Accounting Observer > Public Blog - The Urge To Merge (Internationally)

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The Urge To Merge (Internationally)

Apr 29

Written by: Jack Ciesielski
4/29/2008 9:27 AM

You might reflexively think about a possible combination of US accounting standards and international accounting standards, but no - the urge to merge internationally is what's going on at Ernst & Young .

The firm announced the merging of "87 country practices in Western and Eastern Europe, the Middle East, India and Africa into a new EMEIA Area." That's not all: the 700 partners in the Far East practices supported a similar move across 15 countries and territories.

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

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

That doesn't make the firm suddenly bigger or grow more quickly. And it doesn't really change too much for the investor. What's interesting though, is that it gives a couple glimpses inside the auditing world that investors rarely get. First, the sheer size of a Big Four organization is something investors rarely contemplate. The EMEIA area alone will be an $11.2 billion organization, meaning it's hugely important to the firm as a whole: last year, E&Y's global revenues were $21.1 billion. That puts them in the same league as Electronic Data Systems or Constellation Energy Group; ahead of JC Penney or Tyco. Yet investors rarely consider the size and reach of these firms that are acting as their agents in the auditing of financial statements.

The other glimpse: note that these practices were under the E&Y tent, but as different country practices. It's not like all of the firms within the firm are necessarily as uniform as investors might believe. Going forward, there should now be a high degree of consistency and uniformity in the way these practices operate within E&Y. That's something that should matter when say, a Peoria-based audit client has a significant business unit in the Middle East that's audited bythe EMEIA arm of E&Y. Yet investors never wonder much about how the audit gets done until a failure shows up. Nor is there much information available about how the audit gets done.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.