BearingPoint: The end of an era

 

The outlook was not good from the beginning. A scheduled initial public offering for KPMG Consulting, which would become BearingPoint Inc., finally occurred in February 2001, but it had been delayed for six months because the market for IPOs and for hi-tech consulting services was declining rapidly. Within months of going public, however, management of the new firm announced that they would repurchase $381.3 million in stock from Cisco Systems, a partner since 1999, and embarked on an ambitious series of international acquisitions, seriously eroding the $2 billion raised in the IPO and setting the stage for the accounting and debt problems that would overwhelm the company causing it to cease operations in July 2009.
 
At the time of the IPO, following the collapse of Arthur Andersen, the Big Four accounting firms were all involved in a furious competition to scoop up AA's clients and people, and KPMG Consulting Inc. eagerly joined the fray. They would soon acquire 40 international subsidiaries from Andersen and the German and Austrian consulting firms of KPMG. In time they would need to lay off personnel in order to make room for the Andersen people, incurring additional costs. The new firm would be troubled as well by ongoing suits with KPMG from which it had spun off in 2000.
 
Consulting at the Big 5 – then 4
 
The consulting services arms of the Big 5 accounting firms prospered in the 1980s and 1990s, bringing in substantial revenues to the parent firms, but by the end of the decade the accounting firms and their consultants were ready to go their separate ways. In 2000, Arthur Andersen Consulting became the independent entity Accenture, and Ernst & Young sold its consulting unit to professional services firm Capgemini. With the potential for conflict of interest issues arising like those alleged in the Andersen/Enron debacle, separation seemed to be imperative. At the time of the KPMG Inc. IPO, Deloitte & Touche was considering selling its consulting operations and PricewaterhouseCoopers would sell its consulting unit to IBM in 2003.
 
KPMG Consulting Inc. changed its name to BearingPoint Inc., after the Sarbanes-Oxley Act was passed in July 2002, in part to avoid even the whiff of conflict of interest with KPMG LLP. Rebranding was a popular idea at the time – Deloitte had considered calling its consulting unit, Braxton, and before the sale of their consulting unit to IBM, PricewaterhouseCoopers (PWC) was talking about Monday as a possible name for their consulting services. The cost of the rebranding for BearingPoint would be $50 million. At this point, in November 2002, its stock was selling for $6.54 a share down from a high of $21.49 reached in March.
 
Infrastructure and accounting problems
 
In 2003, two years after its IPO, BearingPoint was still depending on the KPMG technology, PEAT, for accounting and human resources functions. PEAT was not designed for a public company or for the internal control requirements of Sarbanes-Oxley. In addition, BearingPoint was trying to integrate its international business acquisitions into the accounting function on the old system. The contract for use of PEAT would expire in 2005. 
 
With little time to go before Sarbanes requirements would be applicable, BearingPoint began the roll out of its new global infrastructure, including, in April 2004, the OneGlobe system which tracked contracts. Almost immediately after the OneGlobe system went live in April 2004 according to a story in Baseline, “A BearingPoint message board began to fill up with complaints that users couldn't track jobs clearly, get bills out, and receive data and reports they were sure were accurate.”
 
Later when BearingPoint finally filed the firm’s 10-K for 2004 in February 2006, the 2,000 page document which detailed a long list of internal control problems, would say that many of the company's financial errors resulted from the poor implementation of a new computerized accounting program. The previous management team (CEO Randolf Blazer) put the new OneGlobe system in place prematurely and did not adequately train employees to use it. BearingPoint concluded that it had to review billing and other data for all of its more than 6,000 U.S. contracts before it could file.
 
But accounting problems were discovered in June 2003 even before the rollout of the new infrastructure, when PwC took over from Grant Thornton as BearingPoint’s auditor. In August the firm said that it would restate earnings for the fiscal year ending June 30, 2003 based on concerns raised by PwC involving its policies for booking revenue from contracts, relating "primarily" to a division based in Germany and the surrounding area. According to the filing, The New York Times reported, the company planned to launch new accounting systems in Europe “to improve the Germanic consolidation and reporting process," and planned to implement a new North American accounting system.
 
In May 2004 after BearingPoint reported a 61 percent decline in first quarter earnings, Moodys Investors began a review of a $250 million revolving credit line that had financed acquisitions.
 
BearingPoint said the first quarter results were poor in part because restrictive labor laws in Europe made it difficult to lay off consultants. Overall consulting revenue from corporate spending on technology and consulting services had dropped, and BearingPoint depended on revenue from short-term contracts with the government, some of which by law it had to hand over to subcontractors. And it needed to invest in software engineers in India and China to take advantage of lower costs.
 
In October 2004 the Washington Post cited a report that Randolf Blazer, BearingPoint’s CEO, was looking for a buyer. Blazer denied this but resigned abruptly in November. After a $92 million dollar error was discovered in third quarter earnings in December, the latest CFO, Robert Falcone announced his retirement.
 

 
BearingPoint Timeline
2000
Spun off from KPMG as KPMG Consulting
 
 
2001
February --IPO
 
Announces decision to repurchase stock from Cisco
 
October -- Initiates acquisition of AABS Europe divisions; Swiss and Austria consulting practices of KPMG
 
Collapse of Enron
 
 
2002
July – Passage of Sarbanes Oxley
 
October -- Changes name to BearingPoint; moves to NYSE
 
November – Robert Lamb resigns as CFO
 
 
2003
March Robert Falcone named CFO
 
June -- Replaces Grant Thornton with PwC as auditor
 
August --Announces that it will restate earnings for 2003 because of accounting errors.  
 
October – Hires E&Y for global internal audit
 
 
2004
Settles with KPMG for $34 million
 
First quarter profits decline by 61 percent. Moody’s expresses concern
 
November -- CEO Randolf Blazer resigns
 
December – Discloses $92 million error in first quarter earnings  
 
CFO Robert Falcone retires
 
 
2005
March -- Harry You named CEO. Will replace 15 of top 20 executives
 
April – settles suits with KPMG for $34 million
 
April -- Announces errors in financial statements spanning two years. Will review all contracts
 
April Joseph Corbett named CFO
 
April -- SEC announces informal review of internal controls
 
April -- Borrows $200 million due April 2009
 
May – Joseph Corbett resigns
 
September -- SEC begins formal inquiry
 
 
2006
February – files results for 2004. Acknowledges material weaknesses.
 
September NY Court says BearingPoint has defaulted on $200 million of bonds. You will challenge
 
November – files 2005 statements. Agrees to higher interest rate. Bondholders drop suit
 
 
2007
June -- PwC resigns as auditor. No disagreements reported. Replaced by E&Y
 
October – files timely
 
December -- Harry You resigns as CEO. Ed Harbach succeeds
 
 
2008
November Kenneth Hiltz appointed CFO, the tenth in nine year
2009
February - files for Chapter 11
 

Turnover, the cost of cleanup, and internal controls

 
As it turned out, executive turnover was just beginning. Harry You, formerly chief financial officer at Oracle, was hired as CEO in March of 2005. You would immediately remove nine of the top twenty executives and fifteen in all during his tenure. Turnover of employees reached a very high level.
 
In April of 2005, BearingPoint confirmed that its financial reports for fiscal 2003 and the first three quarters of 2004 should not be relied upon by investors, The company was able to raise $200 million in a debt offering, but the bad news kept coming. The SEC announced in September that it was initiating a formal inquiry into the company’s controls and in October BearingPoint was forced to postpone its 2004 filing for the second time.
 
When BearingPoint finally did file for 2004, in February 2006, You said that most of the firm’s financial and legal problems could be traced to a former management team inherited from KPMG LLP that "didn't know what they were doing. . . . The previous management had not worked before in a public company, and they didn't know the rules, and frankly they were not competent in many areas," the Washington Post reported. Shares of the company rose to $8.89 on the news.
 
The cleanup project cost the firm more than $100 million, and the company had acknowledged a very long list of accounting control problems.
 
Looming debt: ongoing operations
 
The company continued to have difficulty filing timely.  Bondholders sued BearingPoint for defaulting on $200 million worth of loans after failing to file its 2005 annual report. In November 2006, BearingPoint reached an agreement with the bondholders to raise interest rates on the loans in exchange for dropping the lawsuit.
 
The New York Stock Exchange (NYSE) had given the company three months to file its 2005 annual report before moving forward with delisting. You said last week's filing "puts the past behind us, and we are now moving full speed ahead at completing our 2005 Form 10-Qs and 2006 filings."
 
But the company would continue to have difficulty filing timely and struggled to generate sufficient profits. According to its (four months’ late filing) filing for the first quarter of 2007, bookings of new business were $709.5 million in the first three months of 2007, down from $804.6 million in the first quarter of 2006, in part because of a problem affecting all government contractors: Congress, now controlled by the Democrats, was at odds with President Bush and had not appropriated funds.  
 
A sampling of government contracts awarded in 2007 include a five-year, $50 million contract from the Missouri Department of Revenue to design, implement, and maintain a motor vehicle system, and a $57.9 million contract from the Navy to operate a global information technology network for the Naval Network Warfare Command.  BearingPoint, which had been in Afghanistan since 2002, would continue its work there, winning a five-year, $218.6 million contract from the Agency for International Development.
 
You remained with BearingPoint until December 2007 when he was replaced by Ed Harbach, who had been president and COO. 
 
By the time first quarter losses were reported in May 2008, BearingPoint’s stock price was $1.95. Efforts to sell parts of the company failed, customers were slow in paying, the Post reported, and the company’s the cash reserves declined rapidly. The New York Stock Exchange notified BearingPoint in October that it was not meeting the minimum market capitalization of $100 million. Shares of the company closed at 19 cents. When the NYSE suspending trading in November 2008, BearingPoint stock was worth only a few pennies. 
 
BearingPoint filed for Chapter 11 on February 18. 2009. The decision was made to liquidate rather than restructure.
 
In May 2009, Deloitte & Touche, the only firm of the Big 4 that had not been directly involved with the company as auditor or through lawsuits, purchased BearingPoint’s successful government business for $350 million. The former BearingPoint unit registered about $217 million in federal contracts after the February bankruptcy filing. Deloitte has booked $210 million since the acquisition, according to a spokesman, the Washington Post reports.
 
"They were a very solid company, and from what I can tell have been pretty fully absorbed into Deloitte. A lot of their senior people are still there," said Stan Z. Soloway, president of the Professional Services Council, a trade group for government contractors. They are expected to win more federal contracts in a time of government expansion.
 

Other buyers lined up for the remaining businesses of what had been a well respected professional firm, according to the Washington Post:

May 11: BearingPoint completed the sale of its Japan practice to PricewaterhouseCoopers Japan.
June 15: BearingPoint sold a "significant portion" of its North American commercial services business to PricewaterhouseCoopers for about $44 million.
July 10: Falls Church-based computer services giant CSC said it had reached an agreement to acquire BearingPoint's Brazilian operation.
July 13: Keane, a computer services firm, announced that it had completed its purchase of portions of BearingPoint's state and local government business.
July 17: BearingPoint agreed to sell its practices in Europe, the Middle East and Africa to its European management company for about $69 million.

 

You may like these other stories...

Here's a CPA who truly walks the walk. On March 15, Frank Ryan, CPA, departed San Diego, California, with plans to be in Ocean City, Maryland, by July 2 to teach a course at the Maryland Association of CPAs’ (MACPA...
When Theodore J. Flynn first joined the Massachusetts Society of CPAs (MSCPA) in 1970, it was a different world and a different profession.  The "Big Eight" were still headquartered in Boston. Vietnam War...
Accountant Rickey Charles Goodrich had it a little too good. Many bean counters would kill to serve as financial guru to the likes of Pearl Jam. Goodrich was hired in 2005, and the following year, he became the CFO of Curtis...

Already a member? log in here.

Upcoming CPE Webinars

Oct 23Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.
Oct 30Many Excel users have a love-hate relationship with workbook links.
Nov 5Join CPA thought leader and peer reviewer Rob Cameron and learn ways to improve the outcome of your peer reviews while maximizing the value of your engagement workflow.
Nov 12This webcast presents basic principles of revenue recognition, including new ASU 2014-09 for the contract method. Also, CPAs in industries who want a refresher on revenue accounting standards will benefit.