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Software Design Flaw Cost Millions

By Baselinemag  |  Posted 2006-10-06 Print this article Print

Staffing firm Hudson is trying to fix what it says was a poorly designed financial system—a snafu that led to millions of dollars in accounting errors.

Hudson, a New York-Based staffing and recruiting company, normally hires information-technology project managers and other professionals on behalf of its customers. The division of 3,800-employee Hudson Highland Group says its mission is to "assess, recruit, develop and engage the best and brightest people for our clients."

But this summer, the company was looking for someone who could help turn around one of its own I.T. projects: a badly designed PeopleSoft accounting system that the company had already spent millions of dollars trying to fix.

In August, Hudson hired Michael Whitmer as chief information officer for Hudson North America, reporting to Tom Moran, the division's president. In announcing Whitmer's hiring, Hudson emphasized his prior experience with "a multimillion-dollar PeopleSoft implementation." He previously worked for one of Hudson's rivals, Spherion, where he was vice president of information services.

The PeopleSoft project is critical to operations. Hudson's parent company says problems with the system resulted in its having to restate earnings for the first quarter of 2006—reducing previously reported revenue by $3.8 million for the first half of the year.

In addition, for the first six months of 2006, Hudson spent $3.7 million on "costs associated with the PeopleSoft stabilization." That included contracting with Oracle, which now sells and supports PeopleSoft's applications, to assess the accounting system and carry out recommended changes. The expenses contributed to Hudson Americas' operating loss of $12.1 million for the six months ended June 30, 2006, on revenue of $228.2 million.

What went wrong? It wasn't the PeopleSoft software itself, according to the company. "The basic problem appears to be the design of the installation," said Mary Jane Raymond, Hudson Highland's chief financial officer, according to a transcript of an Aug. 3 conference call the company's top executives held with Wall Street analysts to explain the situation.

Hudson had decided to move to the PeopleSoft financial system in December 2003. Work on the project began in mid-2004, and the system went live on July 1, 2005, spokeswoman Sarah Kafenstok says. Since then, Hudson has "had difficulties in using our new PeopleSoft financial reporting system," the company said in an Aug. 7 filing with the Securities and Exchange Commission.

Typically, Raymond said on the analyst call, an accounting system has a set of subledgers where individual transactions are stored (for example, revenue from a specific customer for a specific recruiting job). That data is then normally inserted into the general ledger in a "control account," which displays the sum of the amounts entered in a subledger (which are typically some logical grouping, like accounts in Southern California). Those control accounts let accountants more easily spot discrepancies between the general ledger and each subledger, because if the sum in the control account doesn't match the sum of actual revenue booked in the subledger, one or more of the transactions in the subledger has been entered incorrectly.

"That, however, is not how our installation was designed," Raymond continued. With Hudson's PeopleSoft implementation, "it is very difficult to extract the detail, and there's actually only a small number of control accounts. So, that makes it actually pretty hard to find differences." As a result, Hudson had developed offline subledgers and other manual processes to reconcile its accounts. That, along with staff turnover in the accounting department in early 2006, Raymond said, meant that certain transactions "were not understood and recorded correctly."

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