THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS

THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS

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An Analysis Of The 2009 Financial Performance Of The World’s Largest Accounting Firms

By Big4.com

January 2010

THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS
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EXECUTIVE SUMMARY

2009 was a difficult year overall for the Big Four accounting firms: Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as their financial performance was affected by tough external conditions, slow global economic growth, cost-conscious clients and sluggish merger and acquisition activity.

After an extraordinary period of continuous revenue growth from the early 2000s to 2008, combined revenue for the four firms in fiscal 2009 did fall by 7% from fiscal 2008 in US dollar terms. Revenue decreases in US dollar percentage terms ranged from negative 5% for Deloitte to negative 7% each for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG.

The large fall in US dollar terms was also driven by the appreciating US dollar during the period. Despite this, the combined revenues of the Big Four firms was an astonishing $94 billion, with PwC retaining its leadership position as the largest accounting firm on the planet by narrowly beating Deloitte.

The Americas region represents about 40% of global revenues for the Big Four firms, but its share has been falling over the years, due to the preponderance of mature markets. Contrary perhaps to common belief, Europe, Middle East and Africa has the highest percentage of total revenues for the Big Four firms at 45%. Asia Pacific, while being the smallest region at 15% of revenues, has posted the highest growth rates, owing to the strong upswing in many emerging Asian economies.

The Audit service line accounts for almost 50% of total revenues and has been generally holding at this level across the years. Tax services experienced strong growth in 2006 to 2008, in sync with global merger and acquisition transactions activity. Advisory services has been the fastest growing service line as the firms extend their services into risk management and business consulting.

The Big Four firms cumulatively employ more than 600,000 professionals globally, with a total of 34,000 partners overseeing a steep pyramid of about 470,000 professionals.

Despite the world’s worst financial crisis for over 70 years, the Big Four firms turned in quite a creditable performance, with revenues falling only by a small percentage in local currency terms. For 2010 and beyond, we will likely see a return back to revenue growth, though it is debatable whether a string of double-digit growth over multiple years will be seen for the next few years. 2010 will also be an interesting year to watch for any changes in Big Four rankings, with a close race between Deloitte and PricewaterhouseCoopers for the leadership position.

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REVENUE PERFORMANCE

2009 Reverses Multi-year Revenue Growth Trend

2009 was a difficult year overall for the Big Four accounting firms: Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as their financial performance was affected by tough external conditions, slow global economic growth, cost-conscious clients and sluggish merger and acquisition activity. After an extraordinary period of continuous revenue growth from the early 2000s to 2008, mostly at a double-digit percentage rate, combined revenue for the four firms in fiscal 2009 did fall by 7% from fiscal 2008 in US dollar terms.

Quite apart from operating considerations, the large fall in US dollar terms was also driven by the appreciating US dollar during the period. The decrease in local currency terms was at a much lower level, ranging from negative 3% to positive 1%.

Despite the decrease in revenues, these large accounting firms posted some big numbers in 2009, their combined revenues was an eye-popping $94 billion, dropping from an all-time record level of over a $100 billion in 2008. Revenue decreases in US dollar percentage terms also differed across firms, ranging from negative 5% for Deloitte to negative 7% each for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG. In local currency terms, revenue decreases were more modest, from positive 1.0% for Deloitte, 0.2% for PricewaterhouseCoopers to negative 0.2% for Ernst & Young and negative 2.6% for KPMG.

The difference across firms was driven by the intrinsic nature of the firm itself and varying compositions of service lines and geographies and a small effect due to fiscal years which spanned different calendar months. Deloitte’s fiscal 2009 ended on May 31, 2009, E&Y and PwC’s fiscal 2009 ended on June 30, 2009 and KPMG was the last to close out the fiscal year on September 30, 2009. In 2009, this small difference in fiscal year-ends would have had a relatively higher impact, for example, KPMG’s fiscal year 2009 coincided exactly with meltdown in financial markets as Lehman Brother collapsed in September 2008. Other Big Four firms had three to five fewer months of this negative impact.

Fluctuations in the US dollar also contributed to the higher level of percentage drops. The US dollar appreciated strongly from mid-2008 to mid-2009 against a basket of foreign currencies, after staying weak in the prior twelve months. This had an unfavorable effect, as depreciating local currencies, where the firms earned revenue, were converted into US dollars, in which the firms reported their annual results. In general, decreases expressed in US dollar terms were about 7% lower than decreases expressed in local currency terms.

PricewaterhouseCoopers retained its first place as the largest accounting firm on the planet with revenues of $26.2 billion, narrowly beating Deloitte, a very close second with revenues of $26.1 billion. Ernst & Young took the third spot at $21.4 billion, and KPMG maintained its position as the smallest of the Big Four firms at $20.1 billion of revenues. Deloitte proved to the most resilient firm to the tough economy, with its revenue falling only 4.9% in US dollar terms, while close rival PricewaterhouseCoopers’ revenues decreased 7.1%. This enabled Deloitte to close the gap against PwC in 2008 to be at almost at par in 2009. In 2010, it will be interesting to see who will gain the leadership spot, as a relatively stronger performance by Deloitte could well edge it past PwC.

The Big Four firms have had an astonishing run up in total revenues over the last six years. In 2004, combined firm revenues were only $60 billion, but by 2008, this had moved up at a compounded annual growth rate of 14% to exceed $100 billion. Some of this gain was from the collapse of Andersen, as Andersen’s $10 billion or so of revenues in 2002 was generally redistributed over the remaining four firms. Beyond this, the global financial boom in the middle of the decade, combined with assertive penetration into emerging economies provided the engine for revenue increases.

This positive trend rapidly reversed in 2009, the first time in six years, as economies all over the world came to an abrupt halt in mid-2008, with many countries going into recessions, and ultimately affecting the seemingly unstoppable growth in Big Four firm revenues. Even with this drop in 2009, the six year compounded annual growth rate from 2004 to 2009 was 9%, a remarkable achievement, given that these multi-billion dollar enterprises had to grow their size by nearly 60% from a high starting point by either finding new revenue opportunities or penetrating current clients.

Despite being auditors for the world’s public companies who are required to report extensive details on their financials, the Big Four firms provide only very high level financial information with minimum commentary, with consequent impact on the depth of possible analysis in our study.

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2009 FIRM PERFORMANCE

We blogged on each firm’s 2009 financial performance as they sequentially reported on The Big Four Blog, and we encourage our readers to read those analyses to obtain a flavor of the timing and our immediate response.

Ernst & Young was the first to report its 2009 financials, and with Deloitte following (on a much delayed schedule) it became clear that the year was turning out to be quite challenging on the revenue line. PwC followed suit, showing flat revenue growth on a local currency basis. KPMG was the last to report in December 2009, and its revenues fell the most among all the four firms. Additional data points from the UK member firms, where the Big Four firms have to provide more detailed information, proved that the pressure on the top line was also leading to lower bottom lines and decreased profits per partner.

In 2009, while revenues fell drastically in developed markets, all firms generally noted that emerging markets were more resilient against slowdowns, and revenues rose in many developing countries. The appreciating US dollar caused the percentage drop in US dollars to exceed the more modest drops in local currency. In general the firms’ results met our expectations, though KPMG’s sharp fall was quite surprising. In addition, Ernst & Young changed their method of reporting in 2009, choosing to report combined, rather than consolidated revenues, which led to a lower level of reported revenues.

PricewaterhouseCoopers’s FY 2009 global revenues for the year ending June 30, 2009 was US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY 2008 in US dollar terms. However, on local currency terms FY 2009 revenues were actually higher than FY 2008 by a modest 0.2%. This performance enabled PwC to remain the largest accounting firm on the planet.

In terms of service lines, Assurance grew 2.0% in local currency terms to $13.1 billion, but in terms of US dollars, revenues actually fell by 4.8% from $13.8 billion in 2008. PwC attributed this to market-leading strength of the business and its continued focus on improved customer service and very competitive pricing. Tax services fell by 0.3% in local currency terms to $6.9 billion, but fell 7.5% in US dollar terms from $7.5 billion in 2008. Tax was impacted by the worldwide decline in corporate deals and restructuring work. Advisory services fell by 2.9% in local currency terms to $6.1 billion, but fell 11.4% in US dollar terms from $6.9 billion in 2008. This service line was the hardest hit by the global slowdown, as M&A and IPOs dried up and private equity firms slowed, while bankruptcy and restructuring work provided some offset.

In terms of geographies, Asia revenues rose about 4% to $3.7 billion in local currency terms but falling about 5% in US dollar terms from $4.0 billion in 2008. Revenues in the smaller regions of Middle East & Africa (up 9.1%) and South & Central America (up 13.3%) also rose strongly in local currency terms, showing strong growth in emerging markets. In the developed world, revenues in both Europe and North America declined, and since these account for 85% of total PwC revenues, they essentially drove the results for the firm. Revenue growth was high in a number of PwC member firms around the world, with particularly good results in Japan, Russia, Spain, Sweden and Canada.


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Deloitte Touche Tohmatsu, the global firm, reported fiscal 2009 revenues for the year ending May 31, 2009 of US$26.1 billion, an increase in local currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008.

By service line, Consulting (Advisory) was the fastest grower at 7.3% in local currency terms; and in US dollar terms, revenue increased 2% from $6.3 billion in 2008 to $6.5 billion in 2009. Audit was relatively flat against 2008 in local currency terms; in US dollar terms, Audit shrank by 6.4% from $12.7 billion to $11.9 billion. Tax was also relatively flat against 2008 in local currency terms; in US dollar terms, Tax revenues decreased by 5.5% from $6.0 billion to $5.7 billion. Financial Advisory Services revenue fell 6.1% in local currency terms, but in US dollar terms, fell by 13.8% from $2.4 billion in 2008 to $2.0 billion in 2009.

In terms of geography, Americas dropped 1.3% in local currency terms and 3.7% in US dollar terms from $12.9 billion in 2008 to $12.5 billion in 2009. Europe, Middle East and Africa rose 2% in local currency terms but dropped 9.0% in US dollar terms from $11.3 billion in 2008 to $10.2 billion in 2009. Asia Pacific grew 4.7% in US dollar terms from $3.2 billion in 2008 to $3.4 billion in 2009. The Asia Pacific region had local currency growth of 7.6% and was the fastest-growing region for the fifth consecutive year. India’s revenues grew 29.9%, Australia grew 11.5% and Japan grew 11.3% in local currency terms.

Africa, the Middle East, and Latin America and the Caribbean posted high growth rates of 21.3%, 15.6% and 13.7% respectively, in local currency.

Despite this remarkable performance, Deloitte was unable to beat PwC to be the largest Big Four firm in the world. Its 2009 revenues of $26.1 billion were behind PwC’s 2009 revenues of $26.2 billion by only $100 million or 0.4%. We had indicated in our earlier analysis that a 4.5% decrease in Deloitte’s revenues in US dollar terms would make it the largest among the Big Four firms. However, Deloitte’s overall revenues actually dropped by 4.9% from 2008 to 2009, narrowing, but not completely closing the gap against PwC. By showing remarkable performance in 2009, arguably one of the toughest environments in recent memory, Deloitte has shown that it is a strong contender for the leadership position.
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Ernst & Young’s combined worldwide 2009 revenues for the year ending 30 June 2009 were US$21.4 billion, decreasing a modest 0.2% in local currency terms from the comparable period in FY 2008 of US$23.0 billion in global revenues. In US dollar terms, the revenue actually declined 6.8% from 2008 to 2009.

Assurance Services with FY 2009 revenues of $10.1 billion offset price pressure with market-share gains, and revenues declined only 0.7% in local currency terms, but 6.3% in US dollar terms. Global Tax Services with FY 2009 revenues of $5.8 billion was up 1.8% in local currency terms due to increased tax enforcement, but dropped 5.2% in US dollar terms. Advisory Services with FY 2009 revenues of $3.6 billion was up 1.5% in local currency terms due to sustained demand for risk management and performance improvement, but dropped 6.0% from $3.8 billion in 2008 in US dollar terms.

Transaction Advisory Services with FY 2009 revenues of $1.9 billion, had a 6.9% decrease in local currency terms due to fall in M&A volumes, but revenues decreased a large 14.8% in US dollar terms from $2.2 billion in 2008.

Across E&Y’s five geographic areas, Japan grew at 7.5% in local currency terms, due to the acquisition of 1,000 professionals from accountancy firm Misuzu; and revenues increased 20% in US dollar terms. The Europe, Middle East, India and Africa (EMEIA) area grew 1.8% in local currency terms, but declined 9.7% in US dollar terms. Oceania decreased 0.4% in local currency terms, but declined a dramatic 15.9% in US dollar terms. The Far East decreased 2.7% in local currency terms and 5.9% in US dollar terms. The Americas area decreased 3.2% in local currency terms, but 5.5% in US dollar terms.

There were some bright spots however, with many of the emerging markets achieving strong revenue growth, including the Middle East at 18.6%, India at 13.1% and Brazil at 8.0%.

Ernst & Young made a key change to their reporting of revenues in 2009, electing to show combined, not consolidated revenues by eliminating intra-firm billings. E&Y restated its 2008 revenues down from $24.5 billion as originally reported to $23.0 billion reported as restated in 2009. The reason provided for this change was, “In line with our globalization efforts to harmonize policies across member firms, revenues for 2009 and 2008 related to member firm billings to other member firms have been eliminated from the financial information presented here. This financial information represents combined not consolidated revenues, and includes expenses billed to clients.”
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KPMG reported 2009 combined revenues for the fiscal year ending 30 September 2009 of US$20.1 billion versus US$22.7 billion for the prior 2008 fiscal year. This was an 11.4% decline in US dollars terms and a 2.6% decline in local currency terms, which was the highest drop among all Big Four firms.

By service line, Audit 2009 revenues were $10.0 billion versus $10.7 billion in 2008, down 6.9% in US dollar terms but a 0.5% increase in local currency terms. In the global financial services industry, Audit services' revenues actually grew 7%.

Tax services revenues in 2009 were $4.1 billion versus $4.7 billion in 2008, a 13.4% decrease in US dollar terms and a 4.3% decrease in local currency terms. But certain practices within Tax did very well: Transfer Pricing grew 5.3%, Indirect Tax grew 8% and International Executive Services grew 7.8%, all in local currency terms.

Advisory services revenues of $6.1 billion in 2009 decreased versus $7.3 billion in 2008, by a large 16.6% in US dollars terms and 6.6% decline in local currency terms. However, Advisory in China and the Middle East posted double-digit growth.

By geography, Americas Region had 2009 revenue of US$6.3 billion versus US$7.2 billion in 2008, decreasing 12% in US dollar terms and 8.6% in local currency terms. Bright spots included Brazil with 5% revenue growth, Mexico with 8.2% growth, Venezuela grew 22.9% and Chile's revenues rose 22.7%, all in local currency terms.

In Europe, Middle East and Africa, combined KPMG member firm 2009 revenues were $10.7 billion versus $12.4 billion in 2008, dropping 13.5% in U.S. dollars terms and 0.6% in local currency terms. Middle East and South Asia was the fastest growing sub-region in Europe; and KPMG in Africa had a 9.3% growth in local currency terms.

In Asia Pacific, combined 2009 revenues of $3.1 billion decreased 1.1% in US dollars terms but grew a substantial 3.9% in local currency terms. Some countries posted spectacular results: Korea had 19.4% growth, Vietnam and Cambodia each had 17.5% growth, and Japan had 7.2% growth, all in local currency terms. KPMG said that Asia Pacific member firms are beginning to see an increasing number of M&A transactions especially in China and Korea.

Revenues in the BRIC countries as a group grew 4.3%. Middle East and South Asia was the fastest growing practice with a 25% growth rate. KPMG’s BRIC headcount increased by 11.5% this year, with BRIC headcount nearly quadrupling in the past ten years.



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REVENUE BY GEOGRAPHY



The distribution of revenues by geography shows some very interesting insights. Contrary perhaps to common belief, Europe (including generally Europe, Middle East and Africa), rather than the Americas region (including Canada, the US and South America), has the highest percentage of total revenues for the Big Four firms, averaging 45% of total worldwide revenues. Americas average about 40% and the Asia Pacific countries (including India, South Asia, China, North Asia and Australia) have the remaining 15% of the revenue share.


The Americas

The Americas represent about 40% of global revenues, but its share has been falling over the years. From 2004 to 2009, there has been a noticeable drop of about 3% in the Americas region’s share of the total revenue for all the firms. In 2005, 43% of combined firm revenues were reported from the Americas region, whereas in 2009, it had dropped to only 40% of total firm revenues.

There also appears to be large variation across firms in the amount of revenue from this geographic region as a percentage of their global revenues. For example, Deloitte at the high end, sources 48% of its revenues from the Americas and KPMG at the low end has only 31% of its revenues from the Americas. Ernst & Young and PwC each have about 40% of their total revenues from the Americas, in line with the total firm average.

While Latin America, and particularly Brazil and Mexico have provided good growth opportunities for growth in recent years, the predominance of the mature markets of USA and Canada with slower growth has generally limited the expansion of Big Four firms in the Americas region. The 3% revenue share loss has generally gone to Asia Pacific, where emerging markets such as China, India, Korea and Vietnam have grown at disproportionately higher rates.

Europe

Europe, surprisingly, is the largest region by revenue for all Big Four firms. The Big Four firms typically combine Europe, comprising the developed countries of Western Europe, the up and coming markets of Eastern Europe with Middle Eastern and African nations for a giant EMEA region. Europe represents about 45% of global revenues, and as we see across the years, this total percentage has remained remarkably flat from 2004 to 2009. In 2004, 46% of combined firm revenues were reported from the Europe region, and in 2009, the same percentage 46% of total firm revenues came from Europe.

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As in Americas, each firm has a different percentage of European revenues as a share of the total revenues. KPMG at the high end sources 53% of its revenues from Europe (KPMG Europe being a key contributor) while Deloitte at the low end has only 40% of its revenues from Europe, this situation being a total polar opposite of the Americas. Ernst & Young and PwC each have 45% of their total revenues from Europe, in line with the total firm average.

This diverse European region comprises both of mature markets such as the United Kingdom, France, Italy and Germany, as well as fast growing Eastern European nations - Poland, Russia, Czech Republic, Hungary and Romania. The Big Four firms have had spectacular growth in Eastern Europe as these high growth economies have matured into capitalistic markets, requiring sophisticated audit, tax and transaction services.

The Big Four firms have had tremendous growth in Russia in particular as part of their BRIC initiatives. Europe also comprises the rapidly rising countries of the Middle East – including Dubai, Abu Dhabi, Kuwait, Saudi Arabia and Israel; as also the larger economies of the African continent – South Africa, Egypt and Nigeria for example. In the Middle East and Africa, the Big Four firms have capitalized on their historical small presence and posted very high annual growth numbers for the last few years, albeit from a smaller base.

Asia Pacific

Asia Pacific, while being the smallest region, has posted the highest growth rates of all regions. This diverse region comprises a few mature markets such as Japan and Australia, but mainly covers fast growth emerging markets such as China, India, Vietnam, Korea and Singapore. The Asia Pacific region has been in an economic boom for most of this decade, and their demand for Big Four firm professional services have multiplied. All the firms have grown at exceedingly high rates each year since 2004, with the result that combined revenues have doubled from $7 billion in 2004 to $14 billion in 2009.

Asia represents about 15% of global revenues for all the firms, and as we see across the years, this total percentage has increased steadily from 2004 to 2009. In 2004, 12% of combined firm revenues were reported from Asia, and in 2009, it had sharply increased to 15% of total firm revenues. This share gain came at the expense of the Americas region, which correspondingly lost its share of the pie.

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BRIC

The BRIC countries – Brazil, Russia, India and China – have been unquestionably the shining stars in the growth story in recent years. Though the firms do not report individual country revenues, there is typically some commentary on the annual report on the spectacular increases in these countries.

For example, Ernst & Young reported in 2009 that revenues in India had increased 13% and in Brazil by 8%; and KPMG said that their headcount in the BRIC countries had nearly quadrupled in the past ten years.

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REVENUE BY SERVICE LINE


The Big Four firms offer a wide variety of professional and financial services, with newer Advisory services adding to their more traditional and deep-rooted Audit (Assurance) and Tax Services. Firms vary in their structure and definition of these broad service lines, typically though about half the revenues are sourced from Audit, and the balance is shared between Tax and Advisory Services.


Audit

The audit service line, the largest in all firms, accounts for almost 50% of total revenues and generally holding this percentage level across the years. Typically Audit services is a steady business, as publicly traded clients renew auditor services each year with some increase in annual fees. Most companies prefer to maintain their auditors for a long time, providing stability to the auditors’ top line. The Audit service line experienced sharp growth in total revenues in 2005 to 2007, but this has slowed down sharply in the 2008-2009 years.

From 2008 to 2009, revenue for the Audit service line for the combined firms shrank by 6% in US dollar terms, which was better than the negative 7% in Tax service line and negative 9% in Advisory, which demonstrated the somewhat anti-recessionary nature of this service line. Audit fees came under pressure in 2009, but firms maintained their focus on client service and market share gains to mitigate any losses in revenue.

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Tax


The tax service line, forms about a quarter of the Big Four firm revenue and generally holding this percentage level across the years. Tax revenue are reasonably steady, as they derive revenue from add-on services provided to audit clients, in addition to tax services provided for transactions, complicated tax restructurings and other projects.

Tax had a very strong growth in 2006 to 2008, in line with large scale global merger and acquisition transactions activity, but had a sharp decline in 2009.

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Advisory

The Advisory service line, forms the last quarter of the Big Four firm revenue and includes the broader non-Audit and non-Tax services such as Transaction Advisory, Risk Management, and Business Consulting services; and demarcations generally vary across the firms. Owing to this catch-all nature of this category, there are many drivers of top line results, merger and acquisition activity being a principal factor.

Advisory services have been one of the fastest growers in the Big Four firms as the firms extend their services beyond assurance and taxation through penetration into current clients or through referrals from other firms who may be conflicted out at their clients. Advisory services have generally increased their share of revenues. In 2004, they had 22% of total revenues and this had sharply increased to 28% in 2009. Despite this sharp growth, Advisory services had the sharpest decline of 9% from 2008 to 2009, as clients slowed down transaction and restructuring activities all over the world.

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FIRM EMPLOYMENT ANALYSIS

The Big Four firms cumulatively employ more than 600,000 professionals all over the world, including partners, audit, tax and advisory professionals and administrative staff. This staggering number has been consistently on the rise since 2004, when cumulative employment was around 435,000 professionals.

Thus in six years, the number of people working at just these four firms has been around 175,000. Despite the reduction in revenues, net employment grew by more than 10,000 professionals from 2008 to 2009, with notably Deloitte and PwC adding to their workforce. The growth rate in employment of people dropped sharply to 2% in 2009.

Typical annual attrition rate at Big Four firms was running about 15% prior to 2008, so for example in 2008, the Big Four firms cumulatively would have made about 140,000 new hires to account for the loss of professionals and the additional growth. This works out to about 550 hires for each business day of the year.

Even in 2009, assuming attrition rates had dropped to 10%, new hires in 2009 would be about 70,000 equating to about 275 hires each day. Truly, Big Four firms are huge seekers of talent with correspondingly very busy recruiters even in a period of deep recession.

Elevation to partner at a Big Four firm is a tough and long process as every professional who has ever worked at one knows. Partners form an elite class within these large partnerships, and only one in about 20 people belongs to this exclusive club. In 2009, we estimate there were only about 34,000 partners in all the Big Four firms, overseeing a steep pyramid of about 470,000 professionals, thus the typical partner being responsible for about 14 professionals in 2009.

In 2004, the professional to partner ratio was only 11, thus partners are taking on more responsibilities in terms of professional management and development over the years.

Another metric that is closely watched is revenue per partner, in 2004, each partner was holding up $2.1 million in revenue, and this had crept up to $2.8 million by 2009, after peaking at $3.0 million in 2008. In other words, each partner was expected to bring in and manage client revenues of nearly $3 million in recent years to justify his or her position in the highest levels of the firms. Clearly, making partner is only the beginning of a series of demanding client development and professional responsibilities down the road.

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ERNST & YOUNG RESTATES REVENUE

Ernst & Young changed their revenue reporting methodology in 2009, by reporting “…combined not consolidated revenues, and including expenses billed to clients in line with globalization efforts to harmonize policies across member firms”. Under the prior consolidation method in 2008, Ernst & Young’s global revenues were $24.5 billion which were revised down to $23.0 billion under the new combined method of reporting. Ernst & Young restated only 2008 under this methodology but did not restate prior years, thus our analysis is affected by this reporting constraint.


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CONCLUSION

The 2007 to 2009 recession has been the world’s worst financial crisis for over 70 years, and despite such turbulence, the Big Four firms turned in quite a creditable performance, with revenues falling by single digits in local currency terms from 2008 to 2009. Since March 2009, global financial markets have seen a marked improvement in equity values, and general business conditions are decidedly in much better shape in December 2009 than earlier in the year.

Leading economic indicators in developed nations are on the uptrend and emerging market countries have posted multiple quarters of positive GDP growth. Clearly as we stand at the beginning of 2010, there is an optimistic outlook among leading executives, and all economies are decidedly on a growth pattern in the coming year. All these are positive indicators favor Big Four firm revenue growth, as the firms participate in an increasing level of financial activities pursued by their clients, whether it be tax restructuring or compliance, transfer pricing, mergers and acquisitions, strategic growth, risk management, IFRS conversions or audit compliance.

Having likely captured the worst of 2009’s impact in fiscal year 2009, we believe that fiscal year 2010, staring mid-2009 to mid-2010, will lead to positive revenue growth due to several key factors:

 An inherent improvement in underlying client fundamentals, with greater emphasis on implementing strategies their own top line growth

 Improved equity markets which are potentially poised to do better in 2010

 A low revenue base for easy comparison

 A depreciating US dollar, which has started sliding against major currencies in mid-2009

 More efficient Big Four firms, which have undergone internal restructurings and much better positioned to take advantage of growth prospects

 Higher penetration into emerging markets with better growth profiles

We think KPMG in particular will have the strongest fiscal 2010, since its fiscal 2009 ended in September 2009, and captured much of the crisis; and further its 2010 revenues will be compared to a much lower base.

The Big Four firms dominate their space and are unlikely to face any emerging competitors for a long time, and while regulation and audit litigation do pose operating and financial risks, it is unlikely that any of these single items will be of sufficient magnitude to generally upset the status quo.

For 2010 and beyond, we will likely see a return back to revenue growth, though it is debatable whether a string of double-digit growth over multiple years will be seen for the next few years. The Big Four firms have participated extensively in the explosive growth in the emerging markets, and further it will be harder to grow at high levels from an already huge revenue baseline, now exceeding $20 billion for each firm.

2010 will also be an interesting year to watch for any changes in Big Four rankings, with a close race between Deloitte and PricewaterhouseCoopers for the leadership position.



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Notes



All figures are in United States dollars



Disclaimer



Source of figures for this analysis are publicly available financial statements and / or press releases issued by Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP on their website or on the internet

Big4.com believes in these numbers, but does not guarantee their accuracy

Some numbers and ratios have been estimated due to non-availability of adequate information

This study is for information only and not to be relied upon for investing purposes

Totals may be affected by rounding





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Capgemini Employee Shareholding Plan A Success, Our Math Shows Why

In November 2009, we had reported on the our news feed on Capgemini’s effort to launch a shareholding plan for its employees, with a maximum of 6,000,000 shares reserved for their employees, opening on November 17, 2009 and settlement-delivery of these shares to occur on December 16, 2009.

Click here for our previously reported news item.

Capgemini now reports that this very first employee shareholding plan has been a success with 14,000 employees subscribing, after reductions, to over €165 million, corresponding to 6 million newly-issued shares, having reached the maximum number of shares offered.

These shares are issued at a price of €27.58, with dividends rights. With this dilution, the number of shares which comprise Capgemini’s share capital will be 153,958,441 on December 16, 2009.

Capgemini indicates that this effort, a sign of the confidence of employees in the firm’s future, now increases the employee ownership of Group capital to around 4% (6MM/150MM). Reportedly, employees subscribed in all 19 countries where the plan was offered, with the majority of subscribers come from France, US, the Netherlands, and the UK.

Let us do some math on this, given the scant information we have available.

From an employee’s perspective, we can presume a typical employee gets, assuming that 6,000,000 shares are equally distributed to each of the 14,000 subscribing employees (6,000,000/14,000), exactly 428.57 shares. And each employee has to put out Euro 11,820 (428.57 * Euro 27.58) to buy into this offer.

What do they get in return?

First there is the capital appreciation. The current price of Capgemini is Euro 31.05 per share on December 18, 2009, which is Euro 3.47 over the subscription price, leading to a current capital gain of Euro 1,487.14 per employee (428.57 shares * Euro 3.47). There is a restriction on when these shares can be sold, as there is a lockup period of 5 years. Now, we don't know what is likely to happen in 5 years, but we can safely say that we have passed through the worst recession of a generation, and stock prices, though not at March 2009 lows, are not that far off from six-year lows. It is very likely that Capgemini, whose performance has been affected, but not devastatingly so, will likely be around as a public company in 5 years, and shares will rise from this low level. Also assume that shares go up conservatively 6% each year (for 4 years) in line with operating performance, then in 5 years, the Euro 1,487.14 will rise to Euro 1,877.48 at a compounded rate.

Second, there is the dividend. Five years worth of dividends of Euro 1 per share is Euro 2,142.86 (Euro 428.47 * 1 * 5 = Euro 2,142.86)

That brings the grand total to Euro 4,020.34, and brings the pre-tax return on initial investment to 34.01% (Euro 4,020.34 / Euro 11,820). And that attractive rate of return is unlikely to be found anywhere today in capital markets!

Which speaks to why the offer was fully subscribed. While Capgemini employees may not all be financial analysts, they certainly have the made the right choice!

From the current shareholders perspective, there is some loss of value, which gets transferred from them to employees. This amount Euro 20.82 million (Euro 3.47 * 6,000,000 shares) is only 0.44% dilution (Euro 20.82 Million / Euro 4.78 Billion company market capitalization). But the advantage current shareholders get is that they rope in employees as fellow shareholders, and thus create incentives for employees to do their best for company performance and move the share price even higher.

From Capgemini’s perspective, this plan allows them to offer monetary value for employees, align employee interests with shareholder interests, and solidifies employee involvement for the longer term.

Theoretically then, this appears a win-win all around, as generally employee shareholder plans aim to do, notwithstanding unforeseen events or unpredictable conditions down the line, which could make this a total wash.

This is our outside-in analysis. If you’re a Capgemini employee and subscribed to this offer, let us know by comments how you thought about it, and what is the general mood of other employees who subscribed. And tell us if we got our math generally right…..

Big Ernst and Young Settlement on Bally Fitness, Large Implications

This is the leading item on the SEC.gov website today, with the SEC charging Ernst & Young LLP and 6 current and former partners for their roles in the accounting fraud at Bally Total Fitness Holding Corporation.

The SEC’s key finding: E&Y knew or should have known about Bally's fraudulent financial accounting and disclosures; and despite that, the firm issued unqualified audit opinions that Bally's 2001- 2003 financial statements were in line with US GAAP, and the audit itself was conducted in accordance with GAAS. The SEC indicates these opinions were “false and misleading”. The fraud accounting includes prematurely recognizing revenue and improperly deferring costs, which overstated income and inflated stockholders’ equity. The SEC claims that “E&Y did not express a qualified or adverse audit opinion, or refuse by disclaimer to express any opinion at all, but instead issued audit reports that contained unqualified opinions on Bally’s 2001-2003 financial statements.”, and this is indisputably incorrect.

E&Y, statutory auditor for Ballys has agreed to pay $8.5 million to settle the SEC's charges; and each of the E&Y partners also has settled the SEC's charges against them.

The SEC sounded an very alarming note of concern. According to Robert Khuzami, Director of the SEC's Division of Enforcement. "It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct," said

"Ernst & Young and its partners on the Bally engagement violated their fundamental duty to function as public watchdogs, even after E&Y personnel identified Bally as one of the firm's riskiest audit clients," added Fredric D. Firestone, Associate Director in the Division of Enforcement.

The SEC also charged Bally's former CFO John W. Dwyer and former controller Theodore P. Noncek, who also agreed to settle the SEC's charges.

The SEC states that E&Y had already identified Bally as a risky audit because its managers were former E&Y audit partners who had "historically been aggressive in selecting accounting principles and determining estimates," and whose compensation plans placed "undue emphasis on reported earnings." Out of more than 10,000 audit clients in North America, E&Y identified Bally as one of E&Y's riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.

The SEC indicates that the 3 E&Y partners knew or should have known that E&Y's unqualified audit opinions regarding certain Bally financial statements were materially false. In addition to agreeing to pay $8.5 million to settle the SEC's charges, E&Y agreed to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.

Ernst & Young issued a statement saying, "These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago."

Wow!

There are so many critical points in this news release.

First, there is a lot of messiness in Bally itself. The company was charged with sales fraud by the NY State AG and the SEC launched an accounting investigation in 2004. The company went into bankruptcy in August 2007, emerged from bankruptcy in October 2007 100% owned by a hedge fund, Harbinger Capital and then refiled for bankruptcy in December 3, 2008. Note that the sales fraud (1999 - 2004) and the bankruptcy yo-yo (2007 – 2008) were unrelated to the accounting issues

Second, the SEC appears to be taking this very seriously. Note the inherently strong language in their statement and their comments. This is not your ordinary rap on the knuckles, and the amount fined “one of the highest ever paid by an accounting firm” shows that the SEC wants to showcase this particular situation as a warning to all other accounting firms:
“failed to fulfill their basic obligations”
“sharp reminder to outside auditors”
“seriousness of their misconduct”
“violated their fundamental duty to function as public watchdogs”

Third, the circumstances of E&Y’s involvement in Bally appear to be quite dubious. …”its managers were former E&Y audit partners who had "historically been aggressive in selecting accounting principles and determining estimates," and whose compensation plans placed "undue emphasis on reported earnings."”. Wait a minute, were Bally managers ex Ernst and Young partners? Which managers were they? – CEO, CFO, CAO, its not specified. Were they known to take aggressive positions within E&Y or after leaving? Were their compensation based on achieving certain EPS targets? And going around GAAP and getting the auditors’ consent a way to get more bonus? So many unanswered questions.

Fourth, “E&Y agreed to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.” This is a large commitment on the part of E&Y to make changes in their internal procedures, and also not to ever be afoul of securities laws. Look for some tough modifications on how audits are conducted by E&Y in the future with checks and counter checks to ensure that client financial statements are in conformance with GAAP and external audits are thorough, insightful and detailed to prevent sign-offs on any companies which do not comply. The SEC has specified 8 such actions that will be undertaken rather immediately by E&Y.

Finally, this is indeed a wake-up call for the Big Four firms and the accounting industry. The SEC is getting tough, and has demonstrated here that it will allow no breach of laws and investor protection, no matter how old the case and how messy the other circumstances are for the ultimate client.

This case points out the long-tail impact of a bad audit, in causing distress to accounting firms, many years after the audit has been completed. And we don't think this is the end of the affair, there are a lot of other pending accounting investigations with the SEC, Huron Consulting for example, and the outcomes for firms convicted of wrong doing are going to be high. The SEC is just emerging itself from getting a bad rap in the Madoff affair, so may be getting a little more aggressive and assertive than in previous years. Also investors would hope for drastic changes in the audit process of accounting firms, if the firms’ integrity as ultimate protectors of investors’ interests has to be fully and firmly re-established.

The Ernst and Young case is fully specified here: Click here to download full SEC case on E&Y

Accenture Q1-2010 Revenue Short But EPS Beats Street. Good Outlook

Accenture Q1-2010 Revenue Short, But EPS Beats Street. Good Outlook

Accenture (NYSE:ACN) just reported Q1-2010 results after market close today. The full earnings release is available on the Accenture.com investor relations site. We will only provide our quick analysis here at this time.

It was a mixed quarter for Accenture, they were a little behind Street expectations on the top line but beat consensus EPS by 2 cents. Consulting revenue fell 15 percent and outsourcing revenue dipped 4 percent. Wall Street is looking for revenue strength to see how the economic recovery is progressing, having argued that companies have done all they can on the cost side to be efficient and lean. Investors first reaction was to sell owing to the miss on the revenue side and the stock turned down 3% in after hours trading but recovered to near-flat towards the end of the conference call.

Accenture guided Q2-2010 to a lower number on the revenue side than the Street, but promised excellent performance in the second half of 2010. Full year outlook sales were higher than the street, indicating $6+ billion sales in both quarters of the second half. With a relatively deteriorating dollar compared to prior year, there is a foreign exchange tailwind for Accenture in the next few months, and the company even upped its FX effect by a positive 1%. FY 2010 EPS guidance spanned the consensus EPS of Wall Street, but it was better than their previous guidance.

Conditions are tough, and since January 2009 Accenture has been affected, much like every other company by the global slowdown. The prior Q1-2009 quarter was before this impact, so understandably both revenue and EPS were lower in this quarter. Given all this, the performance of the company has been quite creditable due to its global breadth, depth and diversity of business lines. Bookings in the quarter were $5+ indicating that the pipeline is being nourished decently, but outsourcing bookings actually fell more than consulting bookings.

Accenture has $4.0 billion in cash at November 30, 2009 even after distributing $500 million in dividends and continuing its stock purchase. There is little debt and the balance sheet is rock solid.

The ACN stock is trading near 52 week highs and close to its all time highs. The quarter was not blow out but the long term story is totally intact. This is a well run machine, and produces flat EPS in the very worst of times, a performance any portfolio today would love to have. As the global economy does turn around this year, Accenture is poised to benefit by helping clients both with Consulting and Outsourcing services.

Accenture plans to add 45,000 new professionals this year, adding to its 175,000 existing staff to exceed the 200K level shortly.

We have been long time admirers of the Accenture financial machine and its performance, strong cash position, efficient and competitive management, global scale, keen ambition and focus on operations which will prove to create shareholder value well into the future.

As we have seen in previous quarters, investors seem to reflect on performance during the night and the stock actually does well the next morning. We won't be surprised if all the analysts who attended the conference call think through what was said, and produce quite favorable notes, and ACN has a pretty good morning on the NYSE tomorrow. We'll keep you posted on Twitter. Follow us www.twitter.com/big4alum

Accenture, Q1-2010, Earnings, EPS, Revenue, Consulting, Outsourcing

KPMG 2009 Revenues of $20 B Drop 11%, Most Among Big Four Firms

KPMG just reported its 2009 combined revenues for the fiscal year ending 30 September 2009 of US$20.11 billion versus US$22.69 billion for the prior 2008 fiscal year. This was a 11.4% decline in U.S. dollars terms and a 2.6% decline in local currency terms.

From our previous blog posts, let’s look at the headline numbers for other Big4 firms:

“PricewaterhouseCoopers just released its FY 2009 global revenues for the year ending June 30, 2009, which came in at US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY 2008 in US dollar terms. However, on local currency terms FY 2009 revenues were actually higher than FY 2008 by a modest 0.2%”

“Deloitte Touche Tohmatsu, the global firm, just came out with its fiscal 2009 revenues for the year ending May 31, 2009. 2009 full year global revenue was US$26.1 billion, an actual increase in local currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008.”

“Ernst & Young just reported its combined worldwide results for the year ending 30 June 2009 (FY09), the first Big4 firm to report its global results. Combined global firm revenues of US$21.4 billion for the fiscal year ended 30 June 2009 (FY09) decreased a modest 0.2% in local currency terms from the comparable period in FY 2008. In FY 2008, E&Y reported US$23.0 billion in global revenues, and in US dollar terms, the revenue actually declined 6.8% from 2008 to 2009.”

By service line, Audit 2009 revenues were US$9.95 billion versus US$10.69 billion in 2008, down 6.9% in U.S. dollar terms but a 0.5% increase in local currency terms. In the global financial services industry, Audit services' revenues actually grew 7%.

Advisory services revenues of US$6.07 billion in 2009 decreased versus US$7.27 billion in 2008, by a whopping 16.6% in U.S. dollars terms and 6.6% decline in local currency terms. However, Advisory in China and the Middle East posted double-digit growth.

Tax services revenues in 2009 of US$4.09 billion versus US$4.73 billion in 2008, a 13.4% decrease in US dollar terms and a 4.3% decrease in local currency terms. But certain practices within Tax did very well: Transfer Pricing grew 5.3%, Indirect Tax grew 8% and International Executive Services grew 7.8%, all in local currency terms.

By geography, Americas Region 2009 revenue of US$6.31 billion versus US$7.17 billion in 2008, decreased 12% in US dollar terms and 8.6% in local currency terms. Bright spots included Brazil with 5% growth, Mexico with 8.2% growth, Venezuela grew 22.9% and Chile's revenues rose 22.7%, all in local currency terms.

In Europe, Middle East and Africa, combined KPMG member firm 2009 revenues of US$10.73 billion versus US$12.41 billion in 2008, dropping 13.5% in U.S. dollars terms and 0.6% in local currency terms. Middle East and South Asia was the fastest growing sub-region in Europe; and KPMG in Africa had a 9.3% growth in local currency terms.

In Asia Pacific, combined 2009 revenues of US$3.07 billion decreased 1.1% in U.S. dollars terms but grew 3.9% in local currency terms. Some countries posted spectacular results: Korea had 19.4% growth, Vietnam and Cambodia each had 17.5% growth, and Japan had 7.2% growth, all in local currency terms. KPMG said that Asia Pacific member firms are beginning to see an increasing number of M&A transactions especially in China and Korea.

Revenues in the BRIC countries as a group grew 4.3%. Middle East and South Asia was the fastest growing practice with a 25% growth rate. KPMG’s BRIC headcount increased by 11.5% this year, with BRIC headcount nearly quadrupled in the past ten years.

In 2008, KPMG had 137,000 people and this number was reported in 2009 at 140,000 people, a increase of 3,000 net of hiring over attrition.

Our Analysis:

A drop in revenue was expected, the surprise was the magnitude of the drop, which was higher than other Big4 firms.

Growth in emerging markets was expected. Decrease in developed countries was also on the cards.

Tax revenue decrease (in double digits) was more than anticipated. Advisory decline was expected, with M&A activity drying up.

BRIC increase was expected also, most Big Four firms have had excellent performance in these countries.

Compared to all other firms, KPMG had the largest drop in revenues from 2008 to 2009, this could be either attributed to KPMG’s uniqueness among Big4 firms, being the smallest, as also having a year that ends that started in September 2008 and ending in September 2009, a full three months behind other Big Four firms, and encompassing perhaps the worst of the global financial crisis.

KPMG maintains its 4th place as the smallest of the Big Four firms in 2009. Its sharp drop from 2008 to 2009, indicates that it actually lost ground in 2009 versus 2008 against its next closest rival Ernst & Young on the revenue front.

What’s really interesting is that while the results are already out on PR newswire, the KPMG.com site has yet to be updated with its own firm 2009 performance!

With all the Big Four having reported 2009 results, we’ll be coming out shortly with the 2009 Big Four Firm Financial Performance Study. Stay tuned.

KPMG Europe Revenues Drop 0.4% As Expected, Audit Shines

KPMG Europe LLP, which covers the UK, German, Swiss, Spanish and Belgian practices just reported its 2009 revenues at €3.5 billion in the year ending 30 September 2009, a 0.4% drop from 2008 on a pro forma basis at constant exchange rates. Overall, KPMG said that top-line growth proved hard to come by as a result of difficult market conditions.

In the UK, revenues were €1.9 billion, down 1.6% (This translates to approximately GBP 1.7 billion). Compare this to Ernst & Young UK which grew 2009 revenues by 8% to GBP 1.4 billion (some of it due to merger), PricewaterhouseCoopers UK 2009 revenues rose 1% to GBP 2.25 billion, while Deloitte UK 2009 revenues shrank 2% to GBP 1.97 billion.
In Germany, revenues were €1.2 billion, down 1.7%
In other countries put together, revenues were €0.4 billion, up 2.7%

By service line, Audit revenues were €1.28 billion, up 3.1%; and proving to be the bright spot across services and geographies. Tax revenues were €837 million, down a whopping 5.4% due to low M&A activity but transfer pricing service demand was strong. Advisory was flat at €1.4 billion, with lower M&A offset by restructuring and debt advisory work.

KPMG also said that since 30 September 2009, member firms in the Netherlands, Luxembourg, the CIS and Turkey joined KPMG Europe ELLP, which now comprises firms in 14 countries - including the six in the CIS (Russia, Ukraine, Armenia, Georgia, Kazakhstan and Kyrgyzstan) - and has combined pro forma revenues of €4.5 billion with 31, 000 employees.

John Griffith-Jones and Rolf Nonnenmacher, joint chairmen of KPMG Europe LLP, said: "This was a creditable performance against the backdrop of the worst financial crisis in almost 80 years. We might have hoped for better economic conditions in our second year as a merged firm but rather than put our expansion plans on hold we have continued to pursue a whole range of strategic initiatives that will shape our performance over future years.

Looking ahead, Rolf Nonnenmacher and John Griffith-Jones said 2010 would be another challenging year, though there were encouraging signs of economic recovery.

As expected, and in line with other Big4 firms, European revenues in 2009 came in lower than 2008 by a modest percentage. UK revenues for KPMG were below E&Y and PricewaterhouseCoopers but just a shade better than Deloitte UK. KPMG Europe also includes only the developed nations of Europe this year. Next year, with the addition of other firms, notably Turkey and CIS, the combined firm not only enjoys a higher level of revenue but also likely a higher level of overall growth as the Big Four firms have been showing higher increases in revenues in less developed nations. Also, the impact of foreign exchange rates on KPMG Europe is muted, as most of transactions are done either in Euros or British Pounds.

This was expected and inline level of performance with no unusual surprises, and flat revenue is creditable given the very tough conditions all over Europe in 2009. KPMG is also the last firm to report in the year, and by being delayed till end of September 2009 (versus mid year 2009 for other Big 4 firms), we can see that the economic impact on Big4 firms still continues. 2010 looks to be equally tough, though some good news is rising on the horizon for the global economy.

We are still awaiting KPMG International 2009 results for year ending 30 September 2009 which could be released any time now, and bring to close all the reporting for Big4 firms in 2009.

Big Four Firms Dominate Best Places to Intern Rankings

If you want to find a great job upon graduating from college, then starting early appears to be the secret.

Business Week and Bloomberg just released their third annual listing of top undergraduate internship programs in the country based on pay and the percentage of interns who get full-time jobs, and feedback from career services directors.

And the Big Four firms completely dominate this ranking, taking the top four of the five top spots, beating out such well-known companies as Goldman Sachs, General Electric, Microsoft, Boeing, Cisco, and Johnson & Johnson.

The number one spot goes to Deloitte which also placed number 1 in the recent best places to launch your career rankings. Interns pocket a cool $10,000 for the summer, and very likely to go back to Deloitte with a confirmed offer. It must be a worthwhile experience, since 7 of 10 entry level hires were previous interns. However, there are relatively a lot of spots available which seemed to have held steady despite these tough times for hiring,

2009 Rank - 1
2008 Rank - 4
Employer - Deloitte
Interns hired in 2008 – 2,200
Interns hired in 2009 – 2,233
Intern hiring planned for 2010 – N/A
2009 Average hourly wage ($) - $24.50
2009 Average total pay for interns ($) - $10,000
2009 Interns who received full-time job offers (%) - 73
2009 Interns with offers who accepted (%) - 80
2009 Entry-level hires who were former interns (%) - 70
2009 Best Places to Launch a Career Rank - 1

KPMG bags the second spot on this ranking, shooting up 3 places from 2008, it placed number 4 in the recent best places to launch your career rankings. Interns seem to get more pay than even number 1 Deloitte by taking home $10,900 for their efforts. The likelihood of going back to KPMG after the internship is extraordinarily high, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. Also a huge 91% of entry level hires were previous interns. The number of internships seem to be shrinking at KPMG, with 500 less spots next year than in 2008.

2009 Rank - 2
2008 Rank - 5
Employer - KPMG
Interns hired in 2008 – 2,200
Interns hired in 2009 – 1,745
Intern hiring planned for 2010 – 1,700
2009 Average hourly wage ($) - $24.80
2009 Average total pay for interns ($) - $10,900
2009 Interns who received full-time job offers (%) - 90
2009 Interns with offers who accepted (%) - 93
2009 Entry-level hires who were former interns (%) - 91
2009 Best Places to Launch a Career Rank - 4


The third place winner in Ernst & Young, staying flat from its spot in 2008, it was just behind Deloitte in the recent best places to launch your career rankings. Interns make the least dough among Big Four firms for their diligence. The likelihood of going back to the firm is also as high as KPMG, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. But it is interesting to see that 4 of 10 new hires do not actually intern with E&Y, which tells you that if you miss the cut this year, there’s still a good chance of a full time offer. Ernst & Young is actively reducing the number of internships, with 800 less spots next year than in 2008.

2009 Rank - 3
2008 Rank - 3
Employer – Ernst & Young
Interns hired in 2008 – 2,507
Interns hired in 2009 – 1,971
Intern hiring planned for 2010 – 1,800
2009 Average hourly wage ($) - $22.00
2009 Average total pay for interns ($) - $9,585
2009 Interns who received full-time job offers (%) - 92
2009 Interns with offers who accepted (%) - 92
2009 Entry-level hires who were former interns (%) - 60
2009 Best Places to Launch a Career Rank - 2

PricewaterhouseCoopers, the largest Big4 firm on the planet gets fifth place, behind Proctor and Gamble, and falling 3 spots from #2 spot in 2008. PwC was behind Deloitte and E&Y in the recent best places to launch your career rankings. Interns make just a smidgeon less than Deloitte, but have a good shot at going back to the firm, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. As with E&Y 3 of 10 new hires do not actually intern with PwC, so if the intern bus leaves this year, there’s still a good chance of a full time offer. PwC is holding nearly flat its number of open spots.

2009 Rank - 5
2008 Rank - 2
Employer – PricewaterhouseCoopers
Interns hired in 2008 – 2,320
Interns hired in 2009 – 2,278
Intern hiring planned for 2010 – 2,175
2009 Average hourly wage ($) - $23.75
2009 Average total pay for interns ($) - $9,878
2009 Interns who received full-time job offers (%) - 89
2009 Interns with offers who accepted (%) - 93
2009 Entry-level hires who were former interns (%) - 69
2009 Best Places to Launch a Career Rank - 3

Accenture has moved up smartly to number 9 from a #47 spot in 2008. Accenture was 11th place in the recent best places to launch your career rankings. Interns get the lowest rate on a per hour basis, but seem to make it in hours to make almost the same as another Big4 firm. 2 of 10 new hires do not actually intern with Accenture, so looks like the internship program is not the only route to a job at Accenture.

2009 Rank - 9
2008 Rank - 47
Employer – Accenture
Interns hired in 2008 – 198
Interns hired in 2009 – 122
Intern hiring planned for 2010 – 150
2009 Average hourly wage ($) - $21.00
2009 Average total pay for interns ($) - $9,975
2009 Interns who received full-time job offers (%) - 95
2009 Interns with offers who accepted (%) - 85
2009 Entry-level hires who were former interns (%) - 22
2009 Best Places to Launch a Career Rank – 11

There are two clear take-aways from this ranking. First, Big4 firms are a great place to have an internship, and the chosen ones seem to like it well enough to begin their careers there. Second, career planning just got moved a year ahead if we take these high percentages to be true – if you didn’t make the internship list, it's a tough road to get an entry level job. But let that not dissuade candidates who want to work at a Big Four firm, as many alumni can agree, hiring of experienced level candidates happens all the times and at different points in a career, there’s a lot of depth, breadth and requirements for external professionals in all Big Four firms.

But if you’re a junior at a college though and reading our blog, you’re better off getting serious at those internship campus interviews right away.

Here's the link to the Business Week Ranking

Accenture Makes Right Decision, Drops Tiger Sponsorship

Just now, on the Accenture.com website Newsroom, we find the following news update:

“Accenture Sponsorship Update

Related Assets December 13, 2009NEW YORK; Dec. 13, 2009 – Accenture (NYSE: ACN) today announced that it will not continue its sponsorship agreement with Tiger Woods.

For the past six years, Accenture and Tiger Woods have had a very successful sponsorship arrangement and his achievements on the golf course have been a powerful metaphor for business success in Accenture’s advertising. However, given the circumstances of the last two weeks, after careful consideration and analysis, the company has determined that he is no longer the right representative for its advertising. Accenture said that it wishes only the best for Tiger Woods and his family.

Accenture will continue to leverage its “High Performance Business” strategy and “High Performance Delivered” positioning in the marketplace. The company will immediately transition to a new advertising campaign, with a major effort scheduled to launch later in 2010.”

We applaud this decision. Accenture has made the right choice.

As we have said earlier, Tiger’s private persona has got entangled so much with his public personality, that there was collateral damage to his sponsors. We argued that continuation of sponsorship is tantamount to condoning immoral behaviors of Accenture’s advertising front man, and sends the wrong signal to its clients and employees.

Accenture has finally taken the correct moral decision, and we stand vindicated in our point of view, which we forcefully expressed before the scandal grew to such enormous positions.

This has just come out on the Accenture website, and clearly there will be speculation on Accenture’s next steps. Serendipitously, 2010 is just round the corner and Accenture can start off on the right foot for its marketing campaigns. On its own, Accenture is a strong global brand, has excellent operating management and enviable financial performance. It will continue to create shareholder value in good measure in the future on its own steam.

Tiger was helpful to the brand when it was appropriate, not simply convenient. We may say that the circumstances have changed to make the association inappropriate, but not inconvenient. Disengagement may be troublesome in the near term, but prove to be substantially right over the long term.

This courageous decision, as we had anticipated, came earlier than other sponsors, and had done the firm, its employees and its alumni proud.

We’ll have more on Monday when the dust settles and more reaction is available.

Note that this is likely to come up on December 17, 2009 conference call, when Accenture reports is Q1-2010 results.

Tiger Drops Golf, Accenture Drops Ads

Yesterday, Tiger Woods made a public statement that he was taking an indefinite break from professional golf on his home page. Much has been made of the exact words used in this statement. Regardless this was the perhaps the right (and very tough) decision to make under these trying circumstances.

Tiger, who was in the middle of the storm, blinked first.

And that perhaps makes it an easier decision for his sponsors.

We can understand the feelings involved in Tiger’s staying away from his key passion. Golf made Tiger, and Tiger was golf, and he has been the greatest ever player of the game till now. That is undeniable, his game was a joy to watch, and his victories were treasured moments for all golf fans. On the golf course, he was a consummate player and a fierce competitor, and his “championship face” showed his intense concentration and desire to win. Golf viewership and victory purses soared whenever he was in contention. Tiger was compelling and his game and strategy were delightful. This we grant and cannot take away at all.

Tiger may return to golf one day, claim his few majors and yet become the greatest player ever of the game. But his indefinite is as vague as the Federal Reserve Board’s intention to keep interest rates at zero percent for an indefinite period. Someday, things will change from status quo and the public will forget all about it all, with some other bizarre occurrence occupying its fickle mind.

Unfortunately, his personal behavior has been out of sync with being a master of a tony and elite sport. And that has been the cause of his present downfall. We want our heroes to be pure and ethical and beyond mere mortal corruptions.

And our issue here is not with Tiger the individual, rather with his sponsorship relationships. And in particular with that of a Big4 firm, Accenture.

His sponsors, in a very tight spot yesterday, are probably breathing a sigh of relief. A tough decision on their part became much easier today.

AT&T and Gillette have already made announcements and likely to step away soon.

In case of Gillette, Tiger will be phased out from TV and print ads, public appearances and other efforts linking the two entities together. Damon Jones, Gillette spokesman, said,
"This is supporting his desire to step out of the public eye and we're going to support him by helping him to take a lower profile."

In case of AT&T, spokeswoman Susan Bean said, "We support Tiger's decision and our thoughts will be with him and his family. We are presently evaluating our ongoing relationship with him."

Accenture, the other key sponsor, has not made a public statement as yet, but has been proactively fading Tiger away as their advertising front. Three days ago, Tiger Woods prominently featured as the only graphic on their global home page www.accenture.com. Two days ago, there were two other graphics which shared the page along with Tiger. And yesterday, the Tiger graphic was gone.

Also, other references to Tiger in their advertising campaigns were being aggressively removed with many relevant pages showing up as errors. Accenture ads also changed, with Tiger’s photograph being taken away overnight. Much has been said on social media about Accenture’s tag lines on Tiger advertisements, and what seems very normal under former circumstances, now have an undeniable second meaning, all too inappropriate.

In our earlier post, we said:

“We think however, that Accenture should stop sponsoring Tiger Woods right away. This, in our opinion, is the right moral decision. Accenture is a well-regarded, respected squeaky-clean brand signifying class, ethics and high standards. It is a tough decision to disassociate from an advertising front man, but that front man has not kept his end of the bargain, and has caused injury to his wife and family.

Continuation will send a wrong message to Accenture"s employees and clients that such behavior is not reprehensible since it can be justified to be monetarily beneficial. Accenture may not be unduly hurt financially by this step, and its own future actions rather than its association with Tiger will prove its corporate success.

We would think Accenture alumni will think similarly and will be proud that Accenture chose the right moral decision rather than the right business decision. In this case, we believe Accenture should blink first, regardless of the consequences.”

We sense that Accenture is quickly stepping away from Tiger Woods, but has not made a public statement as yet about sponsorship. And this has accelerated each day as more unsightly Tiger news hits the wires. Bloomberg claims Acenture spokesman Alex Pachetti didn’t return calls seeking comment.

And we still maintain that Accenture should make a public statement to discontinue its association and sponsorship. Continuation is certainly not the right course of action, and our non-scientific poll of visitors on www.Big.com indicates that 67% agree that Accenture should stop.

We understand that the sponsorship is worth $10-$15 million on an annual basis. This money is best allocated to other activities to promote the Accenture brand.

The coming week will have more concrete developments, and we hope that what we are looking for will show up in the next few days.

China and Brazil Lead IPO Comeback In 2009

In consonance with a smart pickup in global equity markets from a trough in March 2009 to near January 2009 values towards the end of this year, Initial Public Offerings have also gathered a lot of steam.

Ernst & Young’s year-end 2009 Global IPO update shows that the dollar value of deals in the first 11 months of 2009 till November 2009 of $95 billion is at the same level as the first 11 months of 2008, though there were only 495 deals in 2009 versus 740 deals in 2008. For the full year 2009, E&Y expects the deal value to exceed $100 billion.

While 2008 was not a great year compared to the go-go 2007, this update clearly points to stability and a potential bottoming out of the IPO marketplace. And that, in a year full of glum news, is some cause for celebration.

After a dull first half 2009, IPO activity picked up in the second half, mainly due to deals from Asia and South America, which raised $69 billion in listings year to date 2009, about 72% of the total IPO value. Emerging markets provided the boost to capital raisers, and developed world capital markets took a real backseat in this regard. Of the top 10 IPOs, six were from emerging markets.

China and Brazil have been the key drivers of global IPO activity.

Large scale stimulus and focus on domestic consumption in China, have created near 9% growth each quarter in China this year, and Chinese stockmarkets were the first to move up in 2009. Chinese companies, with ample growth opportunities were tapping both the Hong Kong and Shanghai stock markets to gather capital from investors. China State Construction Engineering Corp, which listed in Shanghai in July 2009 at $7.3billion, and Metallurgical Corp of China Ltd ($5.2 billion on the Shanghai and Hong Kong stock exchanges) were the top IPOs for 2009.

Brazil’s economy and stock market have been the fastest growing this year, and low inflation, higher commodity prices and general optimism pushing Brazil to be a top flyer in capital markets. Banco Santander Brazil SA was the largest IPO in 2009 and the largest in Brazilian history, raising $7.5 billion.

In North America, IPO value actually declined 38%, from $27 billion in the first 11 months in 2008 to US$17 billion with 66 IPOs listed in 2009

In Europe, IPO value actually declined 66%, from $14 billion in the first 11 months in 2008 to US$5 billion with 50 IPOs listed in 2009

In Middle East IPO value actually declined 85%, from $13 billion in the first 11 months in 2008 to US$2 billion with 16 IPOs listed in 2009

By sector, industrials (77 IPOs); materials (68) and high technology (55) led by numbers of IPO. Financials, industrials and real estate accounted for 50% of total capital raised.

No surprise then that the Hong Kong Stock Exchange and Shanghai Stock Exchange jointly accounted for 36% of all IPO capital raised on the entire planet in 2009.

Gregory K. Ericksen, Global Vice Chair Strategic Growth Markets for Ernst & Young had this to say about growing power and confidence in emerging markets, “The principal exchanges in China, India, Brazil and other emerging markets are now mature enough to source funding for the very largest companies seeking listings.”

Bankers in New York and London had better be worried. Big deals are being done in the East and in the South, and there appears to be enough talent and demand in those markets, that they may continue to stay there. The BRIC countries, as we have seen in almost every survey and study, will be the head horsemen as the global chariot finally leaves behind this awful recession for better roads ahead.

Tiger Woods Dilemma for Accenture – Cloud or Cancer?

Using celebrities as company advertising fronts has both immense rewards and equally high risk. On the positive side, associating with a well-known, successful and popular personality provides instant brand recognition, enhances the company by association and quite often works off the image already created and crafted by that celebrity. The risk however is that any negative impact to that celebrity creates collateral damage for the company, and a long-term association is difficult to quickly unwind.

With his recent accident in Florida and the ensuing public brouhaha, Tiger Woods has been dominating the internet and tabloids with some less than salubrious news. His image as a clean, conscientious family man has taken a huge beating, and his purported dalliances outside his marriage have completely tarnished his public persona.

This has already lead to collateral damages for his numerous commercial sponsors, including Accenture, Pepsi-Gatorade, Nike, NetJets, Gillette, Golf Digest and Electronic Arts. Most sponsors have stated that they will stick with and stick by Tiger through these trying times. As of today, only Gatorade has dropped Tiger by discontinuing its Gatorade Tiger Focus line of energy drinks, and Gatorade claims that this decision was made months before this recent incident.

Tiger reportedly makes $100 million dollars each year from these sponsorships; and has made over $1 billion over his career-to-date, the highest ever by a single athlete.

We think Tiger Woods poses a dilemma for Accenture.

Accenture has been closely associated with Tiger Woods for several years now, the company advertisements (both on print, TV and the internet) prominently feature Tiger, often facing difficult conditions, but with brimming confidence that he will find a way out, as he has done so many times in real life in golf tournaments. Accenture’s “Go On, Be A Tiger” tag line has been a hit, with its pithy admonition for companies to make calculated investments (with Accenture’s help, of course) and come out winning. There are many other memorable lines, including “Opportunity isn’t always obvious”, and “It’s what you do next which matters”, which have served Accenture well as Tiger has gone on to the highest possible levels in professional golf with amazing talent.

In addition, Tiger is the front man at Accenture Match Play Championships, which he has won several times, and he did launch his 2009 season after returning from reconstructive knee surgery. The association between Accenture and Tiger is quite strong (and likely quite lucrative) for Tiger, but the reverse association is actually more so for Accenture. Note that on its own, Accenture is a strong global brand and very well known in its industry and to corporate clients all over the world.

So Accenture has a lot riding on Tiger maintaining his image. The unintended consequences for the company can be quite high. The swirl of bad news and with more revelations showing up each day is likely causing some concern at Accenture HQ.

That is not to say that it will be devastating, in fact, investors, the ultimate owners of the company don't particularly seem to mind. A Motley Fool survey of investors got Accenture a respectable and solid 4 star as a stock investment, and Goldman Sachs recently upgraded Accenture to buy with a price target of $50.

The key question is whether this is a Cancer or a Cloud.

Is Tiger’s public image permanently damaged, with no chance of recovery? Or is it a passing scandal, which after living out its short life will pass away and out of the public’s very short term memory. Note that in previous scandals with well known athletes (think Michael Jordan, Mike Tyson, Kobe Bryant etc.) though dominated the news at the time did all eventually melt away as the public moved on to the next cheesy news. And these athletes did go on to win public favor and do even bigger things in their careers.

If a Cancer, then Accenture is better off pulling its sponsorship right away. And if a Cloud, its probably better to stay and wait it out till things subside.

Of course, the same decision has to be likely made by each sponsor, and this opens up a fascinating game theory problem. If all sponsors drop at the same time, and it is really a Cloud, regardless it is deemed a Cancer; and Tiger and all sponsors lose. If sponsors continue, they are sending a message that it is a Cloud; and the scandal is a mere distraction.

The problem happens when they don’t act as a pack.

If one sponsor decides it's a Cancer, and other sponsors decide it’s a Cloud, then the former sponsor loses the game as the athlete comes back swinging. Conversely, if one sponsor decides it's a Cloud, and other sponsors decide it’s a Cancer, then the former sponsor has a big public image loss.

The key question is who blinks first?

Of course, with the passage of time, does the decision become easier; and the optionality value dies a little.

Accenture looks to be playing it safe. It’s gently pulled out all its ads with Tiger Woods on the internet, and it appears that all prime time TV ads have been stopped. The www.accenture.com home page, which on December 7th, 2009 had a large graphic of Tiger Woods, has been now replaced with two additional graphics on December 8th, 2009, so that the Tiger Woods graphic now only shows once every three times the home page is retrieved.

Accenture has not yet made a public statement that it is either staying with or trenching Tiger. It is keeping its options open and doesn’t want to the first to blink.

We think however, that Accenture should stop sponsoring Tiger Woods right away. This, in our opinion, is the right moral decision. Accenture is a well-regarded, respected squeaky-clean brand signifying class, ethics and high standards. It is a tough decision to disassociate from an advertising front man, but that front man has not kept his end of the bargain, and has caused injury to his wife and family.

Continuation will send a wrong message to Accenture’s employees and clients that such behavior is not reprehensible since it can be justified to be monetarily beneficial. Accenture may not be unduly hurt financially by this step, and its own future actions rather than its association with Tiger will prove its corporate success.

We would think Accenture alumni will think similarly and will be proud that Accenture chose the right moral decision rather than the right business decision. In this case, we believe Accenture should blink first, regardless of the consequences.

There will be certainly daily, if not hourly developments on this front, and we will continue to blog on this topic. Accenture’s final actions and subsequent events will make for a fascinating case study. If any readers have any insights on this, we welcome your comments.

KPMG Global Business Outlook Validates Current Optimism and Confidence

KPMG recently released its Global Business Outlook Survey on global manufacturing and services. And it has good news for the world economy and some unexpected surprises.
Overall, the survey indicates that, with manufacturing and service sectors getting more confident, there are robust growth prospects for the world economy over the next 12 months.

In October, there appears to be renewed optimism for 2010, with sentiment being highest in the US and the BRIC area, although EU and Japanese companies also anticipate solid gains in output. We already know about rosy prospects for BRIC, but US’s leadership position is unexpected and a pleasant surprise. Brazil is set to post a particularly marked expansion, whereas India is expected to underperform its BRIC peers. Overall, revenues and profits are expected to increase at solid rates.

Services are expected to lead manufacturing by a slight amount in this recovery, as typically service industries are much faster to react to demand upturns that longer lead time manufacturing industries. Correspondingly, hiring intentions are strongest in the service sector, although manufacturers also anticipate a rise in staffing levels.

The most upbeat expectations for activity in the service sector are by Post & Teleco companies, followed by Renting & Business Activities firms. In manufacturing, confidence is highest in the Chemicals & Plastics and Timber & Paper sectors. Further, within services, labor-related costs are predicted to be a higher contributing factor to inflation than outsourcing and all other non-staff costs.

Inflation is expected to show up in 2010, as both input costs and output prices are expected to increase, although at a benign rate, with inflationary expectations being highest in the BRIC region. Japanese companies, as in previous years, are anticipating continued deflation.

On the jobs front, the one-year outlook comes out looking broadly positive. Jobs are expected to be added in both services and manufacturing sectors, with services leading the way. Among all nations, the BRIC countries and the US are expected to lead the expansion. European service providers anticipate only a modest rise in staffing levels, mainly Italy, the UK and France, while Japanese companies are looking to a marginal reduction.

We have said earlier that Big Four firm surveys are a good barometer of executive mood and actual business performance and act as a leading indicator of when the world economies will emerge from their slump. Over the last six months, we have noticed that surveys from PricewaterhouseCoopers, Deloitte and Grant Thornton have all been signaling that the worst is over, and optimism is generally back. This corroborates other business and consumer confidence indices all over the world, as well as a good upswing in stock and asset prices since March 2009. This comprehensive survey from KPMG only validates the recovery story better. The survey has a lot of coverage on results by individual country and sector and recommended reading for those planning, budgeting, investing, hiring or otherwise interested in the global prospects for 2010.

The complete 69 page survey is at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Business-Outlook-survey-November-2009.aspx

The survey uses net balances to indicate the degree of future optimism or pessimism for each variables, which can vary between -100 and 100. A value of 0.0 signals a neutral outlook for the coming 12 months. Values above 0.0 indicate optimism amongst companies while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase. The current report is based on responses from around 6,200 service and manufacturing firms worldwide.

Deloitte Versus KPMG in Dubai World Saga

Just in the last few days, Dubai World (DW) shocked investors all across the world in announcing that it will take steps to seek a six month standstill period on payments of interest and principal on $59 billion of its outstanding debt. This terse and surprising announcement on late Thursday November 25, 2009, the eve of a national holiday in Dubai, spooked stockmarkets all over the globe, with Asian and European markets reacting immediately on open with a 3% drop, before recovering somewhat over the day on Friday.

Middle Eastern and South Asian markets, countries with most exposure to Dubai business, dropped precipitously if not in percentage terms, then certainly in confidence in the city-state’s future. On Thursday, the first full trading day in Europe since Dubai’s announcement, the FTSE 100 index in London lost 3% to close down 171 points, the DAX index in Germany fell 3.25% and the CAC-40 index in France lost 3.41%. In Tokyo, the Nikkei 225 stock average, was less affected, falling about 0.62%.

Dubai World (DW) is Dubai’s (one of the seven United Arab Emirates) state investment fund which makes portfolio and real estate investments both in the country and abroad, including the QE2 cruise liner, the Emirates airline and the Travelodge budget hotel. DW’s debt of $59 billion is 75% of the total $80 billion debt of the country. DW has principal real estate investments through its arm Nakheel with its glamorous resorts on man-made beaches at the Palm, exotic seven star hotels and the tallest building in the world.

Property prices in Dubai have slumped and buyers are nowhere in sight, thus sharply reducing incoming funds, while debt burden continues. DW borrowed heavily from commercial banks, especially in the UK to fund its various investments, and at that time, with the go-go attitude in the sheikdom, and with the implicit backing of a supportive government, banks were happy to part with their money. What seemed quite normal at that time is likely causing a lot of heartache now.

Dubai World has hired Deloitte and Rothschild to assist in its efforts to gain a standstill period from its debtors DW had a $3.5 billion bond payment due in December and wants some breathing space on all debt repayments which are due until the end of May 2010.

Aidan Birkett, the head of Deloitte UK’s 1,200 strong London Corporate Finance practice flew immediately on Wednesday with a large support contingent to Dubai. Aidan Birkett has handled such cases earlier and is no stranger to big-ticket debt restructurings. See his profile at

http://www.deloitte.com/view/en_GB/uk/services/corporate-finance/article/96909311586fb110VgnVCM100000ba42f00aRCRD.htm
http://www.deloitte.com/view/en_GB/uk/services/corporate-finance/press-release/e2e99c9096ffd110VgnVCM100000ba42f00aRCRD.htm

A Deloitte spokesman said: 'We can confirm that Aidan Birkett, managing director for corporate finance at Deloitte, has been appointed chief restructuring officer to Dubai World.'

Interestingly Aidan Birkett left PricewaterhouseCoopers UK in October 2000 along with three other senior partners Andrew Grimstone, Jerry Loftus and Stephen Knight to join Deloitte UK.

There seems to be some talk now that Abu Dhabi, Dubai’s oil-rich sister emirate would bail out DW to protect the credit rating and stature of the entire UAE, but again there is no definitive agreement that this would happen right away. Abu Dhabi has reportedly said that it would not do a blank-check bailout but deal with the issue on a case by case basis.

On the other side of the fence, big UK banks, namely HSBC, Royal Bank of Scotland, Lloyds Banking Group and Standard Chartered reportedly hold $30 billion or 50% of this debt and consequently quite invested to defend their interests and get the best deal possible on reclaiming their money back from the beleaguered DW. Data from the Emirates Banks Association shows that HSBC has exposure of $17bn, Barclays of $3.6bn and RBS has about $2.2bn.

They have hired KPMG to assist them in this endeavor, though there are reports that PwC is also in the running. KPMG will be formally appointed once the creditor banks have created a steering committee comprising five or six of the main lenders to lead the negotiations, it added. No one apparently at KPMG was immediately available to comment.

So, its Big4 firm versus Big4 firm in a battle that is certainly the first business news today all across the world. One issue that we would point out is that KPMG is the statutory auditor for one of DW’s portfolio subsidiary companies - Dubai Ports World (DP World), and this would create certainly, a direct if not indirect conflict, for KPMG, though at this point it is not clear how this conflict is going to be resolved. http://www.dpworld.com/ar/2008/inc/2008_DP_World_Annual_Report.pdf

In an editorial in the UK’s The Telegraph, influential bond investor, Mohamed A El-Erian, CEO and co-CIO of PIMCO said it in clear terms of why this is such a key development for the world, “Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.”

See his entire editorial at
http://www.telegraph.co.uk/finance/economics/6678194/Dubai-what-the-immediate-future-holds.html

What drove the choice of Deloitte and KPMG is also not very clear at this time, why E&Y and PwC are out of the picture either by choice or by refusal is also not fully known. We will certainly learn more as this saga unfolds over the next few weeks, and we will keep you updated on latest developments as with the key role played by the Big Four firms in this riveting story.

Of course, if our readers have more news, ideas, insights or comments, we welcome their input.

Ernst and Young’s Top Entrepreneurs Maintain Vision Despite Tough Conditions

Entrepreneurs are hardy folks. Undeterred by current circumstances, they are entirely focused on their vision and a rosier tomorrow.

And in this deep and difficult recession, Ernst & Young found that entrepreneur-driven companies are still looking for growth and opportunity in these tough times by adapting their operating methods to set themselves up for market leadership when the economy does turn to the upside.

Ernst & Young surveyed the 250 winners of the 2009 Entrepreneur Of The Year program, and came up with these valuable findings from respondents:


Growth remains number one. Despite the downturn, 78% are still pursuing growth opportunities.

Clearly customers are always right. 78% have increased their focus on customer satisfaction and loyalty. 75% have plans to expand into new customer segments/ geographies.

Cash is king. However, only a fourth were still seeking to secure their cash position.

Maintaining innovation is critical. 60% wish to implement technology for higher business efficiency or accelerated growth.

Some M&A in the offing. 49% are thinking of purchasing distressed competitors, and 55% think the reason for such transactions would be to add strategic value as well as business growth.

Risk is being scrutinized. 37% place higher emphasis on geographic risk exposure

Act now. 45% are increasing the how quickly they are making decisions since the economic downturn.

Employee motivation. 57% are pushing their communication and transparency harder to retain employees. 46% are using the downturn as an opportunity to fill key strategic posts.


Entrepreneurs are some different as E&Y finds from other mature multinational firms in having higher emphasis on growth and acquisitions.

“This survey confirms that, even in the worst times, future market leaders are looking for growth…. Such trailblazers will be vital to the world’s economic recovery.” said Greg Ericksen, Global Vice Chair, Strategic Growth Markets, Ernst & Young.


We can recall hearing of many studies which indicate that the fastest-growth companies are born in a recession. Tough economic conditions provide the breeding ground for innovative, cost-focused, nimble and niche-focused companies. Why? Recessions mean lower competition, recessions means more focus on cash flows and recessions mean creativity to secure niches and gain revenues from demanding customers. Its not easy at all, since demand dries up totally and it calls upon guts and will to keep going in the face of current depression and hopes for a better tomorrow.

But E&Y’s selection of visionary entrepreneurs do stand out for a key reason. They seem to look past the cloud of economic downturn and to the silver lining. Growth and customers are the lifeblood of any business, and by staying focused on what brings in the cash into the door, this mindset lays out a good game plan for all business owners to survive and thrive.

When things do turn around, look for these terrific companies run by E&Y Entrepreneurs of the Year to show the path to success.

Deloitte Finds 2009 Holiday Shoppers Will Use A Lot More Social Media

Deloitte’s recently published 24th Annual Holiday Survey of retail spending and trends vindicates what you are likely seeing all around you. Consumers are expected to increasingly use social media for their holiday shopping this year.

Deloitte finds 17% of consumers plan to use social media in their holiday shopping, and among those, 60% plan to use it to find discounts, coupons and sale information. 53% plan to use social media to research gift ideas and 52% plan to check the gift wish lists of friends and family.

In terms of user demographics, 52% are 18-29 years old, 33% are 30-44 years old and 12% are 45-60 years old. 19% plan to use their cell phone to find store locations, research prices, find product info, get discounts and coupons and read reviews. 25% expect to make a holiday purchase with their phone. 22% will shop primarily online this year, and 44% will use an online coupon.

Here are some more interesting findings:

Consumers May Not Return to Old Habits
Consumers have not only changed their shopping habits for this year, but this could well be a permanent change. 26% will spend less in the future than prior to the recession. 44% say they are loyal to stores they like, but make fewer trips or purchase less at them. According to Deloitte’s Stacey Janiak, “…Consumers will not return to spending levels seen before the recession anytime soon, and high-volume discretionary purchasing could remain a thing of the past.”

Men More Optimistic Than Women and Spending More
Women are less optimistic about the economy, and 53% of women would spend less this holiday season, compared to 43% of men. 50% women say the economy will improve next year, compared to 58%.

Sustained Interest in Green
20% say they plan to purchase more eco-friendly products this holiday season than they did in the past. 47% are willing to pay more for a green gift.

The survey polled 10,878 consumers between September 24 and October 2, 2009.

Here’s what we have to say:

First, this is a big win for social media in general and also for US consumers. Last year, social media (whether it be Twitter, Facebook, MySpace or LinkedIn) would not have made the radar either in terms of affecting the overall consumer psyche, much less impact retail buying behavior. US consumers are turning out to be a smart lot and social media has also gained ground. So it does make a whole lot of sense that cost-conscious consumers with increasing usage of networks, connections and friends are able to scout out and take advantage of deals. It’s harder to say whether retailers will win or lose, clearly lowest prices will be discovered quickly and consumers will gravitate to them, but retailers can also use social media and use viral marketing to their advantage to buzz their products at fractions of cost of normal advertising.

Second, we wonder how social media will be used. Will stores Twitter about what’s on sale on a shelf? Will you get instant info on whether size 9 is available at Neiman Marcus in the color you’re looking for? Will your friend Twitter you on a great discount she has found? Will retailers announce midnite sales with throwaway prices and bitly their coupon? Will you get a sales invite or coupon from your friend on Facebook? Will you become a fan of Sports Authority and buy a golf set when it comes on sale? Will groups of friends on Facebook converge at a retailer site to make a bulk purchase to gain discounts? And many such others.

Third, we would not be surprised if both consumers and retailers find innovative ways to clear both the information and goods market. This is the serendipitous juxtaposition of a high volume of consumers, retailers and smart social media platforms. And this will likely lead someone to come up with a unique way to leverage social media, and some sharp entrepreneur will pick it up create a new service. Exciting, isn’t it?

In any case, don't be surprised this year if you see one of every three 38-year old women set down their iphones in a mall, expand a bitly link on their Twitter account, come up with the bar code on Twitpic and scan it on the cash register to get a pure cashmere wool sweater, originally $125, for just $32!! That’s the real deal.

A Wake-up Call For America

We saw this on the Grant Thornton home page, and the title was so tantalizing, it was too good not to dig in and blog about it.

This recently released study by David Weild and Edward Kim indicates that a sharp fall in US publicly listed companies is generally driving a depression in US stock markets and further, that it has inhibited economic recovery, impaired the job market and undermined U.S.competitiveness. The deep underlying cause for this – severe changes to the market structure over the last twenty years.

The effects are well known, and we read the authors’ 44 page report to see if the connection to IPOs is well founded. We’ll quote verbatim from the report to make points and we’ll add our own analysis and observations.

First of all, we must say it is a compelling read with some disturbing trends and conclusions that vividly show that the US has experienced serious decline of leadership in the IPO market, and overseas markets have seen rapid growth in IPO listings, especially in Asia, where listings have more than exceeded their strong GDP performance.

“The Great Depression in Listings,” as Grant Thornton calls it, is the precipitous decline over the last decade in the number of publicly listed companies in the United States. Consider in 2008, there were 6,943 publicly listed companies in the US, a full 38% lower than the previous peak of 8,823 US companies, and this comparison looks even worse at minus 55% if you adjust this number for intervening GDP growth. The authors think that the number of companies in the US should actually double to keep up with “replacement” level of what is needed on a relative basis.

What has led to this significant drop? The authors list three key causes:

1. Problems in market structure are undermining the United States’ global competitiveness. Essentially, US listed markets are in secular decline since 1991

2. The number of new listings needed merely to maintain the United States’ listed markets is much larger than expected. US lags Asia and its capacity to generate new listings is well below replacement needs. The US needs 360 new listings per year merely to maintain a steady number of listed companies in the U.S.

3. The lack of new listings in the United States’ markets is threatening the U.S. job market. This impacts small businesses the most, and the authors calculate that up to 22 million jobs may have been lost because of the broken US IPO market.

Grant Thornton has a strong argument that the underlying reason for “The Great Depression in Listings” is not Sarbanes-Oxley, but what they call “The Great Delisting
Machine,” an array of regulatory changes that were meant to advance low-cost trading, but have had the unintended consequence of stripping economic support for the value
components (quality sell-side research, capital commitment and sales) that are needed to support markets, especially for smaller capitalization companies. GT cautions that today, capital formation in the U.S. is on life support. Within the venture capital universe, the average time from first venture investment to IPO has more than doubled.

The authors content that low cost trading, the advent of the online brokerage (ETrade, Ameritrade etc.), new order handling rules, decimalization (remember the cute fractions for stock prices), Sarbox and the global research settlement has led to a culture of “Casino Capitalism” in the US markets. Black pools of capital, unregulated hedge funds, naked and predatory shorting, high-frequency trading, and credit defaults swaps (the menace which led to this recent recession) are all rampant and rapidly spreading in US markets. The charts show that high frequency trading accounts for 70% of all US equities trading.

Is all lost? The authors point to two solutions which can help, and Grant Thornton urges Congress and the SEC to hold immediate hearings to understand why the U.S. markets have shed listings at a rate faster than any other developed market, and to pursue solutions that, together with thoughtful oversight, will advance the U.S. economy, grow jobs, better protect consumers and reduce the deficit — all without major expenditures by the U.S. government:

1. Alternative public market segment: A public market solution that provides an economic model to support the “value components” (research, sales and capital commitment) in the marketplace. This solution would establish a new, parallel market segment that benefits from a fixed spread and commission structure. It would be subject to traditional SEC registration and reporting oversight (e.g., annual and quarterly reporting, Sarbanes-Oxley compliance).

2. Enhancements to the private market: A private market solution that enables the creation of a qualified investor marketplace — consisting of both institutional investors and large accredited investors — that allows issuers to defer many of the costs associated with becoming a public company before they are ready for an IPO. This market would serve as an important bridge to an IPO.

The first one is almost a throwback to the eighties with fixed commissions to support value-adding trading activites, while the second calls for a shadow market where unregistered securities can be freely transacted by legal investors.

The report is full of charts which support the (rather distressing) conclusions, and Grant Thornton has provided insights and trends not heretofore studied in this manner. The historical facts are clear and point to a crisis in IPO markets in the US.

The authors draw a dramatic conclusion that 22 million jobs have been potentially lost due to the decline of IPO listings since 1997. This is a huge number, and though the presented math seems to support this, it is arguable whether so many jobs have not been created in the US, and conversely if the IPO market were to revive, that we could create equal numbers on the rebound. Clearly, a large number of US jobs have not been created since more companies did list outside the US - but 22 million, that just stretches our envelope. Does going IPO automatically create jobs? And don’t pre-IPO companies hire employees, regardless of whether they list in the US or not?

Doubtless, there is a crisis in the US IPO markets, and this issue is getting compounded each year. If action were not taken now, the US could lose the lead it has held for decades in global capital markets. The situation is dire indeed, and all regulators and lawmakers should react to save the US from certain followership.

This report is a must-read for all players in the capital market space, and we trust you will find the results equally astounding.

Clearly, this is a wake up call for America, and the title does full justice to the seriousness of this problem.

Here's the report on GT's website.

Checkout Our “The Best Of “Twitter Lists – Love Your DM or RT

Twitter just released its latest exciting functionality - Twitter Lists, and we think it’s awesome and very timely.

It allows us to curate who we think are the most appropriate Tweeters to follow in our niche space of The Big Four Firms, accounting, finance, tax, jobs and related topics.

We have already created some list, which we are calling “The Best Of”. We rather like this name, but we’ll evolve as lists get more ingrained, and may change.

For example after our search, all the Twitterers we think are most relevant to follow for Deloitte happenings in the Twitter universe, we have added to our “The Best of Deloitte” list.

This is our subjective selection, and we think it's a pretty good one. That’s not to say that we have completely covered all the bases, so if there is someone that just needs to be on or off any of these lists, please DM or shout out to us @big4alum. Thanks in advance.

Also, we’ll continue to refine and add/subtract to this list over time, but our intent is to keep them highly relevant and focused. We see that some of our list already have some followers and no doubt this will pick up as Twitter Lists get more ingrained and Twitter itself allows tweets and Twitter Lists to be retweeted.

So, here are our lists – follow us or follow the lists, and keep that feedback going!!

All The Lists
http://twitter.com/big4alum/lists

Best of Accenture

http://twitter.com/big4alum/best-of-accenture

Best of Capgemini

http://twitter.com/big4alum/best-of-capgemini

Best of Deloitte
http://twitter.com/big4alum/best-of-deloitte

Best of Ernst & Young
http://twitter.com/big4alum/best-of-ernst-young

Best of KPMG
http://twitter.com/big4alum/best-of-kpmg

Best of PricewaterhouseCoopers

http://twitter.com/big4alum/best-of-pwc

Best of Accounting

http://twitter.com/big4alum/best-of-accounting

Best of Finance

http://twitter.com/big4alum/best-of-finance

Best of Tax

http://twitter.com/big4alum/best-of-tax

Again, we’re at http://www.twitter.com/big4alum

Top Companies in Deloitte’s 2009 Tech Fast 500 Sport Phenomenal Sales Growth

Recently, Deloitte released its 2009 Technology Fast 500 Rankings, an annual ranking of the fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America.

The criterion – grow the fastest in revenue over five years. And the number 1 winner - ReachLocal, a privately-held global provider of localized Internet advertising solutions based in Woodland Hills, CA, with revenue of $147 million and a 5-year fiscal growth rate of (get this!) 146,050% percent. In 2004, ReachLocal’s revenues were just $100,000 and in 2008, its revenues had catapulted to $147 million, yes that’s in millions.

And here’s what this company does: “ReachLocal brings order to the fragmented local Internet by connecting advertisers, publishers, and creative solutions providers together on one platform. Wherever customers are online, ReachLocal helps businesses find them with the broadest reach of local digital media, a dedicated force of local Internet Marketing Consultants, and technology that continually optimizes results.”

Here are the top ten winners of this ranked list:

(Rank Company Sector Five-year Revenue Growth CEO)

1 ReachLocal Internet 146050% Zorik Gordon
www.reachlocal.com

2 Infinera Corporation Communications/Networking 86580% Jagdeep Singh
www.infinera.com

3 Affymax, Inc. Biotechnology/Pharmaceutical 54768% Arlene M. Morris
www.affymax.com

4 Hughes Communications, Inc. Communications/Networking 49988% Pradman P. Kaul
www.hughes.com

5 Entropic Communications, Inc. Semiconductor 40691% Patrick Henry
www.entropic.com

6 Onyx Pharmaceuticals, Inc. Biotechnology/Pharmaceutical 38769% N. Anthony Coles
www.onyx-pharm.com

7 Data Domain, Inc. Computers/Peripherals 35084% Frank Slootman
www.datadomain.com

8 Genomic Health, Inc. Biotechnology/Pharmaceutical 33716% Kimberly Popovits
www.genomichealth.com

9 Zila, Inc. Biotechnology/Pharmaceutical 27715% David R. Bethune
www.zila.com

10 Force10 Networks, Inc. Communications/Networking 24528% Henry Wasik
www.force10networks.com

Here are some interesting facts about this ranking:

The Western region of the United States has the highest concentration of ranked companies (34%), followed by the Northeast (28%), Southeast (15%), Canada (10%), Southwest (8%) and Midwest (5%).
The software sector was 38% with 189 companies, followed by communications/networking (16%), biotechnology/pharmaceuticals (13%) and Internet (9%). Comprising the balance 24% were medical equipment, scientific/technical instrumentation, computer/peripherals, semiconductors, media/entertainment and clean technology companies.

In the top 10, there were 4 biotech and pharma but no software companies. Deloitte added clean technology as a new category in 2009 and 7 companies made the list.

The average growth rate for the Fast 500 fell by 720% to 2,486% in 2009, from 3,206% in 2008. The 10-year high was recorded in 2002, when the overall average growth rate was 6,772%, the 10-year low was in 2007 with average growth of 1,823%.

To make this list, current-year revenues must exceed $5 million USD or CD, and doubled in last 5 years.

We are quite amazed by the ultra-strong growth exhibited by these Fast 500 Tech companies, clearly with the average company growing by 2,500% means that they have multiplied their sales by 2.5 times in five years. Clearly, such growth is mainly doable in tech companies, where innovative research, visionary management and new solutions can find receptive customers, either by changing the current paradigm or offering services which provide value to a growing list of customers. Also interesting to note the total absence of software companies in the top 10, is the era of Microsofts gone for ever?

Given that statistically, most small businesses fail in their first five years of starting up, these companies deserve much acclaim, and thanks to Deloitte for granting that much needed recognition.



Deloitte’s 2009 Technology Fast 500™ Ranking

Huron Consulting Group Q3-2009 Operations Strong, Shares Zoom

Huron Consulting Group Inc. (NASDAQ: HURN) just reported its Q3-2009 results, with revenues of $172.2 million increasing 2.1% from $168.7 million in Q3-2008 and up sequentially from $165.8 million in Q2-2009. However, more importantly, Huron took a $106.0 million non-cash pretax goodwill impairment charge, about 20% of the total goodwill balance of $506.5 million as of June 30, 2009. In addition, there were restructuring and restatement charges of $15.1 million. The GAAP loss per share including the aforementioned charges was $(3.16) in Q3-2009 compared to diluted earnings per share of $0.12 in Q3 2008.

Non-GAAP adjusted diluted earnings per share was $0.59 in Q3 2009 compared to $0.86 for Q3 2008(7). This change is almost entirely due to the increase in the effective tax rate. Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which excludes share-based compensation expense, non-cash compensation expense, restructuring charges, non-recurring expenses related to the restatement, goodwill impairment charge, and an other gain, was $38.1 million, or 22.1% of revenues for the third quarter, compared to $40.8 million, or 24.2% of revenues, in the comparable quarter last year.

Average number of full-time billable consultants totaled 1,430 for Q3-2009 compared to 1,488 for Q3-2008. Average number of full-time equivalent professionals totaled 861 for Q3 2009 compared to 947 in the same period last year.

By terms of Operating Segments comparing Q3-2009 versus Q3-2008, Health and Education Consulting revenues increased 30%, Legal Consulting revenues dropped 23%, Accounting & Financial Consulting sales fell 24%, and Corporate Consulting revenues fell 14%. Thus, the 2% increase in sales for the company covered a lot of difference in performance across segments.

Digging below the reported loss, Huron actually had some good financial nuggets in this quarter’s results. Cash from operations did increase from $44 million in Q3-2008 to $52 million in Q3-2009. And cash on the balance sheet increased from $14 million in Q3-2008 to $27 million in Q3-2009.

The accounting restatement of $106 million, from the goodwill impairment, had only a non-cash impact on financial results.

Huron indicated for full year 2009, revenues would be in an updated range of $650 million to $665 million. The Company also anticipated GAAP loss per share in a range of $(2.01) to $(1.80), non-GAAP adjusted diluted earnings per share in a range of $2.85 to $3.05, loss before interest, taxes, depreciation and amortization in a range of $(13) million to $(8) million, and Adjusted EBITDA in a range of $139 million to $144 million.

These were quite good results and investors cheered, pushing the stock up 16% (HURN open $24.57 to $26.99 at 10 am) on the open, and up 10% ($25.90 at 4 pm) at the end of trading today November 5, 2009.

Why? Huron’s operations seemingly are intact. Q3-2009 revenues actually rose and operating income and adjusted EBITDA fell only slightly. The accounting restatement had only a non-cash impact on financials, and more critically, the issue was contained, measured and fully absorbed in just a few months after disclosure. Hopefully it is done.

Clients don’t seem to be abandoning Huron as was widely anticipated, if anything Health and Education clients are giving more business to Huron. Sales in the other segments did decrease, this may be due to general economic slowdown. Huron has fewer consultants than it had a year ago, but utilization has only fallen by a few percentage points. Costs are being managed in line with top line declines.

2009 outlook of revenues of $660-$665 million are almost flat to full year 2008. This is cash coming into the door paid for by clients who are purchasing Huron services. Also, full year 2009 EBITDA of $139-$144 million is higher than $122 million of EBITDA in full year 2008.

The stock is on its climb back, it fell from $45 at end of July 2009 to $12 after the goodwill announcement, but has more than doubled since that time. As we have blogged earlier, this seems to be a cloud rather than a cancer for the company, if new management sets things right for investors and clients stay, HURN could potentially look to regain its erstwhile level of stock price in the medium term.

Here’s some background on the accounting restatement right from their release:

“The Company announced on July 31, 2009 that it would restate its financial statements for the fiscal years 2006, 2007 and 2008 and the first quarter of 2009. On August 17, 2009, Huron completed the restatement. The restatement pertained to the accounting for certain acquisition-related payments received by selling shareholders of four acquired businesses that were subsequently redistributed by such selling shareholders among themselves and to other select client-serving and administrative Company employees based, in part, on continuing employment with the Company or the achievement of personal performance measures.

The selling shareholders were not prohibited from redistributing such acquisition-related payments under the terms of the purchase agreements with the Company for the acquisitions of the acquired businesses. However, under GAAP, such payments were imputed to the Company, and the portion of such payments redistributed based on performance or employment was required to be reflected as non-cash compensation expense of the Company, even though the amounts received by the selling shareholders did not differ significantly from the amounts they would have received if such portion had been distributed solely in accordance with their ownership interests. The restatement was necessary because the Company did not record such portions of the acquisition-related payments as a separate non-cash compensation expense with a corresponding increase in paid-in capital.

Based on the results of the Company’s inquiry into the acquisition-related payments to date and the previously disclosed agreement amendments with the selling shareholders, earn-out payments for periods after August 1, 2009 are accounted for as additional purchase consideration and not also as non-cash compensation expense. The Company recognized $1.2 million of additional non-cash compensation expense during the third quarter of 2009 related to the redistributed acquisition-related payments for the period from July 1 to July 31, 2009.

The restatement resulted in a reduction of approximately $56 million in net income and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for all restated periods. However, the restatement had no effect on Huron’s total assets, total liabilities or total stockholders’ equity on an annual basis. Further, the Company did not expend additional cash with respect to the compensation charge, and the restatement had no effect on Huron’s cash or net cash flows from operations.

As a result of the significant decline in the price of the Company’s common stock following the Company’s July 31, 2009 announcement of its intention to restate its financial statements, the Company engaged in the previously announced impairment analysis with respect to the carrying value of its goodwill in connection with the preparation of the financial statements for the quarter ended September 30, 2009, and recorded a $106.0 million non-cash pretax charge for the impairment of goodwill, which was approximately 20% of the Company’s total goodwill balance of $506.5 million as of June 30, 2009. The impairment charge was recognized to reduce the carrying value of goodwill associated with the Company’s Accounting & Financial Consulting and Corporate Consulting segments. The impairment charge is non-cash in nature and does not affect the Company’s liquidity.”

Capgemini Q3-2009 Revenue Down 9%, But Confirms 7% Operating Margin for 2009

Capgemini just reported its Q3-2009 financial results with revenues of EUR 1,946 million, which was 9.0% below Q3-2008 revenues of EUR 2,098 million on constant exchange rates. On a reported basis revenues were 7.3% lower. Capgemini attributed this to a decline in the economic environment, and a sharp reduction in corporate IT spending.

In terms of segments, Consulting Services and Local Professional Services revenues fell 12.5% on average, and those activities most vulnerable to the economic cycle falling the most. Outsourcing Services provided an offsetting effect with a 2.7% decline in revenues due to the expected – and announced – fall in business under a major contract in North America.

In terms of geography, UK and Ireland revenues gained 1.5%, North America revenues fell 7.3%. Revenues in other regions fell 13.3% on average, with France posting a fall of 9.9%.

Q3-2009 bookings were EUR 1,981 million, with Outsourcing Services bookings increasing 7% over Q3-2008, in Consulting Services, Technology Services and Local Professional Services, the book-to-bill ratio remained above 1.

Capgemini provided some forecasts for Q4-2009, estimating it would drop 9% versus Q4-2008, but the company confirmed an operating margin % of around 7% for full-year 2009. Capgemini indicated that signs that activity is stabilizing and even picking up in some market segments, though benefits are not expected to filter through immediately.

Let’s break down this for some interesting conclusions:

First, the revenue decline is generally in line with Accenture’s Q4-2009 and other Big4 firms which have recently reported. Capgemini reports in Euros, so it was spared some of the negative impacts of the appreciating US dollar which hurt many of the other Big Four which report in US dollars.

Second, Outsourcing is clearly resonating with clients, and cost-conscious customers are looking to large IT companies to help them reduce their own infrastructure costs. A relatively smaller fall in Outsourcing revenues is also in line with what Accenture recently reported.

Third, bookings in the Q3-2009 were actually slightly ahead of revenue, indicating that the pipeline is not growing as fast as one would like, but certainly not shrinking.

Fourthly, Q4-2009 guidance of a 9% drop indicates that the second half of 2009 would be weaker than what Capgemini guided in its Q2-2009 earnings release, where it indicated that H2-2009 revenues would drop between 4% and 6%. The company seems to be managing costs in a tough environment and keeping expenses generally in line with the decline in top line. Operating margin in 2009 is expected to be 7% versus 8.5% achieved in full year 2008.

Finally, recent reports and chatter on Twitter indicates that Capgemini will be strongly expanding in India, and pushing its Business Information Management services. With Outsourcing strong and Kanbay hopefully fully incorporated into operations, India clearly seems to be a strong source of revenue and growth for the company in the future.

Investors seemed to be quite neutral to this announcement and the stock stayed about EUR 31 per share on Euronext, though Capgemini has retreated from its highs of around EUR 37 reached in mid October 2009.

With markets stabilizing, and reasonable growth prospects ahead, 2010 may show better results from the company.

All Big Four Firms Make The World’s Top 50 Most Attractive Employers List

We have blogged earlier about Universum, the employer branding company, particularly on their MBA and undergraduate surveys of top employers. The Big Four firms, Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and Accenture typically make the top ranks in their surveys.

Now they have come up with the world’s Top 50 most attractive employers, their first global index of employer attractiveness which highlights the world’s most powerful employer brands, those companies that excel in talent attraction and retention.

To come up with these results, nearly 120,000 students at top academic institutions in US, Japan, China, Germany, France, UK, Italy, Russia, Spain, Canada and India chose their ideal companies to work for.

And the Big Four firms are again on the very top of this list. Against some very tough competition and some very tough critics (students!) all the firms made the Top 10 Global top 50 business list, in august company of Google, Goldman Sachs, McKinsey and Microsoft. Accenture was just a tad behind at rank 23.

Global Top 50 Business

Company Ranking 2009

Google 1
PricewaterhouseCoopers 2
Microsoft 3
Goldman Sachs 4
Ernst & Young 5
Procter & Gamble 6
J.P. Morgan 7
KPMG 8
McKinsey & Company 9
Deloitte 10

Accenture 23

Interestingly, Universum also put together a global top 50 engineering company list, and the Big Four firms also make good rankings on that list as well, again aside top companies such as IBM, Intel, BMW and General Electric. In this list, Accenture was the first of the Big Four at rank 20, with KPMG making the last of the lot at rank 47. Big Four firms are not typically known for engineering, so we are certainly surprised at this. Perhaps the definition is broader than just hardcore engineering, in which case, the Big Four firms do offer services in hardware, software, outsourcing, system design, ERP, social media and disciplines related to business information technology.

Global Top 50 Engineering

Company Ranking 2009
Google 1
Microsoft 2
IBM 3
BMW 4
Intel 5

Accenture 20
Deloitte 29
Ernst & Young 33
PricewaterhouseCoopers 37
KPMG 47

In any case, Big Four professionals can feel quite proud of this ranking, and alumni can use this in their cocktail conversations!

Big Four Firms Dominate UK’s Large Cap Market, Is Big Three Possible?

The Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance just published its Fourth Progress Report on the implementation of the MPG recommendations on Promoting Choice in the UK Audit Market.

While the report generally deals with progress on a number of FRC’s key strategic initiatives, there is a very interesting analysis on the concentration of the auditing market in the UK which is dominated by the Big Four firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.

Here is the summary conclusion from the report, “Appendix 2 shows changes in market concentration from 2006 to August 2009. Since that date the market has see a slight increase in the number of FTSE 350 companies with non‐Big Four auditors, although looking at the latest figures compared with those in February 2009, it is possible that this trend may now have stalled. Subsequent to August 2009, the FRC is aware of at least one FTSE 350 company which has changed from a non‐Big Four auditor to a Big Four firm. Non‐Big Four firms remain strong in AIM and to a lesser extent in the FTSE Small Cap and Fledgling indices.”

This Appendix has a lot of information on market concentration statistics. Essentially it looks at public companies represented in the four key UK indices (FTSE 100, FTSE 250, FTSE Small Cap and AIM) and shows the percentage of public companies in each index audited either by a Big Four or non Big Four firm. The time period spans November 2006 to August 2009.

There are some startling findings and interesting conclusions from this study.

In the FTSE 100 in August 2009, PwC audited 41% of public companies, KPMG audited 25%, Deloitte audited 21%, E&Y audited 15% and non-Big Four audited 1%. In the FTSE 100 in November 2006, PwC audited 42% of public companies, KPMG audited 22%, Deloitte audited 18%, E&Y audited 17% and non-Big Four audited 0%.

In this large capitalization segment, it is clear that the Big Four firms clearly dominate this market. Non Big Four firms have a negligible share of this market. Yes, that’s a measly 1%. It is certainly up from 0% a few years ago, but nothing to write home about. It also appears that KPMG and Deloitte took share from other two Big Four firms, this could be due to the large size of KPMG UK and KPMG Europe; and Deloitte’s increasing share of the Big Four pie.

In the FTSE 250 in August 2009, PwC audited 28% of public companies, KPMG audited 21%, Deloitte audited 26%, E&Y audited 20% and non-Big Four audited 6%. In the FTSE 250 in November 2006, PwC audited 31% of public companies, KPMG audited 23%, Deloitte audited 24%, E&Y audited 19% and non-Big Four audited 3%.

In this larger set of public companies, while the Big Four firms have a majority share, non Big Four firms have a reasonable share which has doubled in recent years. PwC’s share loss is noticeable over this period


In the FTSE Small Cap in August 2009, PwC audited 22% of public companies, KPMG audited 21%, Deloitte audited 19%, E&Y audited 18% and non-Big Four audited 20%. In the FTSE Small Cap in November 2006, PwC audited 23% of public companies, KPMG audited 20%, Deloitte audited 18%, E&Y audited 20% and non-Big Four audited 19%.

In these smaller sized companies, it is clear that while the Big Four firms have a four-fifths of the market but the non Big Four firms also enjoy a 20% share.


In the AIM in August 2009, PwC audited 11% of public companies, KPMG audited 15%, Deloitte audited 11%, E&Y audited 8% and non-Big Four audited 55%. In the AIM in November 2006, PwC audited 10% of public companies, KPMG audited 13%, Deloitte audited 10%, E&Y audited 7% and non-Big Four audited 60%.

In the alternative market, the Big Four firms actually are in a minority position with the non Big Four firms having a majority share, though this share has decreased by a substantial 5% over the last few years.


Overall, it is evident that large public companies overwhelmingly choose Big Four firms as their auditors. The high concentration in this sub-segment clearly limits choice for multinational companies which may require either deep auditing expertise or substantial presence in countries all over the world, which clearly rules out smaller firms, leaving the field completely to the larger behemoths.

As we travel down into the smaller capitalization companies, non-Big Four firms have increasing share, either since the Big Four firms do not devote resources to penetrate this segment or the non Big Four firms offer more customized services to smaller clients who may not need the sophistication or breadth of a large public accounting firm. This stands to reason too. The loss of share of non-Big Four firms in AIM is troubling.

The demise of Andersen has significantly concentrated market power in just four firms. The exit of any one of these firms, if at all conceivable, can have a significant impairing impact on choice for clients. The choice is narrow already. Conflicts between audit, tax and consulting rules out certain choices for public auditors. And if that pool were to shrink, choice would completely disappear.

We have argued in our earlier blog posts that the reduction of the Big Four to Big Three would have serious financial impacts on the audit and tax industry, on financial markets and on investors in all countries all across the world. The structure in other countries may not be exactly as the UK, but quite similar, with Big Four firms dominating the upper client echelon. Financial regulators and market participants would at all costs avoid the failure or exit of any player or combination of players. We think No Deloitte & Young, No KPMGPwC, No EYPwC or any other alphabet soup. Consider that the KPMG was penalized $450 million in the US, but allowed to continue as a firm after paying that fine. The aftermath is too difficult, we believe, to live with.

While the ultimate fear of an exit may be unfounded, Paul Boyle, Chief Executive of the FRC, did say, “The FRC remains concerned about the significant uncertainty and cost which could arise in the event that one or more of the Big Four audit firms left the market. Regardless of the actions taken by market participants, this risk is likely to remain significant in the medium to long term. It remains to be seen whether market-led actions will prove to be sufficient to reduce this risk to an acceptable level.”

Clearly this is a concern for governmental regulators, and though Mr. Boyle claims the risk is “significant”, we would think that the possibility of occurrence is very small. The Big Four will continue to the Big Four for a long time to come. We really like our site name as it is!!

What do you think about exit, demise or combinations? Possible? Probable? Allowable? ???

Deloitte Revenues Grow 1% Local Currency, Now Just Behind PricewaterhouseCoopers

 

 

Deloitte Touche Tohmatsu, the global firm, just came out with its fiscal 2009 revenues for the year ending May 31, 2009. 2009 full year global revenue was US$26.1 billion, an actual increase in local currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008. The tough economic climate and appreciating US dollar were the two main factors in 2009 which impacted Deloitte as much as it did other Big Four firms. However, a 1% growth in local currency bested both

E&Y (0.2% increase in local currency http://bigfouralumni.blogspot.com/2009/09/ernst-young-external-challenges-drive.html) and

PwC (0.2% increase in local currency http://bigfouralumni.blogspot.com/2009/10/pwc-fy-2009-revenues-rise-modestly-from.html). KPMG is yet to report its 2009 results, as its year ends in September 30, 2009.

 

Despite this remarkable performance, Deloitte was unable to beat PwC to be the largest Big Four firm on the planet. Its 2009 revenues of $26.1 billion were behind PwC’s 2009 revenues of $26.2 billion by only $100 million or 0.4%. We indicated in our earlier post that a 4.5% decrease in Deloitte’s revenues in US$ terms would make it the largest among the Big4 firms. But this is only a statistical miss. By showing remarkable performance in 2009, arguably one of the toughest environments in recent memory, Deloitte has shown that it is a strong contender for the leadership position.

 

“Achieving positive growth in this exceptionally difficult economic environment was the result of close attention to the needs of clients and a strong commitment to professional excellence by our member firm professionals. Despite the tough economy, we remain focused on our vision to be the standard of excellence and will continue to invest in pursuit of this vision,” said Jim Quigley, CEO of Deloitte Touche Tohmatsu

 

By service line, Consulting was the fastest grower at 7.3% in local currency terms. In US$ terms, Consulting revenue grew 2% from $6.3 billion in 2008 to $6.5 billion in 2009. Audit was relatively flat against 2008 in local currency terms. In US$ terms, Audit shrank by 6.4% from $12.7 billion to $11.9 billion. Tax was also relatively flat against 2008 in local currency terms. In US$ terms, Tax revenues decreased by 5.5% from $6.0 billion to $5.7 billion. Financial Advisory Services revenue fell 6.1% in local currency terms, but in US$ terms, fell by 13.8% from $2.4 billion in 2008 to $2.0 billion in 2009, driven by lower M&A activity.

 

In terms of geography, Americas dropped 3.7% in US$ terms from $12.9 billion in 2008 to $12.5 billion in 2009. Europe, Middle East and Africa also dropped 9.0% in US$ terms from $11.3 billion in 2008 to $10.2 billion in 2009. Asia Pacific grew 4.7% in US$ terms from $3.2 billion in 2008 to $3.4 billion in 2009.

 

The Asia Pacific region had local currency growth of 7.6% and was the fastest-growing region for the fifth consecutive year. India grew 29.9%, Australia grew 11.5% and Japan grew 11.3% in local currency terms. Europe, Middle East, and Africa region (EMEA) grew 2% but Americas declined 1.3% in local currency. Africa, the Middle East, and Latin America and the Caribbean posted high growth of 21.3%, 15.6% and 13.7% respectively, in local currency.

 

Deloitte said that its aggregate compounded annual growth rate (CAGR) was 9.4 percent from 2005-2009 and 14.7 percent from 2005-2008, 2009 bringing an abrupt stop to a remarkable growth rate.

 

Employment at Deloitte was a bright spot, during 2009, the firm hired more than 40,000 professionals. The workforce now stands at 168,651 people globally, representing a 4.5% (7,351) increase from 161,300 in 2008. Assuming 32,649 left the firm for the net to increase, the attrition rate comes out to be 20% in 2009 (32,649/161,300).

 

Some other interesting factoids in the Deloitte report:

 

Over 75,000 Deloitte professionals are on LinkedIn

The Deloitte Global Facebook page has 11,348 fans





The Deloitte Global Twitter feed has 2,169 followers

• A typical Deloitte professional flew 14,220 kilometers in 2009
• Over 5,300 jobs were posted on any given day in 2009 on Global career websites
• 2,322 average number of job applications received any given day
• 821 average number of student applications received any given day

 

Here are our observations and analysis on this report:

 

• First, this report was quite late this year. Deloitte’s year ended May 31, 2009, which is a good 4.5 months ago. Deloitte reported much earlier in 2008, and was the first to report. Why the delay? Was it waiting for PwC results??
• Second, while near flat growth in local currency terms and decline in US$ terms was expected, nonetheless performance was quite compelling, and Deloitte has zoomed up to near PwC level, missing leadership (intentionally or unintentionally) by 0.4%. This sets up an interesting rivalry for 2010, with both firms having good chance to establish leadership. PwC’s position for the first time ever, seems a bit shaky.
• Third, emerging markets show strong growth despite tough economic conditions, validating their continuing good economic story and Deloitte’s ability to be part of that increase. Developing markets in Europe and Americas expectedly declined.
• Fourth, we applaud Deloitte’s reporting of Social Media metric, the first Big Four firm to do so. By openly declaring that more than 75,000 of its professionals are on LinkedIn, this has effectively removed the stigma of placing your profile on the world’s largest professional network. You are not looking for another job when you are on LinkedIn, you are enhancing your network. Going public with this is commendable. We invite each and every of those 75,000 Deloitte professionals to join other Big Four professionals and alumni on our Big Four Firms Alumni and Professionals group to enhance their network. Deloitte has also a strong fan base on Facebook and a nice Twitter following. We give a hearty Thumbs Up to Deloitte for being open and proud of their social media presence.

 

 

In summary, though delayed, Deloitte put up some excellent numbers, stayed a smidgeon behind PwC in revenue, and took the leadership in social media reporting.

 

KPMG is the last to report in early November, and we will then offer our 2009 Big Four Financial Performance Analysis. See our 2008 Big Four firm analysis at http://bigfouralumni.blogspot.com/2009/01/big-four-firms-combined-revenues-top.html

 

What do you think of this? Look forward to comments both from Deloitte professionals, alumni and others.

 

 

Our Twitter Feed Ranked as Top Five for Accounting Jobs by Dow Jones WSJ

We were recently, and unexpectedly, surprised by our ranking by the well respected FINS.com as one of the “The Top Five Twitter Feeds for Job Hunters in Accounting”. We are thankful to FINS for recognizing our Twitter and web efforts towards the Big Four firms alumni community.

This is what FINS said about us, and we quote verbatim, “2. @Big4Alum: This juicy feed is run by the alumni group behind Big4.com, a blog that caters to the interests of former employees of Accenture, Andersen, Bearing Point, Deloitte, Ernst & Young, CapGemini, KPMG and PricewaterhouseCoopers. Even for those who haven't had the privilege of working at one of these accounting giants, it's well worth reading. Particularly job seekers, who need to be up on the doings of the big boys. Tweets chronicle the latest job appointments, openings and other happenings, such as a discussion on CNBC on accounting's role in the financial crisis between Jim Turley, global chairman of Ernst & Young, and Bob Moritz, U.S. chairman of PricewaterhouseCoopers.”

Here is the link:

http://www.fins.com/Finance/Articles/SB125605830139196837/The-Top-Five-Twitter-Feeds-for-Job-Hunters-in-Accounting?Type=0&idx=10

The source of this ranking (Dow Jones / WSJ) indeed gives it the most validity. Here is what FINS is:

FINS is a new venture from Dow Jones, publisher of The Wall Street Journal. In other words, we know people who know people – particularly finance insiders, top recruiters and industry experts who have shared their secrets and inside information with us. We understand that it's about more than just a job; it's about your career. So we created FINS to help guide you through the finance job market and propel your career

All the jobs posted on our Twitter feed are real jobs that are posted by real recruiters. In other words, there are actual humans coming to our site and posting jobs which show up on Twitter. No bots. We encourage all our Twitter followers to apply to these jobs, or retweet them so other Big four alumni who are looking can benefit.

Asia Pacific Uber Rich Suffer A Lot In 2008, But Roar Back Quickly

We have blogged earlier about the fascinating results of the 2008 Capgemini Merrill Lynch Global Wealth report, where high net worth individuals (HNWIs – net assets greater than US$1 million) and ultra-high net worth individuals (Ultra HNWIs – net assets greater than US$30 million), the uber-rich of the world, lost a cool $8 trillion of wealth from 2007 to 2008.

Recently, Capgemini released its 4th annual Asia Pacific report focused on this specific region. And this is interesting in the sense in that Asia Pacific is the new wealth creation hotspot of the world, and it appears millionaires and billionaires are being crafted here almost every week.

The findings in the Asia Pacific region are equally noteworthy. The ultra rich in the region were not immune from global collapse in markets and demand. Just from 2007 to 2008, the Asia Pacific population of HNWIs fell 14.2% to 2.4 million in 2008 and their combined wealth dropped a huge 22.3% to US$7.4 trillion. Correspondingly, the number of ultra-HNWIs fell 29.6% to 14,300 and their total wealth shrank 35.1%.

But all is not bad news in the region. While there has been serious declines in the past, the numbers of Asia Pacific’s HNWIs and their wealth is expected to increase as market conditions improve (at a robust annual rate of 8.8% till 2018), as the region roars back first out from the global slowdown.

China and India are likely to lead HNWI growth in Asia Pacific. Further, Capgemini makes a bold prediction: the Asia Pacific region is poised to surpass North America and Europe to have the highest levels of wealth in the world.

At this point in time however, Japan and China have a large (72%) percentage of the Asia Pacific HNWI population and 66% of its wealth, with both figures up from 2007.

In Japan, the number of HNWIs fell 9.9% from 2007 to 2008 to 1.37 million in 2008 and their wealth dropped 16.7% to US$3.2 trillion, a smaller drop than other markets.

In China, despite steep market capitalization losses, its HNWIs avoided the larger losses seen in other markets due to the closed nature of its markets and robust macroeconomic growth. The number of HNWIs in China fell 11.8% from 2007 to 2008 to 364,000 in 2008 and their combined wealth dropped 20.7% to US$1.7 trillion. But note this: China’s HNWI population now exceeds that of the United Kingdom to be the fourth-largest in the world.

In India, the HNWI population fell 31.6% from 2007 to 2008 to 84,000.

In Hong Kong, the HNWI population had the biggest percentage decline in the world, falling 61.3% to 37,000.

Being the conservative lot that they are, Asia Pacific HNWIs increased their allocations to safer and simpler investments in 2008 in a move to preserve wealth, increasing their cash positions to 29% from 25% in 2007. By the end of 2008, Asia Pacific HNWIs had 23% of their wealth in equities, down 3% from 2007. In Australia, HNWIs cut back their allocations to the asset class to 25% from 38%, while Hong Kong HNWIs scaled back their exposure to 21% from 33%.

Interestingly, the rich people in Asia Pacific put their money where they lived: investments in home-region and domestic markets rose to 67% from 53%, as global market uncertainty deterred Asia Pacific HNWIs from investing in other regions.

All this is interesting stuff. But it has key consequences for equity markets, GDP and wealth management. These uber rich are the world’s savviest investors and move capital to where it can earn the highest risk-adjusted returns. Further, they invest consistently in hard and intellectual assets to protect and preserve their wealth.

Capgemini’s findings that the Asia Pacific region will likely become home to the largest population of HNWIs is a key fact to pause and consider. Wealth is likely to be created at the fastest pace in Asia over the next ten years as emerging economies will surpass the developed world in assets, technology, standard of living and hungry customers. We may have to turn upside down the famous dictum to given to ambitious young professionals.

If you really want to be rich, then the new mantra for the 21st century may well be: Go East, Young Man!!

PwC FY 2009 Revenues Rise Modestly From FY 2008 Despite Tough Environment

PricewaterhouseCoopers just released its FY 2009 global revenues for the year ending June 30, 2009, which came in at US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY 2008 in US dollar terms. However, on local currency terms FY 2009 revenues were actually higher than FY 2008 by a modest 0.2%. These results were clearly impacted by two large macro factors. The global economic crisis put a sudden halt to the multi-year annual growth in revenues as clients withheld spending on professional services. The other impact was FX, as the appreciating dollar over the reporting period resulted in lower US dollars for each unit of local currency leading to a reduction in revenue on US dollar terms from FY 2008 to FY 2009.

In terms of service lines, Assurance grew 2.0% in local currency terms to US$13.1 billion, a remarkable achievement, since it was the only service line to do so. But in terms of US$, revenues actually fell by 4.8% (the press release says positive 4.8%, which seems to be an error). PwC attributed this to “market-leading strength of the business and its continued focus on improved customer service and very competitive pricing.”

Advisory services fell by 2.9% in local currency terms to US$6.1 billion, but fell a whopping 11.4% in US$ terms. This service line was the hardest hit by the global slowdown, as M&A and IPOs dried up and private equity firms took their foot off the pedals. Bankrupcty and restructuring work provided some offset.

Tax services fell by 0.3% in local currency terms to US$6.9 billion, but fell a 7.5% in US$ terms. Tax was impacted by the worldwide decline in corporate deals and restructuring work.

In terms of geographies, Asia revenues rose 5.4% to $2.7 billion in local currency terms and also rising 1.0% in US$ terms. Revenues in the smaller regions of Middle East & Africa, South & Central America and Australasia & Pacific also rose strongly in local currency terms, showing strong growth in emerging markets. In the developed world, revenues in both Europe and North America declined, and since these account for 80% of total PwC revenues, they essentially drove the results for the firm. Revenue growth was high in a number of PwC member firms around the world, with particularly good results in Japan, Russia, Spain, Sweden and Canada.

One bright spot was hiring, where, “….the PwC network also hired about 30,000 new people and increased its total workforce to more than 163,000 demonstrating a commitment to attracting the right people to serve clients around the world." Last year, PwC reported total workforce of 156,000, so the net increase of 7,000 staff would have meant a gross reduction of personnel of 26,000 leading to an around 15% attrition rate, composed of voluntary and involuntary departures.

"The past 12 months have been challenging for our network, with most PwC member firms facing tough economic conditions. While PwC's results for FY 2009 are not as good as we would have liked, they have held up well in the circumstances," said PwC Global Chairman Dennis M. Nally. "In addition the combination of first rate customer service and very competitive pricing has allowed us to increase our market share in many of our markets around the world.

PricewaterhouseCoopers is the second firm to report its FY 2009 results after Ernst & Young (Deloitte, the first to report in 2008 is conspicuously behind in reporting their performance this year), and the final numbers and commentary are not dissimilar to Ernst & Young.

On the positive side, achieving a small increase in local currency terms in what is probably the toughest financial environment in years is a remarkable success. This is evidence of PwC’s global breadth and depth and ability to continue to provide professional services to clients and fully earning each dollar from their clients. The US dollar’s appreciation does have a negative impact on year over year revenues, but this is clearly outside the firm’s control.

Growth in Assurance services and in emerging markets of Asia and Africa show that these regions continue to advance in both economic and financial terms and PwC’s ability to fully tap into this astounding growth. Fall off in developed economies were expected, but it is not as bad as it could have been, and certainly compared to other companies and firms around the world.

As expected, FY 2009 brings to a sudden halt the run of double-digit % growth in revenues that all the Big Four firms have enjoyed over the last five years. Next year, as the economies and capital markets rebound and the dollar depreciates, we would actually expect better financial performance in FY 2010.

Another big question we posed last year was Deloitte’s surprising push toward leadership of the Big Four firms. Last year, Deloitte posted revenues of US$27.4 billion, only $0.8 billion behind PricewaterhouseCoopers of $28.2 billion. This year, PwC’s revenues have fallen 7.1% to $26.2 billion. If Deloitte’s revenue fall only by 4%, its FY 2009 revenues could exceed $26.2 billion, making it the largest Big Four firm on the planet. It seems a tough task, though not impossible based on where the growth is coming from, we’ll just to wait for Deloitte’s results.

Deloitte Finds Business Tribalization Gathering Momemtum, Still Ways To Go

Tribalization of Business?

Really??!! Are we going a few hundred years back in time?

It really appears so. Social media is here to stay and becoming more mainstream each day, and smart businesses better adjust to this new reality.

Market segments are now tribes. Channels are now networks. Advertising is now viral transmission. Early adopters are primal influencers. And so on.

Deloitte asks, “Why social software and communities matter to business?”, and answers:
Humans are hard-wired to cooperate and share opinions
Communities can have an “amplifier effect” on marketing, customer support and other corporate functions
The positive impact of effective communities can be game-changing

While much of this is common sense, the internet and social media sites have truly provided the modern world to interconnect in a way that has never been possible in human existence, so in a sense this is a new avenue for businesses to rethink strategies and reach customers in an increasingly flat world.

In their new 2009 Tribalization of Business Study, Deloitte shows that while progressing well, organizations have not yet fully tapped social media’s total potential

Here are the key findings of this research:

There is continued maturation of the enterprise’s use of communities and social media. People are now looking not only at the very visible number of active users and their level of participation, but also at non-active users or “lurkers” – people who observe the community, but don’t participate in the discussion. A full third are analyzing data on how these lurkers derive value from the community and a fifth have set up formal “ambassador” programs to attract lurkers. While these can be easily fixed by partnering and new management practices, only a few companies are taking the steps necessary to overcome these challenges.

While 58% evaluated partnering with existing communities, complementary vendors or end users when developing their community, 55% of the companies that evaluated a partnership did not actually partner. There appear to be significant gaps between community goals (such as generating word of mouth, customer loyalty and brand awareness) and how success is being measured.

There is a much longer flipbook, and here are some interesting findings that we were able to unearth:

Only 16% of the communities had more than 10,000 members
Only 26% of the communities were more than 1 to 3 years old
Only 45% will increase their investment in next 12 months as in the last 12 months
Only 32% are actively capturing data on “lurkers”
80% don’t have a formal ambassador program

Only 6% have more than 6 people managing their communities

36% say that the Marketing department manages their communities

34% say that the biggest obstacle is getting people to engage and communicate

37% say that number of active users is the best way to measure success

33% say that how often people comment is the best way to measure success

And Deloitte ends with the usual consultant-ese strategic conclusions:

To realize the full benefit of social media and online communities, it is imperative that business leaders move beyond viewing them as “bolt-ons” to their companies

Companies should consider integrating the new information flows associated with communities with those information flows that already exist within their companies

To be able to extract true business value from communities, new management strategies and practices will be critical, including redefining the scope and role of alliances as well as the overall boundaries of corporations

In simpler language - bring social media into the center of the company, connect the external environment to the internal environment, and rethink the way you can create value.

Social media is just getting started, and this study is a typical depiction of a large movement in its early stages - paradigms are being questioned, new business practices are being implemented, ROIs are getting examined, old ways of measurements continue and investments are minimal.

But as social media gathers momentum, both with individuals and eventually with businesses who serve those individuals, we should see some of these trends and percentages change with it. Meanwhile, Deloitte offers strategic consulting assistance for businesses who want to move faster on this path!

SEC’s Strategic Plan Seen to Support IFRS Transition and PCAOB

The Securities and Exchange Commission just released its 2010-2015 Strategic Plan with some broad objectives to focus on securities compliance fostering and enforcement. The US SEC has been under considerable attack since it missed one of the world’s largest $60 billion Ponzi schemes operated by Bernard Madoff. Apparently, there were five particular instances over the years where the SEC could have caught Madoff had they pursued either their own processes or followed through on tips provided to them. Refocusing on enforcement is clearly goal number one.

In addition, the SEC has a key role to play in the oversight of the Financial Accounting and Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB), the SEC’s directions sets the tone for the activities of these two boards which will ultimately have a large impact on US accounting standards and regulations.

Here are their four strategic goals, which look quite on point and much needed for the institution to continue to perform its duty to investors and the American people:

Strategic Goal 1: Foster and enforce compliance with the federal securities laws

Strategic Goal 2: Establish an effective regulatory environment

Strategic Goal 3: Facilitate access to the information investors need to make informed investment decisions

Strategic Goal 4: Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital

In particular, Strategic Goal 2 and outcome 1 have relevance to the Accounting profession and the Big4 firms. In overseeing both the FASB and the PCAOB, the SEC’s conduct has broad implications on accounting standards, disclosures, reporting, firm processes and overall audits.

Outcome 2.1: The SEC establishes and maintains a regulatory environment that promotes high-quality disclosure, financial reporting, and governance, and prevents abusive practices by registrants, financial intermediaries, and other market participants.

Promote high-quality accounting standards: The SEC will continue to promote the establishment of high-quality accounting standards by independent standard setters in order to meet the needs of investors.

For example:

• In overseeing the Financial Accounting Standards Board (FASB), the SEC will strengthen and support the FASB’s independence and maintain the focus of financial reporting on the needs of investors, consistent with the recommendations set forth by the SEC Advisory Committee on Improvements to Financial Reporting;



• The SEC will support FASB’s efforts to improve financial reporting, including recent standard-setting initiatives such as off-balance sheet accounting and accounting for financial instruments; and

• Due to the increasingly global nature of the capital markets, the agency will promote high-quality financial reporting worldwide through, among other things, support for a single set of high-quality global accounting standards and promotion of the ongoing convergence initiatives between the FASB and the International Accounting Standards Board.

Foster high-quality audits through the oversight of the accounting profession: The SEC will continue to oversee the PCAOB and its regulation of the accounting profession through the PCAOB’s inspection and disciplinary programs. The SEC also will work closely with the PCAOB on the promulgation and interpretation of auditing standards to address current issues in the capital markets.

The third point in the FASB says that the SEC supports the IFRS conversion, having recently put the timetable back on its front burner agenda, and agreed to reconsider the timeline and activities for the conversion of US GAAP to the international IFRS. Just today, James Turley said that this standardization was absolutely essential for US capital markets and investment analysis.

The point on PCAOB is also important, in that the SEC will and may need to refocus the PCAOB to “address current issues in the capital markets”, which brings in the need to adapt current circumstances it the global financial systems, where auditing of complex financial products will need to be better scrutinized by public accounting firms and their processes vetted with more rigor.

We believe that while this is only a small part of the SEC’s very broad and extremely crucial role in regulating US capital markets, their direction for accounting standards seems appropriate.

The SEC does welcome comments on its strategic plan and those of our readers who are more involved with how it impacts them can send thoughts to strategicplan@sec.gov

IPO Activity Rises in Q3-2009, China Leads in Numbers and Deal Value

Ernst & Young just released its eagerly awaited Global IPO report, an analysis which is very topical today to validate the recovery seen in capital markets throughout the world. Results from this surveys in recent quarters have been quite glum, as companies and investors stayed away from initial public offerings. But this latest Q3-2009 report appears to have a much more positive spin, in line with other concurrent financial and Big4 surveys which indicate that things may finally be turning around towards better times.



The Q3-2009 IPO market was US$37.8 billion, the highest amount since Q2-2008 and a whopping 292% increase over the previous quarter of Q2-2009. The 149 IPOs were the highest quarterly total in 2009. But the more interesting fact this quarter relates to geography, with 7 of the top 10 largest IPOs being from Chinese companies, typically choosing the Shanghai or Hong Kong exchanges to list their stock. The largest IPO in the quarter and the year so far was China State Construction Engineering Corp, which listed in Shanghai in July 2009 at US$7.3billion.



Another statistic which proves the dominance of China on the world IPO market, 63% of the total IPO value ($23.8 billion) was for 62 Chinese companies, followed by US with total value of $3.2b or 8.4% of global capital raised and India with total value of $2.6b or 7.2% of global capital raised.



There was not much news from Europe, there were no IPOs in Germany and Italy, one each for France and Spain, and 2 in the UK. Total Europe value was US$189.2million or 0.5% of the Q3-2009 total. In Q3-2005, 31% of total listings came from Europe, and this shows the precipitous decline in IPO from the Continent, which is somewhat behind Asia and the US in recovering and spurring listings of private companies.



Ernst & Young expects Q4-2009 to be another strong quarter for the IPO market in Asia; the absence of a rapid rebound in Europe; and a cautious but substantive improvement in IPO sentiment in the US as risk appetite returns.



In another indicator of better health, the number of companies that have withdrawn their filings or postponed their IPOs, which rose 62%, to 120, last year, has also decreased.



Despite the flurry of recent IPOs from China to list on the Hong Kong markets, investors have been less than receptive to their debuts. Recent IPOs like Metallurgical Corporation of China Ltd., China Lilang Ltd. and China South City Holdings Ltd. Have all declined in price from their offer price, raising investors’ concern the market’s appetite for IPOs may be waning. This is completely different from the investor frenzied appetite for any IPOs prior to 2007, where even mediocre companies opened higher and climbed rapidly from their initial listing prices. Only the recent debut on October 6th 2009 of China Resources Cement Holdings Ltd. closed at its offer price, offsetting declines of as much as 17% by 5 other Hong Kong IPOs in September 2009.



Clearly quality has trumped quantity, showing that investors are savvy, demanding and quite tough with companies which do not meet their expectations, despite the paucity of new offerings. While E&Y only reports the IPOs which go to market, the survey doesn’t seem to look at post-IPO stock performance, which is equally a good indicator on the underlying health of these companies, and their survey would be much benefited by including such data to get a complete picture.



Nonetheless, that companies, underwriters and investment banks are even believing that IPOs are possible signals a key change in investor psychology, and recent success like Verisk, A123 and others signify that companies which provide good value will get the investor attention they deserve.



We will look at the Q4-2009 Global IPO report, which undoubtedly, will show that both the numbers and the deal value have increased strongly from previous quarters.

Accenture Q4-2009 In Line, But Sober Outlook Below Investor Expectations

Accenture just reported its fourth quarter of 2009 and full year of 2009 results at 4 pm on October 1, 2009. We have summarized for you the highlights of these results:

Fourth Quarter 2009
Net revenues of $5.15 billion (versus $5.14 Wall Street expectations) a 14% decrease in U.S. dollars and 7% in local currency. EPS $0.39 plus $0.24 restructuring charge for operating EPS of $0.63 (versus $0.63 Wall Street expectations) compared with $0.67 in Q4-2008. New bookings were $5.54 billion. Operating income was $420 million, and operating margin was 8.2%. Absent the restructuring charge, operating income was $672 million and operating margin was 13.1%, the same level as 2008. Restructuring charge was $253 million. Free cash flow, defined as operating cash flow net of property and equipment additions, was $971 million, an increase of $27 million over Q4-2008. Accenture’s total cash balance at Aug. 31, 2009 was $4.54 billion, compared with $3.60 billion at Aug. 31, 2008 and $4.00 billion at May 31, 2009.


Full Year 2009
Net revenues of $21.58 billion (versus $21.58 Wall Street expectations), a 8% decrease in U.S. dollars and flat in local currency. EPS of $2.44 plus $0.24 impact from the restructuring charge for total of $2.68 (versus $2.68 Wall Street expectations) compared with $2.65 in fiscal 2008. New bookings were $23.90 billion. Operating income was $2.64 billion, and operating margin was 12.3%. Absent the restructuring charge, annual operating income was $2.90 billion and annual operating margin was 13.4%.

Net Revenues by Operating Group
Communications & High Tech: $4,831 million, compared with $5,450 million for fiscal 2008, a decrease of 11 percent in U.S. dollars and 4 percent in local currency.

Financial Services: $4,323 million, compared with $5,005 million for fiscal 2008, a decrease of 14 percent in U.S. dollars and 6 percent in local currency.

Products: $5,530 million, compared with $6,069 million for fiscal 2008, a decrease of 9 percent in U.S. dollars and 1 percent in local currency.

Public Service: $2,984 million, compared with $2,871 million for fiscal 2008, an increase of 4 percent in U.S. dollars and 11 percent in local currency.

Resources: $3,880 million, compared with $3,963 million for fiscal 2008, a decrease of 2 percent in U.S. dollars and an increase of 8 percent in local currency.

Net Revenues by Geographic Region
Americas: $9,403 million, compared with $9,726 million for fiscal 2008, a decrease of 3 percent in U.S. dollars and flat in local currency.

Europe, Middle East and Africa (EMEA): $9,904 million, compared with $11,546 million for fiscal 2008, a decrease of 14 percent in U.S. dollars and 2 percent in local currency.

Asia Pacific: $2,270 million, compared with $2,115 million for fiscal 2008, an increase of 7 percent in U.S. dollars and 12 percent in local currency.


Accenture set the annual cash dividend at $0.75 per share, an increase of $0.25 per share, or 50 percent, over its previous annual dividend, paid semi-annually rather than annually starting Q3-2010. The Board also approved $4.0 billion in additional share repurchase authority.


Outlook for Q1-2010 Net revenues in the range of $5.3 billion to $5.5 billion, which assumes a foreign-exchange impact of 0 percent compared with the first quarter of fiscal 2009.

Fiscal Year 2010 Net revenue growth to be in the range of negative 3% to positive 1% in local currency. Diluted EPS to be in the range of $2.64 to $2.72, with operating margin to be 13.4 percent. Operating cash flow to be $2.39 billion to $2.59 billion; property and equipment additions to be $290 million; and free cash flow to be in the range of $2.1 billion to $2.3 billion. The annual effective tax rate is expected to be in the range of 30 percent to 32 percent. New bookings in the range of $23 billion to $26 billion.

Clearly the appreciating US dollar this quarter against previous 2008 quarter had a lot to do with the large revenue decrease % in US dollar terms. Nonetheless, these fourth quarter results were in line with Wall Street expectations, with revenue being just a bit ahead of analyst consensus.

The outlook for 2010 fiscal year is more sobering. Company’s revenue range of $20.93 to $21.80 billion is less than current Wall Street expectations of $21.99 billion; and the company’s EPS range of $2.64 to $2.72 is below Wall Street current expectations of $2.77. And this is what appears to be driving the stock price lower now $35.61 or $1.66 or 5% below in after hours trading.

Accenture appears to have been fairly immune to the economic crisis in 2009, posting 2009 results that were slightly better than 2008. But this outlook says that 2010 will be flat to 2009, and the growth that being expected on both top and bottom lines is not going to be there. Accenture’s announcement of increased dividends and share repurchases is yet another sign that the company is returning capital to shareholders and signaling lack of investment opportunities.

Accenture is a strong company and its cash hoard of $4.5 billion is testimony to its strength. But can it really weather through this storm and produce growth? That is the key question that Wall Street will want to have answered, and likely to be a big topic in the conference call. The drop in stock price signals investors’ disappointment with the less than expected outlook for the future.

Ernst and Young UK Reports Excellent Results, Beating Rival Big Four Firms

The Times of London just came out yesterday with Ernst & Young’s UK results (surprisingly, we couldn’t find it on the E&Y UK website).

And according to The Times, it appears that Ernst & Young UK has chalked out a different path than the other two Big4 firms which have already reported (Deloitte and PwC) and on which we have blogged earlier. 2009 revenues grew 8% from 2008 revenues to £1.4 billion. This is a stellar growth, compared to PricewaterhouseCoopers UK which grew 1% to £2.25 billion, and Deloitte UK which actually shrank 2% to £1.97 billion. Contrast this with the global E&Y firm, where revenues in local currency terms decreased by 0.2% but by a stark 7% drop in US$ terms. The E&Y UK firm is smallest of all the UK Big4 firms, and KPMG UK is still yet to report on its FY 2009 results.

E&Y’s Audit division revenues fell 2% to £360 million, but Tax division revenues increased by 6% to £392 million, and M&A Advisory revenues rose a stellar 15% to £289 million, while Other Advisory and Management Consulting was clearly the star of the show, with revenues up an amazing 16% to £342 million.

What led to this good performance? According to Scott Halliday, Ernst & Young’s managing partner for the UK and Ireland, it was due to the integration of the firm’s UK operations with those in Europe, Africa and the Middle East. In November 2008, E&Y merged more than 80 member firms across those regions into a single entity. “There is something fundamentally different about where Ernst & Young is relative to its competitors right now,” Mr Halliday said. “The market’s starting to recognise that and that’s why you’re seeing these results.”

Ernst & Young did not provide exact figures on profits available to partners, but said that it had declined from 2008 to 2009 “in line with our competition”. In 2008-09, PwC recorded profit per partner of £777,000, down 3% while Deloitte UK partners had average profits of £883,000 down 7.5 per cent.

Hiring at E&Y UK continues, with 700 new graduates and promotions of 48 junior accountants to partnership. This is in contrast to the overall E&Y firm where headcount was absolutely flat from 2008 to 2009.

Clearly, this is surprising and unexpectedly good performance at E&Y UK (and deserving our congratulations), the equivalent of beating analyst EPS estimates for other public companies. Expectations were a flat revenue growth in line with other Big4 UK firms and also in line with the overall E&Y firm, but these results show that there is something fundamentally different in E&Y UK and its response to difficult external conditions. It appears to have gained in M&A and advisory services, both growing strongly year on year, despite a rough market. Either E&Y is taking share from other Big4 firms or is providing a client proposition of such value that it is penetrating existing clients with additional services.

KPMG UK is the last firm to report (and we don’t see anything on their website today) and that will complete the picture. With today’s E&Y announcement, the bar has been set slightly higher for KPMG UK, and we’ll have to wait to see if they cross over or under that line.

Ernst & Young: External Challenges Drive Flat Revenue From FY 2008 To FY 2009

Ernst & Young just reported its combined worldwide results for the year ending 30 June 2009 (FY09), the first Big4 firm to report its global results.

Combined global firm revenues of US$21.4 billion for the fiscal year ended 30 June 2009 (FY09) decreased a modest 0.2% in local currency terms from the comparable period in FY 2008. In FY 2008, E&Y reported US$23.0 billion in global revenues, and in US dollar terms, the revenue actually declined 6.8% from 2008 to 2009. This shows the dramatic effect of the appreciation of the US dollar in this period against foreign currencies. In other words, one unit of foreign currency translated to much fewer US dollars in the FY 2009 fiscal year compared to the FY 2008 fiscal year. We have highlighted growth in both local currency and US$ terms in our analysis.

Across E&Y’s five geographic areas, Japan grew at 7.5% in local terms, due to the acquisition of 1,000 professionals from accountancy firm Misuzu; and revenues increased 20% in US$ terms. Europe, Middle East, India and Africa (EMEIA) area grew 1.8% in local currency terms, but declined 9.7% in US$ terms. Oceania decreased 0.4% in local currency terms, but declined a dramatic 15.9% in US$ terms. The Far East decreased 2.7% in local currency terms and 5.9% in US$ terms. The Americas area decreased 3.2% in local currency terms but 5.5% in US$ terms.

There were some bright spots however, with many of the emerging markets achieving strong growth, including the Middle East (18.6%), India (13.1%) and Brazil (8.0%).

E&Y said that, “all of our service lines were impacted by pricing pressure and fee reductions.” Despite that, Assurance Services with FY 2009 revenues of $10.1 billion offset price pressure with market-share gains, and revenues declined only 0.7% in local currency terms, but 6.3% in US$ terms. Global Tax Services with FY 2009 revenues of $5.8 billion was up 1.8% in local currency terms due to increased tax enforcement, but dropped 5.2% in US$ terms. Advisory Services with FY 2009 revenues of $3.6 billion was up 1.5% in local currency terms due to sustained demand for risk management and performance improvement, but dropped 6.0% in US$ terms. Transaction Advisory Services with FY 2009 revenues of $1.9 billion, had a 6.9% decrease in local currency terms due to fall in M&A volumes, but revenues decreased a whopping 14.8% in US$ terms.

Ernst & Young’s employee levels were flat from 2008 into 2009 at 144,500 total employees. Americas declined 4.5% from year to year, this was offset with growth in Japan, EMEIA and Far East. Employee level changes across service lines was moderate in percentage terms from year to year. Attrition levels would be certainly down due to the tough job market, and it seems hiring levels just kept pace with departures.

The recently reported numbers from Deloitte UK and PricewaterhouseCoopers UK were pre-indicators that the Big4 firms would not be reporting blow-out results. And this first announcement from E&Y confirms our premise that business for the Big4 has slowed down dramatically in the last 15 months as the economic global crisis finally had an impact on the Big4 firms due to reduced demand, price pressure and fee reductions. This brings an abrupt stop to 5 year of double-digit % annual revenue growth at all the Big4 firms.

The good news in this release is that revenues have not shrunk by a large amount, showing that the Big4 firms have deep breadth and penetration in every market and country in the world, and their services continue to be in demand by clients as they navigate through this crisis. A flat year to year scenario, given the deepest and most detrimental recession since the Great Depression, is cause for somber reflection, but not for alarm. Consider that Tax and Advisory Services actually grew for Ernst and Young.

We’ll wait to see how the other Big4 firms report results, Deloitte is certainly late this year in their results, but we would expect that revenue growth is nearly flat and all firms will discuss external challenges as the main driver of this situation.

Police Raid Ernst & Young HK Office in Akai Case

We highlight a breaking news story happening on the other side of the world, in Hong Kong the police yesterday raided the offices of Ernst & Young, the erstwhile auditors of Akai. Akai was the largest corporate collapse in Hong Kong, with similarities to the Enron case in the United States. This story is making current headlines in the small city state, making the first page of the influential South China Morning Post and also reported on Bloomberg Asia and Bloomberg.com’s home page today.

Bloomberg further reports that, “The Commercial Crime Bureau today conducted an investigation into a case of suspected ‘forgery’ involving an auditing firm in Hong Kong,” police spokesman T.K. Ng said in a statement yesterday. The police apparently arrested a 41 year man at his house, but the identity of that person or his firm affiliation is not known.

Earlier this week, Ernst & Young, settled with Akai’s liquidator, Borrelli Walsh Ltd and agreed to pay an undisclosed but “substantial” amount to settle claims against the firm of negligence in performing its audit of Akai between 1997 and 1999. Also, on September 23, 2009, the E&Y HK firm suspended one of its partners, Edmund Dang, after pursuing an internal investigation.

The Hong Kong Institute of Certified Public Accountants will reportedly monitor police investigations into Ernst & Young, Winnie Cheung, chief executive of the accounting regulator, said by phone yesterday. The institute, which doesn’t have its own investigative powers, may fine or ban any offenders if the police probe reveals any wrongdoing, she said.

This is a complex story with some unfamiliar names, let’s help by sorting out the players and the actions (keep in mind, this is based on our web research and presented only to clarify the situation for our readers):

Who is Akai?

Akai was a originally a Japanese consumer electronics maker, which went bankrupt in 2000 ending up owing creditors about $1.11 billion. Reportedly, at its peak the company employed 100,000 workers and had annual sales of HK$40 billion ($5.2 billion) with well-known brands including the Singer Sewing Machine Co. of the U.S.

This is Akai’s website - http://www.akai.com/index.asp. Akai in Japanese is the red color.

Who is Borelli Walsh?

Borrelli Walsh is the liquidator for Akai, it is a Hong Kong based specialist restructuring, insolvency and forensic accounting firm, and focuses on Financial and Operational Restructuring, Corporate Recovery and Insolvency, Financial Investigations and Forensic Accounting, Construction Claims Advisory and Recovery, Corporate and Strategic Advice and Information Technology Services

What is Ernst & Young’s role in this case?
Ernst & Young were Akai’s auditors in 1994, all the way to bankruptcy in 2001.


Why is Ernst & Young getting sued?

Ernst & Young was originally getting sued for audit negligence by the liquidator, but Borrelli Walsh appears to have received some recent and rather incriminating evidence of audit fraud. On September 16, 2009, at the opening of the trail against Ernst and Young, Borrelli Walsh alleged that files dating back to 1994 were altered later to give the “semblance of an audit trail.” Borrelli Walsh said audit documents 1994 contained handwriting from an auditor who was not employed by Ernst & Young until 1998. Kosmin also said electronic versions of some documents had been altered with the addition of information years after the documents had been dated.

Of course, Ernst & Young denied this allegation at Hong Kong’s High Court, but later launched an internal investigation, where it expressed that it was “dismayed.” “This investigation has made clear that certain documents produced for the audits in 1998 and 1999 could no longer be relied on due to the action of the audit manager in early 2000,” Ernst & Young said in an e-mailed statement.

Borrelli Walsh was reportedly seeking hundreds of millions of dollars from damages from E&Y.

What was the settlement?
Ernst & Young reportedly settled with Borrelli Walsh to close these claims for an undisclosed but substantial sum of money without admitting guilt. Borrelli Walsh welcomed this settlement, indicating that it would avoid needless legal costs.

Who is The Grande Holdings?
In 2004, The Grande Holdings bought out Akai and brought it out of bankruptcy. The Grande Holdings has other well known brands like Sansui, Akai, Nakamichi and Emerson, and makes high class audio, video and household goods. The website is http://www.grandeholdings.com/english/links.php but it is really sparse in terms of providing any substantive information.

Who is Christopher Ho?
Christopher Ho is the Chairman of Grande Holdings and a former Ernst & Young partner. Hong Kong’s Court of Appeal on Sept. 24 upheld an earlier judgment ordering Ho not to dispose assets of as much as $200 million. Grande said yesterday the Hong Kong courts have also placed restrictions on certain asset sales.



This has the makings of a classic soap opera with twists and turns, new ground breaking evidence, multiple players, allegations and counter allegations and now with the involvement of the police, taking on somewhat of a sinister turn.

Needless to say, this is a messy situation for Ernst and Young, an audit that is more than eight years old suddenly coming to the front burner and creating unnecessary bad press. This is evidence of the long tail of public company audits, and shows just like the Parmalat case with Deloitte, that there is considerable risk in auditing, and audits gone wrong can have bad consequences many years into the future.

We cannot make judgment calls on who was right in this case, but clearly there was something amiss in the audit, and the settlement and subsequent police raid indicate that there is more than just a bad audit. We hope that things do sort out satisfactorily for all parties, and those not even remotely connected with the audit are not held to blame for it, as happened with Andersen.

The recent development in the UK, which rejected caps on auditor liability only adds fuel to this fire, and exposes auditors to potentially limitless and time-unbound liabilities of any audit, which only shows the need for immaculate and tight risk control at every audit step.

We’ll follow this story and by the looks of it, there’s certainly more to come. If any of our readers have more information on this, please do comment.

KPMG: Tax Authorities, Looking For Cash, May Push Transfer Pricing To Front Burner

Transfer Pricing (TP), or the setting of intercompany prices of goods and services transported across country borders by the same company is typically an esoteric tax issue which garners little attention under normal conditions. But as KPMG recently points out in its recently released Global Transfer Pricing Review, the tough economic environment is leading many governments to seek out new sources of tax by extending and tightening controls over cross-border transactions between companies within the same group.

And this topic is quickly getting to the front burner for many multinational corporations.

In the most simple terms, KPMG explains, “Transfer pricing reviews typically focus on comparing transactions between companies in the same organization, with similar transactions between unrelated companies – so called “arm’s-length” transactions. Some authorities may levy taxes and impose penalties on companies where their internal pricing is found to deviate from arm’s length pricing.”

The tool the tax authorities most often use to examine whether pricing is correctly set as per arms-length requirements is the much-dreaded audit. This usually requires intense effort on the part of the multinational to prove they have complied with or in compliance with transfer pricing regulations. The absence of such proof is a nasty fine and potential penalties, all of which companies go to great lengths to avoid.

Multinational companies which are entering new emerging markets such as China, Greece and Vietnam now have to deal with new or greatly expanded TP regimes, while developed countries are stepping up their audit programs and tightening their rules.

There appears to be different approaches taken by tax authorities all over the world to deal with this issue:

In the US, tax authorities are placing advance pricing agreements, which are made between taxpayers and revenue authorities on prices and taxes payable to each transaction. In Canada, there appears to be a movement towards a “taxation by negotiation” approach.

In Europe, there is a flood of new regulations from larger countries, coupled with new TP regulations from Eastern European states. Obviously this impacts companies who are setting shop in these lower-cost countries. In the UK, there is a new risk-based approach to TP enquiries, targeting high-risk transactions and structures.

However, it is in the Asia Pacific region where authorities are most active, and stepping up audit activity, especially in India, Australia, China, Korea, Japan, China and Singapore, showing that Asia is now the new hot spot for TP compliance and activity. Not surprisingly, Asia Pacific tax authorities are seen by many as the toughest in the world in this field.

The 150 plus page KPMG survey is a detailed look at TP regulations in 60 countries, and covers such topics as competent authority documentation requirements, methodologies used, penalties imposed, and recent developments. There are two pages for each country and the book is a splendid guide to understanding the breadth and depth of this complex topic. Each country is different, has varying considerations, and places varied regulations and penalties, making TP professionals a globally savvy bunch to fully understand all these regulations in all these different countries.

However, there is a bottom line to all this. Multinational companies will be subject to more intense scrutiny on their intercompany pricing in the upcoming future, and they had better understand and adhere to global TP regulations as they expand into new markets and also deal with a complex web of goods and services which are continually moving within their company but across geographic borders.

So, it is likely that TP will soon impact finance, accounting, tax, shipping, distribution and pricing personnel much more than it has ever done in the past. As KPMG says,
“With the profits of many multinational enterprises shrinking, tax authorities can be expected to ratchet up their audit activities to ensure that each of their jurisdictions gets its fair share of a shrinking pool of tax revenues.”

The entire report is available at, and a worth read for tax personnel:

http://www.kpmg.com/SiteCollectionDocuments/2009-Transfer-Pricing-Guide-GTPS-Review.pdf

Deloitte Predicts Flat 2009 US Holiday Retail Sales, And A Lonely Mall Santa

Though there are many signs of economic rebound as we have seen from many recent Big4 firm surveys which are indicating consumer confidence, business recovery and overall growth. But there are equally troublesome spots which are looming on the horizon which say that the recovery is not going to be robust or as smart as everyone would like it to be.
Here’s a somewhat somber forecast from Deloitte on 2009 US holiday sales which is getting a lot of media play.

Deloitte says that retailers should expect sales to remain flat against 2008. That’s right. Flat. No growth. No upswing. No crowded aisles. No long lines. But not down as it was last year almost 2.5%. And that’s the good news.

What’s the issue here? It’s the consumer. He/she has restricted availability of credit, is reeling from high unemployment, is dealing with foreclosures, paying down debt through savings and generally not in a mood to spend this Christmas.

And what can change this negative outlook. If the stockmarket rally continues, if housing prices pickup, if gas prices and general inflation stay flat, if the job market starts to canter and if the dollar strengthens, this could help boost confidence at a crucial time for retail, the period between Thanksgiving and Christmas accounting for nearly 70% of all the year’s retail sales.

Deloitte’s Retail group expects total 2009 holiday sales to be US$810 billion, flat over 2008 (excluding motor vehicles and gasoline), however this is better than 2008, which fell 2.4% below 2007, and marking the first decline in holiday sales according to Deloitte’s analysis of Commerce Department data dating back to 1967.

What ar retailers to do to best manage this tough situation? According to Stacy Janiak, vice chairman and U.S. Retail leader, Deloitte LLP, “Retailers appear to have prepared themselves for a challenging season by adjusting inventory and closely managing their expenses. Going forward, scenario planning that accounts for different market conditions may help merchants navigate these uncertain times. Retailers should also consider placing customer insights at the forefront of their decisions around merchandising, pricing and promotions. Retailers that can harness the power of technology likely have a better chance of engaging those consumers who are willing to spend. The proliferation of mobile applications and social networks may yield new opportunities to pursue targeted advertising, build brand loyalty and measure campaign effectiveness.”

Again, this is only a prediction of what’s very likely to occur. Come early next year, when all the numbers are in for the holiday season, we will know for sure. But it does seem tough for the brick and mortar stores, e-tailers like Amazon may yet buck this trend and verify again the continuing trend toward buying stuff on the internet is here to stay.

Ernst and Young: Glamour and Secrecy in Upcoming 2009 Emmy Awards

We have blogged earlier about PricewaterhouseCoopers’ auditing of the Oscar Movie Academy Awards, which the firm has been solely handling for 75 years in complete secrecy with undisclosed locations, strict controls and tight personnel regulations.

The other award which garners similar world wide publicity are the ones for the small TV screen, and in a few days the winners will be announced for the 61st annual Primetime Emmy Awards from the Academy of Television Arts and Sciences. The Big Four firm handling the balloting process is Ernst & Young LLP, which has been doing so each year for the last two decades with the same amount of secrecy and rigor.

For the 21st year, two to three partners from E&Y’s Global Media and Entertainment Industry Center will bring down the secret Emmy envelopes the red carpet in locked briefcases. Owing to tight security, only three E&Y folks know the results till the envelopes are opened on stage during the telecast.

And says John Nendick, Leader of E&Y’s Global Media & Entertainment practice, “…A majority of the Ernst & Young LLP professionals involved with the balloting process are not even aware of who the winners are until they are publically announced on stage.” So the E&Y auditors doing the count are equally unaware of how it’s going to shape up.

Here are some interesting numbers from the balloting process:

6 – number of categories and awards in 1949
103 – number of categories on the ballot in 2009 (a more than 1,500% increase over the first year)
15,000+ -- number of ballots Ernst & Young LLP tabulates each year
16,500+ – number of ballots received during the nomination and final balloting process (a lot of ticking and tying we bet!)
3 – number of people at Ernst & Young LLP who memorize the list of winners (we guess in case the envelopes are somehow lost!)

Presenters at the event are Chandra Wilson of ABC's “Grey's Anatomy” and Jim Parsons of CBS series “The Big Bang Theory” . Here are the series that have gathered the most nominations for 2009:

30 Rock - 22 Nominations (the 2008 winner)

Grey Gardens - 17 Nominations

Mad Men - 16 Nominations

Into The Storm - 14 Nominations

Saturday Night Live - 13 Nominations

Do you have a special favorite which can win?

Watch at 8 pm EST this Sunday, 20 September 2009 for the 61st Annual Primetime Emmy Awards live from Los Angeles on CBS, and see if you can spot the E&Y auditors with that special briefcase. It promises to be fun, and things don’t get any more glamorous for green eye-shaded accountants!