Ernst & Young Global review 2010 Global review 2010 Chairman’s letter 2 Chairman’s Q&A 4 01 Globalization 7 02 People 19 03 Entrepreneurship 29 Facts and gures 41 Ernst & Young Global review 2010 2 Global review 2010 “ Our increasingly complex and interconnected world requires businesses to be more global, more accepting and understanding of diverse points of view, and more focused on what really matters in the post-crisis world.” Chairman’s letter 3 Global review 2010 Chairman’s letter The past year has been one of recovery and readjustment for the global economy — recovery from the worst recession in decades, and readjustment of the relationships between developed and emerging economies, between the public and private sectors, and between global institutions and nation states. The strong recovery we’ve seen in the emerging markets has contrasted with a weaker one across the developed world, accelerating a long-term shift in economic power from west to east and from north to south. Governments, central banks and regulators looked for ways to stimulate and support their domestic economies. And the unprecedented cooperation between countries in the depth of the crisis has come under strain from national pressures. Our increasingly complex and interconnected world requires businesses to be more global, more accepting and understanding of diverse points of view, and more focused on what really matters in the post-crisis world. This is occurring at the same time as sweeping demographic changes continue to impact the world. The teams we will each be part of in years to come will be much more diverse than those same teams may have been a short time ago — diverse in terms of gender, ethnicity, nationality, religion, generation and many other characteristics. Positioned against these trends are some important advantages that Ernst & Young has as an organization. We are recognized as the most globally integrated professional services organization — in our mindset, actions and structure. We are building and fostering the leading people culture in our profession. And we have the leading brand and reputation with entrepreneurs all over the world. These are strengths that we have cultivated for years, and that will serve us extremely well in the decades to come. Our long-term focus on the trends that will be shaping the world means that, as the recovery takes hold, we are uniquely positioned to provide quality services for our clients. Two years on from the worst global downturn in decades, Ernst & Young’s nancial performance held steady and, encouragingly, was much stronger in the second half of the nancial year. This performance is testament to the efforts of our 141,000 people, and I want to thank them for working tirelessly for our clients and colleagues while always demonstrating their unwavering commitment to quality. James S. Turley Chairman and Chief Executive Ofcer Ernst & Young 4 Global review 2010 Jim, you spend a lot of your time speaking with business leaders around the world. Are they condent about global economic recovery? As the recovery takes hold, people I speak to say they’d have hoped that recovery would be more denite everywhere around the world, but there are some bright spots. Different parts of the world are recovering at different speeds — the condence in the emerging markets is strong and justied by both their recovery and their growth prospects. And there’s a slowly growing sense of optimism in the developed economies, too. However, business leaders think that some major risks remain. The rst of these risks is that the international cooperation that we saw during the crisis fractures and countries become protectionist. We are seeing evidence of this in the global dispute over currency intervention. A second risk is that entrepreneurs stay on the sidelines, when they are vital to creating the jobs that are badly needed in many developed economies. And a third risk is that the global economy is knocked backward by a sovereign debt crisis. Apart from focusing on the economy, what are business leaders focused on now? The thing that I’m hearing a lot of discussion and debate around is how companies should prepare for, mitigate or otherwise manage low-probability but high-impact risks. Events this year such as the oil spill in the Gulf of Mexico showed just how signicant these risks can be. Traditionally management and boards have probably spent more time focusing on their higher-probability risks. That’s important, but I think the focus is shifting now to encompass a broader view of all risks, even those thought to be very unlikely to occur. One of the results of the downturn is that the G-20 seems to have emerged as an important body for global economic and regulatory coordination. What is your view on that? I think this is one of the most important changes, or at least it reects one of the most important changes, that has occurred in the past several years. The downturn has really accelerated the shifts in economic power to the emerging markets. This year the emerging markets will account for nearly half of world economic output, more than half of global economic growth, and they are bouncing back from the downturn much more quickly than the developed world. Continued changes in demographics mean this trend will continue for decades. The G-20 is much more representative of this changed world than the G-7 or G-8, and so it’s right that it has become such an important forum for cooperation. The G-20 leaders have called for a single set of high-quality accounting standards around the world. Are we any closer to achieving it? Yes and no, but I remain optimistic. Convergence of IFRS and US GAAP is an important objective on the path to realizing the goal of a single set of high-quality accounting standards used around the globe — an effort we continue to endorse without reservation. Under the leadership of Sir David Tweedie and Bob Herz, the IASB and FASB have made great strides towards realizing the goal. And, we welcome the appointment of Hans Hoogervorst and Ian Mackintosh as IASB Chairman and Vice Chairman respectively, and of Leslie Seidman as Acting Chairman of the FASB. But much work — and much uncertainty — remains. The Boards have an ambitious timetable and, perhaps more importantly, they have not been able to agree on some important areas like nancial instruments. Both the IASB and the FASB feel pressure from the G-20 to complete their joint projects expeditiously. And the IASB feels the added pressure of certain countries that are set to adopt IFRS in the near future. But these pressures cannot lead to a sacrice in the delivery of improved, high-quality and operational accounting standards. Progress on the joint projects also is an important consideration for the US Securities and Exchange Commission (SEC) as it decides whether to commit to a date — or dates — certain to require US companies to adopt IFRS. We hope that taking the time that is necessary to develop improved, high-quality standards in so many important areas will not signicantly affect the SEC in continued progress toward making an adoption decision. However, we are at a critical juncture for all parties. Chairman’s Q&A 5 Global review 2010 Chairman’s Q&A Here is the thing, though. When I talk to people in the US, I make it really clear to them that I can’t see any advantage for the US to operate by a different set of rules than those that are followed in most of the rest of the world. I don’t believe that benets the US economy, the US capital markets or US investors. So that is why I remain optimistic about IFRS becoming the single set of high-quality, global accounting and nancial reporting standards. Because of rising budget decits, governments around the world are searching for revenue while, at the same time, they are competing for scarce jobs and capital. In this complex tax environment, how are clients responding? Clients are denitely getting the message that tax is more important from both a strategic and a risk management perspective. In response, C-suite executives, audit committees and company boards are increasingly including tax risk management as part of overall corporate governance. Last year, the US Commissioner of Internal Revenue, echoing a sentiment increasingly shared by tax administrators around the globe, said that companies need to view tax as an issue that gets appropriate vetting at board level, because complicated business transactions raise complex tax issues and because tax is one of the biggest expenses on the income statement. Transparency is the new watchword of corporate governance. All of this is occurring in a time of substantial revenue needs for most governments in the world and, therefore, increased enforcement activity. Audit committees are also responding by expanding their focus from tax compliance issues to tax risk management. One consequence of the new enforcement era is that tax administrators expect corporate boards to understand the outcomes of their business tax strategies in their role as corporate stewards. This underscores the importance for clients to have open and regular communications, especially between the tax function and the C-suite. We are seeing leading companies implementing more effective communications frameworks to ensure tax issues are brought to the attention of the audit committee and full board. As a result of the nancial crisis, some people have asked, “Where were the auditors?” How do you respond to that? The rst thing I’d say is that it’s important to contrast the last two crises we’ve been through. The crisis at the beginning of this decade had a large number of nancial restatements, so you could rightly call it an accounting and auditing crisis. The crisis that we’re emerging from now was really an economic crisis. It was about credit bubbles, property bubbles, and asset values changing a lot. If the “Enron-era” crisis was characterized by countless restatements of accounts, then this crisis has certainly not been. In fact, the profession feels pretty good about the role it played in helping ensure the fair presentation of accounts. That said, I think there are some very legitimate questions the world is wrestling with now. If you have few if any nancial restatements, yet you still have the crisis we just experienced, then people rightly ask how relevant historical nancial information really is. So the issue becomes a discussion around what information investors need to make the right decisions. Do they need more forward-looking information, more on key performance indicators? Do they need more information about judgments, estimates and accounting policies? This is clearly not just an issue for the profession. It’s something that our regulators and investors around the world are starting to discuss as we all try to prevent a replay of this crisis in the future. So what do you think the auditor’s responsibility should be? We have a proactive responsibility to make sure that we comply with auditing standards and that the clients we serve are complying with the requisite accounting standards. So the rst and most important responsibility is to act diligently and professionally in compliance with standards, and have clients do the same. Where the application of those standards would result in something that is not “true and fair”, then we should gure out how to discuss this with regulators, discuss this in a more open way with audit committees, and gure out the next steps to take. Regulators also want to gure out whether and how auditors should work more closely with prudential supervisors. The UK Financial Reporting Council and Financial Services Authority issued a white paper talking specically about that and this type of discussion is also included in the recently issued EU green paper on the auditing profession. What role should auditors who serve nancial institutions have in talking to different regulators? That’s a discussion that’s going to take place over the next year. How do you feel about how Ernst & Young is doing right now? One of the things that I’m always interested in is how others see Ernst & Young. I travel all over the world, and what I hear about our organization is remarkably consistent around the globe. There are three things, really. First, when others look at the profession, what they say is that Ernst & Young is by far the most global — the most global in mindset, governance, structure and actions. And I hear this consistently whether I’m talking with clients, regulators, students or whomever. 6 Global review 2010 Chairman’s Q&A Second, I hear that Ernst & Young has a leading people culture — a culture that’s built on our values that permeate the organization around the world. When people look at us globally, this is the place they want to be. Third, I hear we have the best brand in working with entrepreneurs — working with business people who are really driving things in the marketplace. Part of that comes from our Entrepreneur Of The Year program, but the biggest part of it comes from our decades-long commitment to having a great client portfolio in strategic growth markets and emerging economies. When people talk about us this way I feel like we’re getting it right — that these advantages we have, and that people see us as having, position us perfectly for continued success, the way the world is today and the way it will be in the future. We’ve won some well-known audit clients over the past couple of years, many of whom have cited our globalized structure and focus on traditional services as a key factor in their decision to appoint us. We’ve gained global household names such as Siemens, Eni, Danone, Enel — subject to shareholder approval, Fiat Industrial and United Airlines. And we’ve won a lot of great projects with non-audit clients, too, ranging from Barclays to Vale. I think these new clients and engagements prove that our global structure is a point of difference that resonates strongly in the market. So I feel great about how we’re doing, although every day we have to commit ourselves to be better. I’m not satised — nor are any of our people — when regulators nd things around the world in our engagements that they wish we had done differently. Quality in Everything We Do is what we are all about. How have you managed to achieve as much as you have done in terms of global integration when it seems as if other similar organizations have struggled? There are probably lots of reasons, but what stands out in my mind is the trust we have built over the years. This is trust among partners of our practices, trust across borders, respect for different opinions and perspectives and a teaming culture that pervades the entire organization. Why do you think Ernst & Young’s people culture is so special? Every culture is unique — it can’t be replicated. At Ernst & Young we aspire to have a leading people culture everywhere in the world. To achieve this, we invest in being the most inclusive organization; having the most robust learning and development framework; and offering the most engaging environment in which to build a career. If we attract and retain the best people — and invest in them — then we will deliver the best results for our clients. Our aim is to be an organization comprised of highly skilled, highly motivated and highly engaged people who believe Ernst & Young is the best organization for them and feel excited and proud to work here. Advisory was one of your growth areas this year. Why are you building your Advisory services again? The downturn created greater demands among our client base for risk management, operational efciency and sustainable performance-improvement services. Such demands provide an opportunity for our profession and our organization to be at the forefront in stabilizing and revitalizing the world’s leading organizations through these difcult times. We have a very focused Advisory strategy. It’s around transactions, risk and performance improvement closely related to our traditional services. We have chosen to focus our investments in our traditional and related services and not pursue investment and growth in the large information technology systems integration and outsourcing space. Finally, what do you feel your most important role at Ernst & Young is? For me, the answer to this question doesn’t change. In my eyes, the most important thing I can do is to ensure the people of Ernst & Young have a personal sense of what is right and what is wrong, and of what is expected of them. And, most importantly, that all our people have a deep belief that nothing is more important than their own personal integrity and commitment to quality. If anyone or anything makes them uncomfortable, at a client or within Ernst & Young, I want them to know that it is not just okay for them to object, or raise their hand, or ask for assistance: it is their personal and professional obligation to do so. That is why, just as in previous years, I spend most of my time traveling to our ofces, visiting our people — speaking with them and our clients. Because getting our people to truly understand our expectations of them, and truly believe in our commitment to them, doesn’t happen just by email or voicemail. Meeting our people where they live, and seeing each other face to face, is the only way. 7 Globalization 8 Global review 2010 “ Globalization is one of the dening issues of our time. Our response has been to transform our organization so that we keep in step with the changing needs of our clients and our people.” Globalization Globalization is shaping our world: it’s expanding horizons as trade, technology and investment increasingly connect countries and companies around the globe; and it’s compressing time and distance as people and products move — and ideas spread — faster than ever before. Globalization magnies opportunity and risk. It opens up new markets and creates opportunities for innovation. And it provides access to new sources of capital and wider pools of skilled employees. But at the same time, globalization has increased complexity. As organizations navigate new markets or encounter new competitors, the demands on them multiply. The recent nancial crisis brought home just how interconnected and interdependent the world has become. It also emphasized two forces of globalization: the shifts in demographics and capital that are shaping the global economy and society as a whole. These trends will increasingly impact markets, competition and recruitment for us and our clients. [...]... Americas Sub-Areas, and for the strategic direction she has given to Ernst & Young s work with Perspectives Charter School The Mayor of Chicago commended Ernst & Young for its achievements at the school, including activities led by Kelly, such as securing funding for classroom libraries and establishing a mentoring program pairing students to Ernst & Young people “I think what the Young Global Leaders... creating shared global services, however, is to support our client teams and global integration efforts Globalized support functions help build a global mindset and underpin our global structure They also develop a consistent, customer-centric approach to internal service, which mirrors the way we serve our clients 13 “Collaboration between teams from member firms of Ernst & Young s Asia-Pacific and Europe,... culture, skills and location — and our global approach were really recognized by Lenovo,” says Alice Chan-Loeb, Ernst & Young s Global Client Service Partner for the computer giant Since its acquisition of IBM’s PC business in 2005, Lenovo had engaged a number of corporate income tax compliance service providers Following a two-day workshop in Beijing, Ernst & Young developed a fully automated system... works with many of Japan’s best-known companies across the financial, manufacturing and electronics sectors It also acts as the hub for our Japan Business Services network — nearly 350 Japanese-speaking professionals based in 60 cities around the globe who serve Japanese clients operating overseas 9 Global review 2010 Globalization At Ernst & Young, we have long thought that globalization is one of the... followed herself In 2010, Kelly was chosen by the World Economic Forum as one of its Young Global Leaders — an exclusive group of high-achievers under 40 whose purpose is to drive positive social change She joins Alexander Ivlev, Russian Country Managing Partner, who was named a Young Global Leader in 2007 Kelly was nominated for her efforts in promoting inclusiveness at Ernst & Young, including developing... another to share insights and ideas,” says Dan Kaplan, Ernst & Young Global Client Service Partner for Xerox “We’ve built trusted relationships throughout Xerox’s global organization by understanding their business imperatives and issues, and demonstrating how we can best help Xerox management overcome the challenges they face.” Ernst & Young has provided global internal audit outsourcing services to Xerox... quality.” Reaching new heights Global review 2010 Globalization Our global approach strengthens our ability to establish and execute on global policies and practices that raise the bar for service quality Our range of global tools and processes supports our people in evaluating, accepting and serving the right clients with the right services These tools include GTAC, our Global Tool for client Acceptance... location — and our global approach were really recognized.” Making tax less taxing Global trading, global teaming “Japanese trading companies — or ‘sogo shosha’ as they are known in Japan — are complex but nimble organizations,” explains Shinichi Saito, Ernst & Young s Global Client Service Partner for one of the best known of these companies “They are highly diversified and highly globalized — often... companies need us to match their global footprint and global outlook as well as deep industry experience across their diverse range of interests In the case of one client, we support its global operations in more than 50 countries, through dedicated teams all around the world It works across many different sectors, so our Global Industry Centers in Oil & Gas, Mining & Metals, Power & Utilities and others are... world, providing high-quality service to the EC.” Since 2007, Ernst & Young has been servicing Audit Framework Contracts for the EC An Audit Framework Contract is an agreement with an audit firm that sets out terms and conditions under which specific audits can be launched It’s a way for the EC to rationalize and harmonize relationships with professional services firms Ernst & Young currently manages . Ernst & Young Global review 2010 Global review 2010 Chairman’s letter 2 Chairman’s Q&A 4 01 Globalization 7 02 People 19 03 Entrepreneurship 29 Facts and gures 41 Ernst & Young Global. reputation as the most globally integrated organization in our eld. Americas EMEIA Asia-Pacic Japan 10 Global review 2010 Globalization At Ernst & Young, we have long thought that globalization. Chief Executive Ofcer Ernst & Young 4 Global review 2010 Jim, you spend a lot of your time speaking with business leaders around the world. Are they condent about global economic recovery? As