During the summer of 2006, a syndicate of investors led by The Blackstone Group, one of Wall Street’s largest private equity investment firms, initiated a secret plan to acquire Freescale Semiconductor. Based in Austin, Texas, Freescale is among the world’s largest producers of semiconductors and for decades was a subsidiary of Motorola, Inc., the large electronics company. In July 2004, Motorola spun off Freescale in one of that year’s largest initial public offerings.

Blackstone retained Ernst & Young (E&Y) to serve as a consultant for the planned buyout of Freescale. Among other services, Blackstone wanted E&Y to review Freescale’s human resource functions and to make recommendations on how to streamline and strengthen those functions following the acquisition. James Gansman, a partner in E&Y’s Transaction Advisory Services (TAS ) division, was responsible for overseeing that facet of the engagement.

Similar to the other Big Four accounting firms, E&Y became involved in the investment banking industry during the 1990s. In fact, by the late 1990s, the small fraternity of accounting firms could boast of having two of the largest investment banking practices in the world, at least in terms of the annual number of consulting engagements involving merger and acquisition (M&A) deals. In 1998, KPMG consulted on 430 M&A transactions, exactly one more than the number of such engagements that year for PricewaterhouseCoopers (PwC). Despite those impressive numbers, KPMG and PwC had not established themselves as dominant firms in the investment banking industry.

In 1998, the total dollar volume of the M&A engagements on which KPMG and PwC consulted was \($1.65\) billion and \($1.24\) billion, respectively. Those numbers paled in comparison to the annual dollar value of M&A transactions for industry giants such as Goldman Sachs, which was involved in M&A deals valued collectively at nearly \($400\) billion in 1998. At the time, Goldman Sachs, Lehman Brothers, Morgan Stanley, and the other major investment banking firms consulted exclusively on

“mega” or multibillion-

dollar M&A engagements. By contrast, the “low end” of the M&A market–

in which the Big Four firms competed–typically involved transactions measured in a few million dollars.

E&Y’s involvement in the huge Freescale M&A deal was a major coup for the Big Four firm. When the transaction was consummated in December 2006, the price paid for the company by the investment syndicate led by The Blackstone Group approached

\($18\) billion. That price tag made it the largest private takeover of a technology company to that point in time as well as one of the ten largest corporate takeovers in U.S. history.

Not surprisingly, Blackstone demanded strict confidentiality from E&Y and the other financial services firms that it retained to be involved in the planned acquisition of Freescale. James Gansman, for example, was told that Blackstone wanted the transaction to be “super confidential” and was instructed in an internal E&Y e-mail to

“not breathe the name of the target [Freescale] outside of the [engagement] team.”.........

Questions:-

1. Identify the specific circumstances under which auditors are allowed to provide confidential client information to third parties.
2. Suppose that you and a close friend are employed by the same accounting firm. You are assigned to the firm’s audit staff, while your friend is a consultant who works on M&A engagements. What would you do under the following circumstances: (1) your friend discloses to you highly confidential “marketmoving”
information regarding a soon-to-be announced merger; (2) your friend not only discloses such information to you but also informs you that he or she plans to use it to make a “quick” profit in the stock market? In your responses, comment on your ethical responsibilities in each scenario.
3. E&Y was providing a consulting service to The Blackstone Group in connection with its planned acquisition of Freescale Semiconductor. Explain how a CPA ’s professional responsibilities differ between consulting engagements and audit engagements.