Services Safari

KPMG Out $80 Million

                             Xerox and KPMG Settle

KPMG LLP, a co-defendant with Xerox and certain executives,  agreed to pay $80 million (USD) to litigants of a class action suit. This is an old case that dates back to 2000 but is just now being settled. To read more on this, see:

http://www.webcpa.com/article.cfm?articleid=27255 for a quick recap on the story

http://securities.stanford.edu/news-archive/2005/20050815_Dismissal100819_Writer.html for a quick summation of a 2005 order involving this case. It's worthwhile as it describes the original complaint in some detail

http://www.gilardi.com/pdf/xerx1preord.pdf for the court document

http://www.businesswire.com/portal/site/home/email/headlines/?ndmViewId=news_view&newsLang=en&div=-436697347&newsId=20080425005003  for press release about the settlement

http://www.gilardi.com/xeroxsettlement/ for the settlement firm page

Fascinating Comments on Public Accounting and KPMG

                      Lots of Feedback re: New Century/KPMG Report

If you didn't see this NY Times column, please check the extensive comments posted at: http://norris.blogs.nytimes.com/2008/03/26/when-auditors-cave/?hp  regarding the New Century audit by KPMG. Apparently, a lot of Times readers posited their thoughts about this situation. A very interesting read.

Would You Want Your Client Work on the Internet?

                150,000 Pages of McKinsey Documents Online

Allstate this weekend made approximately 150,000 pages of project documents that McKinsey & Co. helped produce for them in the late 1990s. McKinsey was apparently hired to help them review their claims processes and reduce total claims expenses. You can view these documents at: http://media.allstate.com/categories/53/releases/4391

Allstate faced criticism for using these new claims practices and litigators have tried to force public disclosure of these documents for the last several years. Allstate, correctly, resisted these efforts as the intellectual property within them was partly or wholly owned by McKinsey. In other words, Allstate may not have had the right to disclose them.

Be forewarned, 150,000 pages of PowerPoint slides is a lot to review. Certainly, I like to look over the work of consultants to see new ideas, new approaches, etc. but 150,000 pages is clearly overkill. Years ago, I met a Big 8 partner who billed based on how thick the executive presentation was. Back then, he thought $100,000 per inch was appropriate. The mind boggles to think of what McKinsey billed Allstate for this. Moreover, I've never seen a project that produced 150,000 pages of original content.

This event creates a new precedent in professional services. The bigger issues for service providers in this are:

• Are your working papers, proposals, reports, etc. really yours?
• Would you let your work products be posted by a client on the Internet?
• Could you prevent public disclosure of these products online by a client? Could you keep these products from becoming legal documents in litigation? Can they be kept from public records or court filings?
• Would competitors benefit from seeing your work products?
• Can your firm charge a client more (substantially more?) if they disclose these products publicly?
• Are all of your documents trademarked, copyrighted or otherwise protected?
• Do you need to separate your work products into distinct groupings so that only the least differentiating documents could be released publicly?

Ideas are the currency of consultants (well, maybe the perfect currency is airline miles but I digress). When others take advantage of your ideas, they devalue your intellectual assets. If competitors steal your ideas, it's theft. If you let them gain access to these ideas willingly, it's stupidity.

Your ideas and intellectual property should remain yours. Protect them.

Good News for Smart Students - Caution to Employers

                          The Offshore Workforce - Latest News

Wachovia Capital Markets, LLC, produces a greatly weekly report on the service sector titled: "Wachovia's Weekly IT/BPO Service Monitor". Last Friday's report had this nugget on page 4:

"US Senators Durbin (D) and Grassley (R) sent letters on April 1st to the top 25 recipients of approved H-1B visa petitions in 2007 requesting detailed information on their use of visas (up to five years). The letters were sent to determine if the visas are being used for their intended purpose - to fill a worker shortage for a temporary time period. The 25 firms accounted for almost 20,000 of the 65,000 annual H-1B visas available. The timing of the letters coincides with the deadline for filing H-1B visa applications for the federal government’s FY09 (Sept.).

The letter was sent to the following companies: Infosys Technologies Ltd., Wipro Limited, Satyam Computer Services Ltd., Cognizant Tech Solutions, Microsoft Corporation, Tata Consultancy Services Ltd., Patni Computer Systems Inc., US Technology Resources LLC, I-Flex Solutions Inc., Intel Corporation, Accenture LLP, Cisco Systems Inc., Ernst & Young LLP, Larsen & Toubro Infotech Ltd., Deloitte & Touche LLP, Google Inc., Mphasis Corporation, University of Illinois at Chicago, American Unit Inc., Jsmn International Inc., Objectwin Technology Inc., Deloitte Consulting, Prince Georges County Public Schools, JPMorgan Chase and Co., and Motorola Inc."

When politicians send out information gathering letters, you can bet there's a tacit and a sub rosa context behind these. The tacit purpose behind these letters may be to identify how the H-1B program is working in practice. The unmentioned purpose may be to collect information that points to either a need for change, a call for reform or a means to whip public frenzy into a firestorm to the political advantage of someone other than the letter recipient. I would caution those receiving these letters to word their responses carefully and tread cautiously. Also, these firms should realize that if even one careless firm admits to a politically explosive practice, even a naive or innocent one, they could effectively tar the reputations of other firms also responding to this letter. Again, I'd be very careful with this one.

On a different note, the Department of Homeland Security has changed the rules for the number of months (now 17) a person with a student visa (F-1) and scarce skills can remain in the US while seeking employment. Please see this DHS announcement for full details: http://www.dhs.gov/xnews/releases/pr_1207334008610.shtm

Why Auditing Should Be Continuous...

                        Lehman Gets Burned for $400 Million

Here's more evidence that:

• crooks can best most controls companies put in place to catch fraud
• Wall Street's woes aren't over
• Auditing needs to be more automated and continuous

In an article in the New York Post (see: http://www.nypost.com/seven/03302008/business/400m_con_job_104125.htm), the Wall Street firm Lehman Bros. got taken in to the tune of $400 million. Did auditors catch it? No. Did SarbOx controls do their job? No. Hmmmmmm

Who to Blame for Skills Shortages

          Are CIOs the Makers of the Tech Skills Shortages They Bemoan?

Check out Allan Alter's piece in CIOInsight (http://www.cioinsight.com/c/a/Opinion/Blame-CIOs-for-the-IT-Skills-Shortage/). Alter lays a goodly portion of the blame squarely at the feet of CIOS. This is an interesting read and one educators, recruiters and others should read.

Call to Action: Need for Accounting Industry Reform

                          KPMG and the New Century Case

The Accounting Industry has an image problem and it's getting worse everyday. Let's recap just some of the issues facing an industry that changes with the speed of the tectonic plates:

• The industry failed in several colossal audits prior to and including the Enron situation. Audits at Waste Management, Sunbeam and others were frequented identified.
• Sarbanes-Oxley legislation was intended to prevent future problems but it clearly hasn't.
• Additional business failures/accounting problems continue to arise.
• SPEs (special purpose entities) are still beyond the grasp of the accounting industry.
• Investors are still getting surprised and losing money.

Today, let's look at New Century and KPMG. In a story titled: "Official: Lender's action set off 'bomb'" (source: Associated Press, March 27, 2008), the AP reported the conclusions of a court examiner looking into the 2005 and 2006 books of New Century. The article offers these disturbing comments:

"Bankrupt mortgage lender New Century Financial Corp. used improper accounting practices while making risky loans...engaged in at least seven improper accounting practices...lender failed to take appropriate steps to manage rising risks caused by the company's aggressive approach to originating loans, often to borrowers who couldn't afford them...KPMG LLC enabled some of the improper practices to continue"

The article reported that KPMG disagreed with the report's conclusions. To read the piece on the Chicago Tribune's site, click here: http://www.chicagotribune.com/business/chi-thu_kpmgmar27,0,1287820.story

What are we seeing in the Accounting Industry today?

1) Do accountants innovate as fast as the best and brightest in Wall Street do? NO WAY. The truly clever people in business finance and accounting are moving at a rate far in excess of that guiding the accounting industry. Clever people are the perennial nemesis of auditors and that's why auditors must do more than slowly evolve, they must outflank, out-innovate and anticipate the next tricks of those who wish to obfuscate, deceive or cheat.

2) Do universities teach the most relevant, timely skills that future accountants and auditors need? I'm checking with some authorities on that issue right now and will report on that later in the week. My working hypothesis is that these institutions are focused on teaching the logic behind accounting but not how it must be applied in today's real world.

3) Do auditors believe they fulfill a role in protecting the public interest? This one's tough. Auditor's evaluate the methods used to prepare and report financial results. They may discover fraud but they would argue that fraud detection is an ancillary, not primary, benefit of their work. Traditionally, auditors look at prior economic events, ensure they are recorded correctly and publish the results. They are not the bookkeeping police. Their job is not to protect and defend ( a nod to the folks in blue) but to report. While that's been the case, it may need to evolve must as police have had to become savvy about combating terrorism and other new threats.

4) Should any auditor accept work with companies that use SPEs? My short answer is no unless the SPE accounts for an immaterial portion of total revenues/costs. The accounting profession lacks real standards for reporting the true risk and exposure behind SPEs. When I read a recent Bear Stern's annual report, the number of SPEs and the amounts of monies associated with each made it impossible for me (and the average investor) to assess the true degree of risk associated with Bear Stearns stock. Worse, the lack of commentary regarding the insurance behind the sub-prime instruments acted as an additional layer of obscurity for investors. Without new accounting reports that provide new levels of transparency into these dealings, the auditor statement on these annual reports is worthless in my opinion.

5) Should Sarbanes-Oxley be repealed? Absolutely. This legislation was intended to inspire shareholder confidence but the documentation of processes didn't produce better accounting results. It did produce obscene profits for Accounting firms. It is unconscionable to allow these firms to continue to profit from legislation that does not help the public good.

6) How innovative should accounting become? Much More! There's so much technology today that operates inside the firewall,in the wide-open Internet and in external databases. New solutions could be built that bring numerous outside data and perspectives to bear. New solutions could offer always-on audit and risk assessment capabilities. Early users of accounting services were grateful for the innovations of Luca Pacioli but could the same be said today? Innovation must occur or the industry will further lapse into irrelevance.

7) Do accountants offer a service, a solution or are part of a profession? This one's a loaded question. Today, I'd say they are service providers that provide a narrowly defined, mostly irrelevant and low-value solution. I would not classify it as a profession anymore. Professionals put public interests first. Professionals have a code of conduct that makes them divorce themselves of unethical clients or illegal or unethical practices. They do not compromise on materials of professional integrity. I cannot see how an auditor can sign off on financial statements when the presence of SPEs makes it impossible to assess the true business and financial risks a client really faces.   

This is an industry in trouble. It needs strong leadership, innovation and change. Will it happen in time?

Destination Wedding? No - Destination Surgery!

                      Surgery - the Emerging Outsourcing Frontier

Next time you need that gall bladder surgery, coronary bypass or other health procedure, your insurer may ply you with financial incentives to get you to have the operation outside of the United States. For example, a heart bypass costs between $10,000 - 18,500 if you have it in India, Thailand or Singapore. Stateside, it will set you back $130,000.

As employers re-negotiate health care benefits packages, some may insist on medical travel unless you want to pay some steeper deductibles or plan costs. In this situation, outsourcing is triggering the work (i.e., the patients) to come to the offshore firm.

This trend may take some time to gain material uptake in the marketplace. Employers with unionized work forces are already spooked about offshore job losses and they will fight these moves. The fact that U.S. patients might lose the right to sue for medical malpractice when using certain overseas physicians or facilities could be another deal breaker.

That said, quality of care in the few facilities offering this is rated well for now and this will need to be closely monitored and adhered to if these sorts of programs are to take off.

Will we see either Hillary Clinton, Barack Obama or John McCain recommend this during their election campaigning? Doubtful.

For more info, see: The Economist, March 24, 2008, "Outsourcing the Patients".

EDS - Overtime Dispute

                                Money Will Settle This

Last month, six former/current EDS employees filed a class-action lawsuit seeking overtime pay (see: http://www.examiner.com/a-1224633~EDS_technical_service_workers_sue_for_overtime_pay.html ). This type of suit occurs frequently and hinges on whether or not specific workers were correctly or incorrectly identified as 'exempt' under Fair Labor Standards Act (FSLA) regulations.

Not surprisingly, specialized websites have sprung up to identify other potential claimants/plaintiffs (see: http://www.edsovertime.com/ ). CRN, Computer Reseller News, has also covered this story.

FSLA suits are usually solved with money. Some goes to the litigants and some goes to lawyers. If found in violation of FSLA regulations, the offending employer makes adjustments to their payroll system going forward, recalculates owed back pay and makes restitution.

Is this a BIG story? Probably not. It's interesting and very solvable. It's only scandalous if long-term patterns of deceit/fraud are uncovered. If it's a legitimate difference of opinion in interpreting regulations, fraud is much harder to prove. Without fraud, the fines will likely be scant. 

M&A in the Services Sector

           Government Sector Deal Volume - Whole Lotta Dealin' Going On

Check out these two links:

http://www.washingtontechnology.com/print/23_03/32312-1.html

http://www.washingtontechnology.com/mergers_acquisitions/2007/

The first is a good article discussing the consolidation occurring in the government systems integration sector. The second is a list of deals that transpired in 2007. It's a good list and one that helps put the services M&A activity in perspective.

There's something structural occurring in this space and it appears that consolidation is being undertaken to:

• create additional scale
• create marketing and operational synergies
• broaden expertise in more service areas

There's something else happening, too. Government services contractors are now becoming more distinct from their private sector counterparts. In fact, it's getting rarer to find firms that successfully sell and service both spaces or serve both spaces well. Why? Well, the selling effort has always been different between public and private sectors. But now, service firms need distinct and focused offerings just for governmental entities (think of Homeland Security - It has very unique needs, needs a lot of help and it didn't even exist a few years ago). Moreover, given the high development costs of some offerings, government service providers are realizing that they must have scale to keep costs at their lowest possible levels so as to continue to extend their win rate.