BDO Seidman Ordered to Pay $521 Million Fine

We have a story about one of the Big Six, and it appears that the risks of doing business as Big Four auditors are not confined to them alone.

BDO Seidman has been ordered to pay $170 million in compensation and $351 million punitive damages. The charges: being negligent to show fraud in Bankest, a financial services company owned by a Portuguese bank, Banco Espirito Santo. A six member jury decided that BDO was guilty in one hour, having found it grossly negligent in June.

Banco Espirito Santo claimed it partnered with Bankest Capital to form E.S. Bankest in late 1990s relying on (BDO Seidman's) faulty audits that Bankest Capital's income had nearly tripled from 1995 to 1996. The bank also relied on later audits from BDO Seidman, which certified audits for E.S. Bankest accounts totaling some $225 million, of which only $5 million represented legitimate income.

The bank is understandably happy with this verdict, but BDO Seidman will appeal it vigorously, by posting a $50 million bail. As expected, the firm will argue that senior management at Banco Espirito Santo was aware of this fraud and was also complicit.

And if it happens, the $521 million fine could have serious consequences on the firm, it could lead to large layoffs and it could lose its position as the number 5 accounting firm in the United States. According to the Wall Street Journal, this "casts a shadow over its future financial viability". Also the WSJ says, "Testimony and evidence presented showed that BDO had profit distributable to partners of more than $170 million for its 2006 fiscal year, which ends in June, and a net worth of about $40.5 million. BDO Chief Executive Jack Weisbaum testified that the firm wouldn't be able to pay punitive damages."

Let' s do some math here, $170 distributable earnings among 250 partners works out to about $700,000 payout per partner. The $521 million damage is equal to three years of current year earnings; and even exceeds the $445 million that KPMG agreed to pay the US government to avoid criminal indictment in its massive tax fraud case.

In a large accounting firm, such a number could be spread over a large number of partners so that the individual impact on each partner is reasonable and can be handled if necessary with lower annual earnings spread over many years.

BDO Seidman USA is allied with BDO International, which coordinates companies with about 30,000 partners and staff and reported total fee income of $3.91 billion in 2006. In the US, BDO Seidman had revenues of $589 million in 2006, 3,800 employees,. 250 partners and 34 offices.

But can BDO Seidman effectively handle such a large amount of payouts, without losing its current structure. This is serious money for a medium sized firm. If the award does go through, we could see the firm essentially unable to handle this financial distress. We have blogged earlier that the finance and investing world could not effectively handle the disappearance of a Big Four firm, but what about such a possibility for a Big Six firm. The debate on caps on auditor liability will again take the forefront on such an eventuality.

We will have to wait on the resolution of BDO's appeal to see how this lands.

CapGemini CTO Ponders on Mass Collaboration

Open Source Innovation and Alumni Mass Collaboration

We have mentioned Big Four in-house bloggers earlier and in particular Andy Mulholland, CTO of CapGemini, and here is an interesting recent blog from him, where he notes that mass collaboration amongst a multitudes of experts can enable exponential advances in research frontiers (Wikinomics). Here is the link to the post. The rest of the blog is good reading too.

http://www.capgemini.com/ctoblog/2007/08/do_you_want_to_solve_your_prob.php

There is limited public information available on the privately held Big Four firms – profitability, strategies, shares, clients, quarterly updates, hiring practices, upward mobility trends etc. etc. We ask whether mass collaboration among Big Four alumni can shed light on information which would be valuable for example job seekers looking to join the Big Four firms – how large the group is, what is the sub-culture, what are recent development etc. We invite comment on this, and Big4.com can be a forum for such information gathering and dissemination.

KPMG Finds Chemical Mergers On the Upswing

KPMG recently released a report on global Chemicals M&A activity, with a particular emphasis on Europe. World chemicals sales in 2005 were a whopping EUR 1,476 billion, with the EU accounting for 30% of this total. 13 of the top 30 companies in the world, accounting for 15% of chemicals sales have HQs in Europe. However, the chemical industry in Europe continues to face a wide range of issues including:

o unsatisfactory financial performance of many companies
o erosion of prices and margins, in many cases driven by competition from Asia
o costly supply chains, expensive sales organizations, and uncompetitive levels of overhead costs
o need to expand into high-growth regions such as Eastern Europe or Asia
o lack of quality and efficiency of innovation

The study finds that M&A activity in the chemical industry appears to be linked to the performance of the financial market. The majority of M&A transactions are in the product categories: specialty chemicals and formulations. Companies active in “value-added” chemicals are attractive to private equity investors. Private equity activity has further boosted M&A activity, thus increasing company valuations, which has been beneficial for potential sellers. Private equity is estimated to have accounted for about 23 percent of deal value from 2000 to 2006.

As with any other industry, valuation multiples have steadily increased for chemicals assets over the past few years, from typically 4x-5x EBITDA to typically 8x-9x EBITDA (in some segments even ten to twelve times EBITDA). Sales multiples are often between 0.8 and 1.2. This increase in prices is the result of the high levels of liquidity in the market as well as the increasingly professional auctions. Very few assets are sold nowadays without some form of auction process. Participants believe that 2007 will be the top of the cycle. However, multiples are expected to remain at the current already high levels or increase slightly due to stiff bidding competition and PE activity. Not all assets achieve these high multiples.

KPMG finds that the successful deal requires attention to the three key Ps: (1) careful preparation and planning;(2) performance and (3) post-deal integration.

Preparation and Planning

Organizations should understand what they are selling and prepare thoroughly for a disposal. As a seller, be forewarned and prepared. Try to see the deal from a bidder’s view.

Performance

Maintain the initiative while remaining flexible, i.e. staying in control of the auction process. Companies, whose core business involves the manufacturing and selling of chemicals must learn from private equity how to make quicker decisions during the M&A process.


Post-Deal Integration

Integration is challenging—as it is in most industries. Speed and rigorous project management are critical. A well-prepared business and integration plan based on thorough market and competitor analysis can avoid integration issues. Measures planned well in advance need to be put in practice immediately after the deal.

The report is available at http://www.kpmg.com/Industries/IM/CP/MAChallenges.htm

As the Big Four firms get involved increasingly in the M&A process, first through auditing, then through due-diligence, and finally as advisors, their perspective and direction is becoming critical for all participants in the deal. Look for the Big Four to become foundational to all deals in the future, especially as the credit market gets tougher and investors turn to professional unbiased third parties to vet the deal and protect their interest, just like public trading companies.

PricewaterhouseCoopers Involved Deeply in China Olympics

PricewaterhouseCoopers Audits 2007 Special Olympics World Summer Games

We are exactly one year away from a special date in one of the rapidly growing economies of the world.

08/08/08 marks the opening of the 2008 Summer Olympics in Beijing, China.

But do you know that the 2007 Special Olympics World Summer Games will be held in October 2007 in Shanghai?

And that the Big Four firms are involved in this venture, albeit indirectly?

In April 2007, PwC was named as the accounting services supplier of the Beijing 2008 Olympic Games.

And now, the Games Executive Committee has named PricewaterhouseCoopers as the auditing services provider. These 2007 Games, held in Asia for the first time, will host 7,500 athletes with intellectual disabilities from more than 160 countries and regions.

And of course, PwC made a generous gesture in keeping with the spirit of the games. PwC donated RMB 1000 for every successful shot made at PwC’s annual China Cup basketball tournament, an inter-office sports event involving all twelve PwC offices in mainland China, Hong Kong and Macau.

PwC’s history working with Beijing’s various Olympic committees began in the year 2000 when the firm first provided financial advisory services to the Beijing 2008 Olympic Games bid committee. In 2001, after Beijing won its bid, PwC turned its attention to providing advisory services during the tender process for building five major Olympic venues including the National Stadium, to be the Olympics’ architectural centrepiece, also known as “The Nest”.

Deloitte Finds US Multinationals With Domestic Focus

A Deloitte study finds that US multinationals still have a domestic mentality regarding compensation despite their rapid globalization.

The recently released International Stock Plan Design and Administration Survey, released by Deloitte Tax LLP along with the National Association of Stock Plan Professionals, had a number of interesting findings. Of all the survey participants and respondents:

70% don’t make any change to their U.S. equity programs to adapt to local pay conditions
65% do not utilize more tax efficient equity alternatives available in many jurisdictions.
60% of companies do not communicate to non-U.S. participants regarding the personal financial impact of participating in these programs
1% consistently customized their communications to ensure that they were delivered in the local language.
62% offer an employee stock purchase plan to employees outside the U.S., but only 15% of those eligible to participate choose to do so.
89% administer their stock plans for non-U.S. employees almost exclusively from the U.S., but only 37% verify the local country tax and regulatory compliance requirements of these plans on an annual basis.
50% manage this compliance process without external assistance, relying on publicly available websites and news bulletins for this information.

Here’s what Matthew Davis a partner in the Global Remuneration & Reward service line of Deloitte Tax LLP has to say about US multinationals: Long-Term Incentive programs are still the primary 'global' compensation program, but the use of U.S.-based program designs results in above-market compensation in many countries. Thus companies miss out on delivering similar benefits at a lower cost.

This bi-annual survey of 291 respondents; including human resources, compensation and benefits professionals, and tax directors provides a comprehensive look at the design and administrative practices of U.S.-based companies that grant stock compensation to employees outside the country.

What is clear to us from this survey is that while American businesses have aggressively ventured into the global arena, localization in foreign countries in matters concerning the pocketbook is far from fully complete.

The complete survey report is available through Deloitte's website at: http://www.deloitte.com/us/tax/NASPPsurvey

BearingPoint Files 10-K for 2006, but Investors Wary

A few weeks ago, BearingPoint (NYSE:BE) filed its 10K for 2006, later than what the SEC allows for companies to file after the end of their fiscal year, but none the less good timing for BE given their past history. Most of the numbers were known to investors anyway so this was a formality. In terms of Q1-2007, BearingPoint indicated lower quarterly sales than the previous year, but mildly better than the previous quarter. Of concern is the voluntary turnover rate of almost 25%, indicating that one-fourth of the professional population is leaving each year, what is not reported is the turnover by managerial grade. Headcount was also lower in the quarter, which means that BE is hiring less than the turnover rate.

Investors are not buying though. BearingPoint stock today is at $6.38, its lowest level in two full years, and a steep drop from June 2007. Improved financial performance and sentiment is necessary to get the stock price back to higher levels.

Or else, look out for a management purchase of the entire company. The market capitalization is only $1.3 billion at this stock level, and the sales of BE are close to $3 billion.



BearingPoint Files 2006 Form 10-K
Company Provides Business Metrics for Q1 2007

MCLEAN, Va.--(BUSINESS WIRE)--June 28, 2007--BearingPoint, Inc. (NYSE:BE), a leading global management and technology consulting firm, said today that it has filed its 2006 Form 10-K with the Securities and Exchange Commission.

BearingPoint's CEO, Harry You, stated, "By filing our full year 2006 financials, we have taken another significant step toward returning to timely filing our periodic reports with the SEC. The business is strong and we continue to see great demand for our services."

Q1 2007 Key Metrics

BearingPoint reported key business metrics for the first quarter ended March 31, 2007, which were driven by solid performance in the Company's core business and continued traction in the marketplace. Highlights include:

-- Bookings of $709.5 million for the first quarter of this year,
a modest sequential increase over $699.0 million in the fourth
quarter of 2006 and a decrease from $804.6 million in the
first quarter 2006, with the decline primarily attributable to
growth in newly signed, but unfunded Federal contracts which
BearingPoint does not include in bookings until related
appropriations are approved.

-- Voluntary total employee turnover of 23.9%, an increase from
21.2% in the fourth quarter of 2006 and a slight improvement
from 24.2% in the first quarter 2006.

-- Total workforce utilization of 76.6%, down slightly from 77.4%
in the fourth quarter of 2006 and a solid increase from 73.4%
in the first quarter 2006.

-- Billable headcount of approximately 15,200, a slight decline
from approximately 15,300 in the fourth quarter of 2006 and
15,400 in the first quarter of 2006.