Ernst and Young

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Background

Ernst and Young is, along with Deloitte, KPMG, and PricewaterhouseCoopers, one of the so-called “Big Four” who dominate the financial auditing market. It was founded in 1989 when Ernst & Whinney merged with Arthur Young.1 Ernst and Young is a network of 492 member companies and affiliates worldwide,2 and its headquarters are in London.3

The company, whose slogan is “Building a Better Working World”, employed more than 284,000 people in 2019 and had global revenues of US$36.4 billion.4

Carmine Di Sibio is the Global Chairman and CEO, and heads a 16-strong executive team which includes global heads of functions and services as well as representatives from three geographic areas: the Americas; Europe, Middle East, India and Africa; and Asia-Pacific.5

It has more than 200,000 clients, including most of the world’s largest companies.6

Relationship with the Tobacco Industry

Even prior to the merger of Ernst & Whinney and Arthur Young, Ernst and Young’s founding companies had a long history of working for tobacco companies, stretching as far back as 1932.7

The company’s long standing relationship with the tobacco industry ranges from auditing accounts to producing reports used by tobacco companies to lobby against greater regulation8 and taxation.9

In 2010, the company stated that it worked with “10 of the 12 tobacco companies listed in the Forbes 2000”.10

Continuing ties to tobacco

Ernst and Young continues to work for major tobacco firms such as British American Tobacco (BAT),11 and Imperial Tobacco.12

Ernst & Young has also written two reports on the e-cigarette market for Nicoventures, maker of Vype and a BAT subsidiary, since 2016.13

Auditor for, and grantee of, the Foundation for a Smoke-Free World

Ernst and Young is the Foundation for a Smoke-Free World’s auditor.14. The Foundation describes itself as an independent scientific organisation but is solely funded by Philip Morris International.

In 2018, Ernst and Young’s strategy consultancy EY-Parthenon was commissioned to produce a report for the Foundation, which said: “Less than a quarter of smokers stay off cigarettes for more than a year with current cessation products’’.15

Health campaigners attacked the report, accusing it of not increasing scientific knowledge and an exercise in “market research for PMI.”16

In 2019 the Foundation gave a grant of US$1,145,028 to Ernst and Young AG, which is based in Switzerland, to look at the effectiveness of alternative nicotine distribution systems.17

Making the case for tobacco

Over the years, Ernst and Young has worked for the tobacco industry in various capacities, including advising on how the industry can effectively promote its agenda and producing commissioned reports that favour industry arguments.

Rebutting tobacco control economic arguments

An Economic Impact Assessment Template Routemap produced by Ernst and Young for BAT stated that economic impact studies have helped “to oppose proposed restrictions on the operations of the industry and in presenting the positive benefits of the industry to parliamentary commissions and the wider public”.18. The document provided evidence for BAT to respond to critics of its economic impact. The Routemap, it cited job creation as one example of how the tobacco industry “produces strong positive improvements in social and economic well-being and the quality of life”.18

The document advised against using a cost/benefit approach, something which is “usually carried out by adversaries to show that the costs of tobacco outweigh the benefits”. One of the “pitfalls” of such an approach is “the lack of agreement as to what are the costs” and benefits to smokers and society of smoking and subsequently as to how to measure the various effects”.18

Lobbying advice for tobacco officials

Ernst and Young has advised British American Tobacco how to be more effective in its lobbying. In the late 1990s, in a document marked “private and confidential”, the firm warned BAT: “You  need to be mindful of the position of officials who are often wary of accepting invitations to lunch or social occasions for fear it may compromise their position”.19

The company stressed the importance of BAT’s reputation and said by lobbying “across meeting tables rather than restaurant tables it prevents British American Tobacco from allegations of bad practice or trying to gain favour with hospitality”.19

Although Ernst and Young urged caution over “mixing business with pleasure” it added there may be “no reason why discrete lobbying cannot be undertaken if you happen to come across a key contact in a social circumstance”.19 For more on this tactic see the special analysis on lobbying decision makers.

Tobacco study described as “below standard”

In a report for BAT in 2010, Ernst and Young claimed that the true level of illicit tobacco consumption in New Zealand was three times higher than previously thought.20 The report went on to claim that an increase in tobacco tax could result in more people turning to illicit tobacco and up to US$20 million in lost revenue to the government each year.

However the warnings were rebutted in a report by the New Zealand Institute of Economic Research, commissioned by ASH NZ. This report said: “Our review leaves us with no confidence in Ernst & Young’s assessment of the impacts of changing the relative levels of excise duty”. 21

It described the company’s assessment as “fundamentally flawed by unrealistic scenarios and incorrect results even for these scenarios” and “of no value in informing debate on policy measures to reduce tobacco consumption”.21

The report concluded: “We consider Ernst & Young’s report to fall well below the standards required for a piece of economic evidence”.21

Arguing against plain packaging

In 2014, ahead of the Australian Government’s review of a decision to bring in plain packaging in 2012, an Ernst & Young report for BAT claimed there was “no evidence that plain packaging has reduced total consumption”.22 It suggested instead that the government policy may have led to an increase in cigarette consumption. This reflected common industry arguments against plain packaging which independent research had shown to be an effective tobacco control policy.

Tobacco tax role criticised

Health experts criticised the New Zealand Ministry of Health for selecting Ernst & Young to review its tobacco taxation policy in 2018 “despite EY’s work locally and internationally for tobacco companies”.23

They added: “This decision may breach the Framework Convention on Tobacco Control (FCTC), at least in spirit”.23

Chequered past

Ernst and Young has been at the centre of a number of major controversies over the past decade.

  • In 2013, it agreed to pay US$123 million in a settlement with criminal prosecutors in the US, relating to tax avoidance schemes.24
  • Two years later, Ernst and Young paid US$10 million to settle allegations that it failed to raise concerns before the collapse of Lehman Brothers in 2008.25
  • In 2016, the firm agreed to pay US$9.3 million to settle claims by the US Securities & Exchange Commission that two of its auditors formed “inappropriately close” relationships with staff at the companies they were auditing.26
  • In April 2020 a High Court judge in London ordered Ernst & Young to pay US$11 million (£9m) to a whistleblower who was forced out of the firm after refusing to cover up a discovery of suspected gold smuggling at a client of the company’s Dubai branch in 2013.27

Relevant Links

Tobacco Tactics Resources

References

  1. Ernst and Young, A timeline of our history, company website, undated, accessed September 2016
  2. Ernst and Young, EY Member Firms and Affiliates, company website, 17 January 2020, accessed June 2020
  3. Ernst and Young, EY opens new global headquarters in London, company website, 14 December 2015, accessed June 2020
  4. Ernst and Young, Global Review, company website, 2019, accessed June 2020
  5. Ernst and Young, Global Executive, company website, undated, accessed June 2020
  6. Ernst and Young, What We Do, company website, undated, accessed June 2020
  7. R.J.Reynolds Tobacco Company, Financial Statement, 31 December 1932, Truth Tobacco Industry Documents, Bates no: 500434521-500434524, accessed June 2020
  8. B&T magazine, Ernst & Young report questions effectiveness of cigarette plain packaging, 2 December 2014, accessed June 2020
  9. Tobacco Reporter, Tax up, revenue down, 9 March 2018, accessed June 2020
  10. S.R.Quah, International Encyclopedia of Public Health 2nd Edition, Academic Press, 3 November 2016, accessed June 2020
  11. British American Tobacco, 2019 Annual Report, company website, undated, accessed June 2020
  12. Imperial Brands, Shareholder Contacts, company website, undated, accessed June 2020
  13. J Well, The Market, company website, undated, accessed June 2020
  14. Foundation for a Smoke-Free World, Form 990-PF, 2019 Tax Return, 15 May 2020, accessed June 2020
  15. EY-Parthenon, Smoking Cessation Products and Services: Global Landscape Analysis, 1 November 2018, accessed June 2020
  16. T. Kahn, Global smokers’ study criticised as biased, Businesslive.co.za, 20 March 2018, accessed June 2020
  17. Foundation for a Smoke-Free World, Form 990-PF, 2019 Tax Return, 15 May 2020, accessed June 2020
  18. abcErnst and Young, British-American Tobacco – Economic Impact Assessment Template and Routemap, undated, Truth Tobacco Industry Documents, Bates no: 900007779-900007844, accessed June 2020
  19. abcErnst and Young, British-American Tobacco: Good Practice Guidelines for Effective Lobbying, February 1997, Truth Tobacco Industry Documents, Bates no: 900007848-900007870, accessed June 2020
  20. Ernst and Young, Out of the shadows: An independent report of New Zealand’s illicit tobacco market, 2010, accessed June 2020
  21. abc]N. Taylor and J. Branson, Review of Ernst & Young’s Report on New Zealand’s Illicit Tobacco Market Report to ASH New Zealand, New Zealand Institute of Economic Research,  22 April 2010, accessed June 2020
  22. Ernst and Young, Historical trends in Australian tobacco consumption: A case study, BAT website, November 2014, accessed June 2020
  23. ab]G. Thomson and L. Delaney, How should governments deal with multinational consulting firms that work for the tobacco industry?, Tobacco Control blog, 23 August 2018, accessed June 2020
  24. S.Bowers, Ernst & Young to pay US regulators $123m over tax avoidance schemes, The Guardian, 4 March 2013, accessed June 2020
  25. M.Dakers, Ernst & Young pays $10m fine for Lehman audits, The Telegraph, 16 April 2015, accessed June 2020
  26. M.Dakers, Ernst & Young fined $9.3m for auditors’ improper relationships with clients, The Telegraph, 19 September 2016, accessed June 2020
  27. M.O’Dwyer, Judge in whistle-blowing case lambasts audit giant EY, The Telegraph,27 April 2020, accessed June 2020