What Went WrongBy Baselinemag | Posted 2006-02-07 Print
The consultancy, touted as a Sarbanes-Oxley expert, failed to report earnings for 18 months and may be de-listed from the Big Board. One reason why: missteps implementing a financial software system.?">
To understand what went wrong-and why-you have to go back to 2001, when the company first set a course that would ultimately put it directly in the path of what former chief information officer and executive vice president Thomas Wilde and other senior executives term a "perfect storm"-a confluence of external events, internal missteps and bad timing that have wreaked havoc with the McLean, Va.-based consultancy.
At the time, BearingPoint was known as KPMG Consulting. It had been spun off from KPMG LLC, the 100-year-old-plus "white shoe" accounting firm, a year earlier during a period when the "Big Five" accountancies had come under pressure to separate their auditing and consulting units because of potential conflict-of-interest problems.
As a traditional information-technology consultancy on the periphery of the Internet bubble, KPMG Consulting had struggled to retain its best people, a number of whom had been lured away by dot-com competitors. It had also missed out on the lucrative initial public offerings that had funded e-business consulting startups such as Scient and Viant. Still, the company's then-chairman and CEO, Randolph "Rand" Blazer, believed it was not too late to get in on the Internet boom. Blazer and his management team decided to reposition the firm as an "e-consultancy," and concurrently do an IPO.
In early February 2001, after two delays, KPMG Consulting went public, hitting the high end of its $18-a-share price range and raising $2 billion, despite a then-tepid stock market.
As it turned out, KPMG Consulting, which later changed its name to BearingPoint, had chosen probably the worst possible time to go public. Even though it raised $2 billion, it had come too late to the dot-com party to collect much more than table scraps and flat champagne.
It had gone public in a period that saw an unprecedented number of corporate scandals including Enron, Tyco and Global Crossing. In their wake, Congress passed the Sarbanes-Oxley Act to crack down on securities fraud and boardroom scandals, and tighten regulation of accounting rules. The bill forces companies to eliminate "creative accounting," such as what was practiced at Enron, install internal controls and identify any concerns, such as a sudden contract cancellation, on a timely basis. It was signed into law by President Bush on July 30, 2002.
Finally, the consultancy business was in the grasp of the worst recession in 15 years, with information-technology spending dropping by 4.1% in 2002, according to research company International Data Corp.
Still, this was not some unproven startup or dot-com mirage, but an established, well-respected consultancy with a track record of providing systems integration and information-technology solutions to big multinational companies such as Chase Manhattan, Honda and MetLife, and public-sector clients including the Library of Congress and National Institutes of Health. Though it experienced a net loss of $26.9 million in fiscal 2002, BearingPoint still generated just under $2.37 billion in revenue for the period and employed nearly 15,000 people at that time around the world.
But instead of cutting back in the face of economic uncertainty and its 2002 losses, Blazer opted for aggressive growth in Asia, South America and, especially, in Europe. "BearingPoint wanted to expand its footprint in Europe," says IDC analyst Alexander Motsenigos. "It was under-represented there."
There was one major impediment to Blazer's aggressive growth strategy. At the outset, BearingPoint had no information-technology infrastructure to manage its business and track its myriad client accounts. It also had limited financial resources since parent KPMG had pocketed most of the proceeds from the IPO. "We were left in essence with no cash," Roderick C. McGeary, presiding director of BearingPoint's board of directors, told Consulting Magazine after the public offering.
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Without the resources to jump-start an information-technology infrastructure of its own, the consultancy had to rely entirely on KPMG's information resources, including its financial system, called PEAT.
QUESTION: For year three of Sarbanes-Oxley, do you expect to spend more or less time on documenting your internal controls? Tell us at firstname.lastname@example.org.
Compliance: How BearingPoint Lost Its Way
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