Every detail that the global accounting firm Ernst & Young told its American partners about its financial performance through late 2000 became public late yesterday, including its profits, details of its capital structure, the hours billed to clients and the average earnings per partner. Many aspects of foreign operations were also disclosed.
While such information is normally closely held, the details were disclosed as part of a divorce case involving the firm's global chief executive, Richard S. Bobrow. The documents were released by Judge Steven R. Nation of Hamilton County Superior Court in Indiana, where the case is being heard, after motions were filed by The New York Times to obtain them.
The disclosure of the details is sure to arouse unhappiness among the firm's 1,900 American partners, experts said. They predicted that the information would put competitors at an advantage in bidding on contracts, hiring employees and settling lawsuits. The financial data will also be of interest to spouses of Ernst & Young partners who are planning a divorce.
As a privately held firm, Ernst & Young is not required to disclose anything about its finances to the public. Three months ago, Mr. Bobrow reported only that worldwide earnings for the year ended June 30 were $10.1 billion, up $300 million, or 2.7 percent, from results in the previous year.
The documents show that in the United States, Ernst & Young had revenue of $4.3 billion in the year ended Sept. 30, 2000, up 12.3 percent from figures in the previous year. Total earnings were $1.3 billion, down 1 percent from a year earlier. The profit margin was 31 percent in 2000, down from 35 percent in 1999.
The equity stake of the nearly 1,900 partners fell to $422 million from $525 million a year earlier, a 19.6 percent decline. Average cash earnings per partner were $565,000, up 9.7 percent from $515,000 the year before.
Larry Parnell, a spokesman for the firm, said that it had a policy of not commenting on its finances and that “we view this as a personal matter” between the Bobrows.
While the financial information may not help competing accounting firms figure out how much Ernst & Young charges its clients, it may be useful for recruiting purposes because it allows competitors to beat Ernst's compensation, said Arthur W. Bowman, editor of Bowman's Accounting Report, an industry newsletter.
Mr. Bowman, who has estimated earnings per partner at the big accounting firms in the past, said that he has estimated that each of Ernst & Young's partners earned $400,000 in 2000, a figure that was far below the actual number. (In comparison, he estimated that partners at PricewaterhouseCoopers took home $584,000 each; at KPMG, $515,000; at Deloitte & Touche, $454,000; and at Arthur Andersen, $515,000.)
“In the latter years, Andersen's average was higher than that,” said Duane R. Kullberg, who retired as Arthur Andersen's chief executive in 1989. But Andersen was always more highly leveraged, with a smaller number of partners than its competitors, he added.
The risk in having such financial information become public is the additional ammunition it may afford plaintiffs suing auditors in shareholder lawsuits, he said. “You disclose how much money you make, and you become a target for every charity in town — and every plaintiffs' lawyer,” he said.
The reports also described the terms of $650 million in loans and revolving credit agreements, including the interest rates and the number of days the credit lines were drawn. These details could prove especially valuable to competitors as a window on how banks assess the firm's financial strength.
Other documents detailed the sale in May 2000 of the consulting arm to Cap Gemini, the big European information technology company. Although the companies valued the sale at $11.3 billion, the partnership documents state that because of a decline in the value of the euro “the value of the global proceeds at closing was $7.9 billion.”
Ernst & Young divided the money, with $5.5 billion going to its American partners, some of which went to shore up an underfunded pension plan for partners, while partners in 129 other countries received the remaining $2.4 billion.
It also showed that the replacement cost of the consulting arm's office furniture was $29 million, nearly five times the figure for its computers and other technology hardware. And it showed such fine details as the consulting arm's ownership of 100,000 warrants to buy shares of the Fleming Companies, the grocery distribution company, for $9.50 each.
Another risk for the firm is a harsh reaction from clients who did not realize how much money their accountants were making. “They don't want to get questioned by the people that hire them saying, `That's too much money,' ” Mr. Kullberg said.
Mr. Bowman added that most people do not realize how much money accountants make, and might be angered by the hefty profit margin earned by Ernst & Young. “The general public doesn't think accountants should make good money,” he said.
Some lawyers who were apprised of the Ernst & Young numbers said they were surprised at how close they were — on average — to what a partner at a large New York firm might make. However, they speculated that the difference between the most junior lawyer and the most senior lawyer at a law firm is probably much smaller than the difference between the earnings of the most junior partner and the chief executive at an accounting firm.
The documents that became public yesterday came from divorce proceedings involving Mr. Bobrow, who fought efforts by his wife, Jan, to discover how much he was worth and how much he made. Despite his efforts to keep the documents from his wife, after she obtained them he did not ask at trial that they be kept under seal. After The Times sought the documents, Ernst & Young and Mr. Bobrow asked that the records be sealed.
In response to the motions to release the documents, Judge Nation wrote: “There is no statute or case law that permits the court to seal trade secrets and/or confidential financial information after they have become part of the public record. Because Ernst & Young and Cap Gemini's trade secrets and confidential financial information were not sealed prior to becoming part of the public record, the confidentiality was lost and the court cannot retroactively alter the status of such documents.”
Out of his $2.75 million annual salary, Mr. Bobrow gave his wife a budget of $5,000 a month to raise their four children, testimony showed. He told his wife he wanted a divorce when he learned he would be promoted to chief executive. He also told her that Ernst & Young's reputation and good will had no value. He offered her a $1 million settlement. Judge Nation awarded her $15 million of the couple's $23.5 million net worth and noted that Mr. Bobrow could expect to earn $36 million to $54 million before retiring on a pension that could be worth more than $1 million annually.
Two of the three other major accounting firms have already made moves to see the files, as have several spouses and former spouses of Ernst & Young partners, according to Mrs. Bobrow and her lawyer, Robert D. MacGill of the Barnes & Thornburg law firm in Indianapolis.
The Grant Thornton accounting firm prepared some of the Ernst & Young documents.
This is not the first time that details of an accounting firm's finances have become public, Mr. Bowman added. He received a copy of similar documents in the early 1990's, when Ernst & Whinney merged with Arthur Young to form Ernst & Young.
“Ernst & Young thought so much of protecting it that they sued me to stop me from publishing it,” Mr. Bowman said. Ultimately the decision was overturned and the information was published, he said. “That's how sensitive this information is.”
And in the late 1970's one accounting firm publicly disclosed its financial results in the belief that how much auditors make should be public, Mr. Kullberg noted. That firm was Arthur Andersen.