Ernst & Young and Capgemini last month agreed to pay $20 million to settle a class action lawsuit alleging the mega accounting firm and its former subsidiary over-charged clients millions of dollars for rebated travel services.
Ernst &Young is the last of three Big Four accounting firms to settle the suit, which also named KPMG and PricewaterhouseCoopers. KPMG and its former consulting unit, BearingPoint, in April agreed to pay $34 million to settle, and PricewaterhouseCoopers late last year settled to the tune of $54.5 million.
Filed in October 2001 in Arkansas by Warmack-Muskogee Limited Partnership, the suit contended the firms billed clients full-value charges for discounted and rebated travel expenses during a 10-year span starting in 1991.
The accounting firms retained millions of dollars from back-end rebates: When travelers booked, they saw a full value fare yet a percentage of that was remitted back to the accounting firms.
While such billing practices are legal when fully disclosed to clients, they raise liability issues when they are not transparent. "There are certain firms that add to their fees—15 percent or so—for administrative charges pertaining to travel, but that's part of the deal, that is part of the engagement document," said Neil Abrams, president of Purchase, N.Y.-based Abrams Consulting Group. "There's nothing wrong with it in a legal sense, but it comes down to the disclosure."
Laurence Smith, an attorney with Wolff & Samson in West Orange, N.J., who advises corporate travel departments, agreed: "The bigger problem was one of disclosure rather than one of practice. The accounting firms gave to their clients, or let them avail themselves of, their corporate discounts. They flew much more reasonably than they ever could have flown on their own. The problem was the accounting firms didn't say to these guys, 'We're going to give you the benefit of our corporate discounts and to the extent that there are any back-end rebates or incentives earned as a result of travel that you pay for, we are keeping it.' At the end of the day, the company would have recognized they were getting a good price, but just not every last benefit."
Ernst and Young retained $98.8 million in rebates on airline tickets between 1995 and 2001, with $37 million retained in 2000 alone—14 percent of the company's U.S. booked air volume for that year. PricewaterhouseCoopers retained $72.4 million in rebates for 10 years, ending in 2001, holding onto $45 million in 2000. PwC in 2000 had a U.S. booked air volume of $383 million.
Domestic back-end rebates are not as common as they once were, which makes the questionable practices of the accounting firms less relevant in today's climate. "You just don't see them much at all in the U.S.," Smith said, adding the use of such rebates in airline negotiations is a bit more prevalent in Asia/Pacific. "I think that has to do more with the Asian carriers' ability or inability to track things on a current basis, and that may also be tied into the global distribution systems that are most prevalent in Asia/Pacific. Even in Asia/Pacific back-end rebates are less prevalent than they were three to five years ago, but you still see some deals structured that way."