened its brand, messaging and positioning, in order to present a more consistent and connected view of Ernst & Young in its interactions with its people, its clients and the wider communities it serves,’ the firm said in a statement.

Accountancy Age first reported the firm’s plans to re-brand in October last year, but this was hotly denied by Ernst &Young’s global press office at the time.

Archive.org has an example of E&Y’s former look from Dec. 2006, and the new look is much improved.  And then there is the first EY.com from 1996, complete with animated GIF.

McGladrey & Pullen has been sued by the bankruptcy trustee for Sentinel Management Group, Frederick Grede, for $550 million, according to the Wall Street Journal.  Gede accuses McGladrey of “certifying false financial statements and creating some of the accounting entries that led to Sentinel’s financial misstatements.”

Mr. Grede, whom the court appointed last year to oversee Sentinel’s bankruptcy, said the firm’s “failure to properly fulfill its responsibilities” let Sentinel executives run the company for their own benefit.”"M&P’s failure to either ensure that Sentinel’s financial statements accurately reflected the facts or refuse to certify materially misstated financial statements, as well as its failure to report these violations in its audit report and to authorities, reflects a deliberate disregard of M&P’s obligations as an auditor,” he said.

Grede has also sued three former Sentinel executives and the Bank of New York.Thus far, McGladrey has not made comment on the suit.  Considering what BDO has faced in the ES Bankest case after deciding to go to trial,  one wonders whether McGladrey will seek a settlement.

Yesterday, Ernst & Young announced a new careers portal, EY Insight.

As part of Ernst & Young LLP’s ongoing focus to recruit a broad talent base of approximately 10,000 employees this year, the firm has launched EY Insight, a fully interactive careers web site experience that provides engaging, personalized tools for prospective employees. EY Insight can be viewed at www.ey.com/eyinsight/index.html.

The site itself is slickly designed, the epitome of Gen-Y targeting on the Web. One interesting feature, Picture Yourself, is a shopping-cart-like tool to assemble a matrix of academic experience and job interests into potential E&Y career paths.“EY 360″ repackages the tried and true “portrait of a young professional” profile and creates a Facebook style snapshot, including “confessions” and a sample daily timeline, complete with a video of a 7:00 AM surfing session before work.

In an 8K filed Tuesday, Broadcom announced its dismissal of Ernst & Young and engagement of KPMG. This is a nice win for KPMG, but the more interesting part of the event was one sentence within the filing:

The decision to change auditors was the result of a competitive process, conducted as part of the Company’s ongoing efforts to enhance its corporate governance practices, that was launched in conjunction with the rotation of the lead E&Y audit partner off the Company’s account pursuant to Rule 2-01(c)(6) of Regulation S-X.

That partner rotation rule, part of Sarbanes-Oxley, requires that the lead and concurring partners rotate off engagements every five years. With smaller audit firms and smaller clients, this has been a big deal. Since a small firm has only so many partners to go around, this often means the loss of a client after five years for the reason alone. Among larger firms and clients, however, we have not seen this mentioned in many, if any, auditor changes.

Broadcom had used Ernst & Young since its 1998 IPO, if not longer, meaning it could have been working with the same partner for 10 years. While we have no further information than this on the situation, that mention under these circumstances seems to bring to light the importance of personal relationships, even with a Big Four firm and a billion-dollar client. Through our Quarterly Competitive Summary, we interview hundreds of CFOs every year following auditor changes. Rising fees and independence concerns have been key reasons cited by CFOs for making an auditor change over the past three or four years. But other factors having to do with the relationship, such as previous experience with a firm, have been a constant through the nine years we have done this research. Furthermore, smaller companies say over and over again that they leave, or are left by, the Big Four in order to get more personal service at Crowe Chizek or Grant Thornton.

The Wall Street Journal features a front-page story this morning on corporate efforts to provide and supplement curricula in schools, including Deloitte.

In a recent class at Abraham Clark High School in Roselle, N.J., business teacher Barbara Govahn distributed glossy classroom materials that invited students to think about what they want to be when they grow up. Eighteen career paths were profiled, including a writer, a magician, a town mayor — and five employees from accounting giant Deloitte LLP.
“Consider a career you may never have imagined,” the book suggests. “Working as a professional auditor.”

While some will undoubtedly criticize a commercial influence in schools, I feel Deloitte’s program as described is necessary and beneficial for all parties. After all, the bulk of corporate presence in schools is more likely to be marketing and sales–vending machines and the like– then educational materials, even if from a particular corporate viewpoint. In Deloitte’s case, they are not pulling out the best and brightest prospects immediately, leaving mysteriously empty desks across Advanced Placement classrooms. Instead, these sort of programs just provide some awareness of the profession and careers in it.

Yesterday, Grant Thornton announced and unveiled its rebranding effort.

Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (Grant Thornton International), unveils its new brand identity today, February 19, 2008. Grant Thornton International member firms around the world will also use the new global brand identity and logo.

As the largest Grant Thornton International member firm, Grant Thornton LLP plans to roll out the new brand in two phases. Phase 1, which concludes with the international rollout today — Feb. 19 — includes the relaunch of the firm’s new Web site, re-branded and re-designed, and a new advertising program for print, radio and television. Phase 2, which will continue from Feb. 19 throughout the rest of 2008, includes the rebranding of the firm’s: thought leadership pieces and new marketing collateral, as they are released; event materials and signage; and existing marketing and other communications.

After a 15-minute tour through Phase One, the new GrantThornton.com, I am impressed with their redesign. Visually, it looks modern and hip, but quite professional, a Web 2.0 motif adapted for serious business. The design is reminiscent of the “-r” sites, such as Flickr.com or Twitter.com, or Facebook.com. Navigation is intuitive and the site makes good use of an adaptive three-column layout. Top level links are consistently displayed across the top, sublinks on the left, content in the middle, and highlights and other extras down the right side. The style serves the substance of the site well, bringing some simplicity to the presentation of the voluminous articles, bulletins, and service descriptions that must fill a major firm’s website.

Moreover, I am impresses with the Grant Thornton’s comprehensive investment in its brand presentation. This is a big effort and requires commitment from firm leadership over the long-term.

The SEC has announced that it will conduct a cost-benefit analysis of the small-issuer 404 attestation requirement. The study will collect data from companies already subject to the attest part of SOX 404, including those just now becoming compliant.

At the same time, the SEC is proposing another one-year extension for this same group of companies.

In connection with the study, the four-member Commission unanimously proposed on Jan. 31, 2008, the one-year extension of the Section 404(b) auditor attestation requirement for smaller companies that SEC Chairman Christopher Cox had previously announced in testimony before the House Small Business Committee in December 2007. The postponement would allow time for completion of the study. Under the proposed extension, the Section 404(b) requirements would apply to smaller public companies beginning with fiscal years ending on or after Dec. 15, 2009.

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