kpmg
DESCRIPTION
TRANSCRIPT
Warrick Cleine, Partner
December 2002
T h e C o m b i n a t i o n o f K P M G a n d An d e r s e n i n
V i e t n a m
kpmg©2002 KPMG Limited, the Vietnam member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
Outline
Introductions
The Audit Industry
What happened to Andersen
Andersen and KPMG in Vietnam
“Project 17”
Introductions – Who Am I?
Partner in KPMG since August 2001
Employee of KPMG since March 1995
Resident in Vietnam since March 1998
Graduate in Commerce (Taxation Law and Accountancy) from the University of Canterbury in February 1992 (B.Com.)
Admitted to Membership of the New Zealand Institute of Chartered Accountants in October 1992 (C.A.)
Registered Auditor, Ministry of Finance, Vietnam, November 1998 (C.P.A.)
Introductions – Who Are We?
KPMG was formed in 1987, and was the culmination of centuries of mergers and acquisitions, commencing from the founding firms:
K stands for Klynveld. Piet Klynveld founded an accounting firm in Amsterdam in 1917.
P is for Peat. William Barclay Peat founded an accounting firm in London in 1870.
M stands for Marwick. James Marwick founded an accounting firm in New York City in 1897.
G is for Goerdeler. Dr. Reinhard Goerdeler was for many years chairman of Deutsche Treuhand-Gesellschaft and later chairman of KPMG.
100,000 staff, 6,000 partners in 150 countries
Introductions – Who Are We?
KPMG Limited, Vietnam
Advisory firm
Audit, Tax & Corporate Services, Advisory
Licensed as a 100% Foreign Invested Enterprise in 1996
Offices in Hanoi, Ho Chi Minh City and Hai Phong, with associated offices in Bangkok, Vientiane, Phnom Penh and Rangoon forming the Thailand/Indochina Business Unit
240 employees and 3 partners in Vietnam and another 1,400 in the Business Unit
Introductions – Why are we here?
Because we were generously invited to tell our story
Because contribution and participation in our community is part of our business philosophy
Because we did something interesting in 2002
Because we think you will benefit from knowing about it
Because we like talking to strangers!
Introductions – What did we do?
“Combined” with Andersen Vietnam Ltd
Achieved the benefits of a “merger” without merging
Changed the shape of our firm in Vietnam
Changed our place in the industry
Secured our futures
Learnt a lot
Introductions – What did we do?
Tried to answer the ultimate M&A question …
“2 + 2 = ?”
The Audit Industry
Also called the “Assurance” industry
Term is a misnomer – the major firms provide a range of professional services using the skills and relationships they possess:
Tax & Legal Consulting
Business Advisory
Information Technology Consulting
Financial Advisory Services
The Audit Industry
What is “Auditing”
An independent review of financial and other information
Reporting to stakeholders (e.g. shareholders, creditors, governments, donors, employees)
Reporting to management
Statutory reporting and non-statutory reporting
Generally focused on “truth and fairness” of information, but special audits may at other matters (e.g. forensic audits, etc)
The Audit Industry
In common with other professions, Audit/Public Accountancy is considered to have a “public good” element. An effective audit industry is essential to:
The operation of efficient and honest capital markets
The protection of the investing public, private and institutional investors who rely on management information (the “Agency Concept” of management and corporate governance)
The management of the State (e.g. by collection of tax revenues, compilation of statistics necessary for public policy decisions, etc)
The industry is therefore subject to both State and self regulation
The Audit Industry
Global industry now said to be dominated by the “Big 4” audit firms
Formerly also included Andersen Worldwide (ex Arthur Andersen) to make up the “Big 5”, and before that the “Big 6”
Two major issues facing the industry today: competition and independence, both stemming from the collapse of Andersen
The Audit Industry
Various arguments mitigating the assertion that there is a lack of competition in the industry:
Global multinationals still have multiple options
National or local firms are significant in each country
Broadening of service lines also broadens competition
Investment Banks and Securities Firms
Law Firms
Strategic Consulting Firms
Nevertheless, the removal of Andersen has heightened global concerns
The Audit Industry
Various arguments against the assertion that audit firms have failed to remain independent of their audit clients to the detriment of the community:
Professionalism and an ethical approach can overcome “independence” concerns
Technical knowledge and skills are enhanced by the ability to offer a broad range of services to an audit client
No or limited evidence that problems maintaining independence spread beyond Andersen
Notwithstanding these observations, regulators and companies have moved to enforce auditor independence rules
What Happened to Andersen?
Andersen Worldwide was one of the World’s largest accounting and consulting firms
At the time of its collapse, it had around 85,000 employees and US$9 billion in revenue
Reputed to have the strongest “corporate” culture out of the “Big 5”
Centrally controlled with a reputation for homogeneous service worldwide and a strong brand identity
Employees had a reputation for “excellence, tinged with arrogance”
What Happened to Andersen?
Oct. 22, 2001 -- Enron Corp., one of Andersen's biggest clients, discloses SEC inquiry into possible conflict of interest related to company's dealings with partnerships.
Nov. 8 -- Enron revises financial statements for previous five years to account for $586 million in losses.
Dec. 2 -- Enron files for Chapter 11 bankruptcy protection.
Dec. 13 -- CEO Joseph Berardino of Andersen Worldwide, which includes U.S. arm Arthur Andersen LLP, defends Andersen's work for the company to Congress but acknowledges that financial accounting practices must change.
What Happened to Andersen?
Jan. 10, 2002 -- Andersen discloses in Washington that its employees destroyed "significant" number of Enron-related documents.
Jan. 15 -- Andersen fires chief Enron auditor David Duncan.
Jan. 17 -- Enron fires Andersen as auditor.
Jan. 28 -- Berardino insists the firm can survive without a merger and isn't pursuing one.
Feb. 4 -- Andersen hires former Federal Reserve chairman Paul Volcker to chair an independent oversight board with power to make reforms at Andersen.
What Happened to Andersen?
March 14 -- Government announces indictment of Andersen by federal grand jury for alleged obstruction of justice for destroying Enron documents.
March 22 -- Volcker urges Andersen's top management to step aside so he can install and head an independent board to try to save company.
March 26 -- Berardino resigns amid exodus of clients, overseas partners.
April 2 -- Andersen concedes defeat in effort to merge its non-U.S. operations with those of KPMG after its lucrative Spanish affiliate becomes the latest to bolt to another rival.
What Happened to Andersen?
April 4 -- Andersen initiates breakup of its U.S. operations
April 8 -- Andersen announces 7,000 layoffs planned over next several months, more than a quarter of U.S. work force.
April 9 -- Duncan pleads guilty to an obstruction charge for shredding documents, agrees to cooperate with prosecutors.
April 26 -- The Justice Department rejects a last ditch effort by Andersen to settle obstruction case.
May 7 -- Opening statements begin in Andersen's obstruction of justice trial.
What Happened to Andersen?
May 8 -- Andersen announces that rival Deloitte & Touche would hire away about 2,000 of its workers. KPMG Consulting Inc. says it plans to acquire as many as 23 business consulting units of Andersen Worldwide's member firms for up to $284 million.
May 13 -- Duncan begins nearly five days of testimony.
June 5 -- The jury is handed the case; deliberations begin the next day.
June 12 -- The jury says it's deadlocked. But the judge tells them to resume their discussions the next day.
June 15 -- Jury finds Arthur Andersen guilty.
What Happened to Andersen?
In addition to Enron, other Andersen clients such as Worldcom, HIH Insurance and Vivendi were in trouble for accounting practices that had been signed off by the firm
Over the following months, Andersen Worldwide member firms in many countries announced combinations with other “Big 5” firms
Andersen was banned from auditing in a number of states in the US
The “Andersen” name disappeared from the world auditing and consulting scene during the second and third quarters of 2002
Audit Industry in Vietnam
Regulated by the Ministry of Finance
Segregated market – foreign and local audit companies
Very competitive market, widely divergent participants
Size
Quality
Client base
Price
Audit Industry in Vietnam
100Andersen Vietnam50Hanoi Co
19VAE JSC28BHP
11Kien Hung 15Thuy Chung
20VAA100HAACO
15Saigon Audit106PwC-AISC
40Hong Duc28AAC
15AnViet159A & C
12DTL Auditing203AFC Saigon
20Pioneer Management177KPMG
30Asia International132PricewaterhouseCoopers
15Polaris Auditing Co95AISC
15HP Audit167Ernst & Young
16AS Audit17SCCT
10Loan Le250AASC
57GT304VACO
Staff NoAudit firmStaff NoAudit firm
Source: Ministry of Finance, as at 30 April 2002
Andersen in Vietnam
100% FIE
Smallest of the “Big 4” audit firms operating in Vietnam
100 employees (80 in HCMC, 20 in Hanoi) and one Partner
Three divisions (Assurance, Tax & Corporate Services, Business Consulting)
Owned and funded by Andersen in the US
Andersen in Vietnam
By the end of the first quarter of 2002, Andersen Vietnam realised that it did not have an independent future
No more funding
Too small to have strategic importance to the Andersen network
Needed to face domestic and international obligations
Decided to seek a combination partner from one of the other “Big 4” firms with investments in Vietnam (KPMG, Ernst & Young, PricewaterhouseCoopers) or Deloitte (indirectly represented in Vietnam via their relationship with the SOE, VACO)
Andersen in Vietnam
Various options considered, with key considerations for management being:
Future opportunities for Andersen peopleStaff retentionAllocation of management positionsFuture profitability/success of combined businessClient retentionDecisions of other Andersen offices
Forced to move quickly to achieve objectives and maximise advantages
Pressure of bankruptcy also influenced management decisions
KPMG in Vietnam
No “crisis” imperative – doing nothing was an option
Assessed opportunity to combine in terms of alternatives:
Organic growth: targeting clients and staff of Andersen
Alternative acquisition: convincing another firm to change
Assessed inherent risks and ability to manage those risks:
Financial risk
Reputational risk
KPMG in Vietnam
Comfortable at Number 2 or 3 in the market, but global policy was to be Number 1 or 2 – needed to grow to meet this objective and achieve “critical mass”
Commenced negotiations with Andersen management
Looked for “synergies” and ways to minimise financial and reputational risks
Began building support within broader KPMG network for a risky transaction with medium/long term benefits
Project 17
Negotiations commenced in March 2002
Major challenge – other Andersen offices defecting to competitor firms
PwC in China, Deloitte in Taiwan/Korea, EY in Singapore, etc
Recognised early that delay could be fatal – needed to move quickly
Andersen to meet objectives of staff security
KPMG to forestall competitors and preserve client opportunities
Andersen Worldwide was now in “meltdown” losing clients and staff
Project 17
Concluded a Memorandum of Understanding in May 2002
Transaction dates set for 17 June 2002
Established “Project 17” teams to implement the combination
Members from both firms to utilise skills and knowledge, and to maximise “buy in” from all sides
Legal, Premises, Public Relations, Information Technology, Marketing, Human Resources, Finance, Risk Management
Project 17
Most significant issue to resolve was financial exposure
Andersen Vietnam was a member of Andersen Worldwide, which had significant potential liabilities, and KPMG Vietnam is a member of KPMG International
Two potential legal exposures:
Vietnamese law: a merger involves the assumption of “rights and obligations” of the merging firms
United States law: a company “assuming the business” of another company may be liable to its liabilities
Project 17
Decided the two firms could not utilise the “merger” provisions of Vietnamese law – the risk was too great
Instead executed separate agreements:
Made offers to some former Andersen employees
Executed an Asset Sale and Purchase Agreement for fixed assets
Andersen Vietnam Ltd would go into liquidation pursuant to the Law on Foreign Investment
Potential liabilities were effectively isolated in the old entity
Project 17
Moved to reassure clients
Potential for backlash from KPMG clients because of reputation
Competitor activity for ex-Andersen clients
Also staff pressure because of uncertainty
Attacked these two issues on multiple fronts:
Active staff communication, involvement and socialising
Aggressive branding campaign – seminars, HTV documentary, advertising – to relaunch KPMG brand and firm in Vietnam
Project 17 – Did we succeed?
Client retention
In line with expectations, but pressure remains
Significant competitor activity
Market image and perception
Clear recognition as one of the two largest firms
Excellent media coverage and profile so far
Good client response
Project 17 – Did we succeed?
Asserting our new role in Vietnam
Bigger firm = different market image
“Global Ideas, Local Understanding”
The new “Big 3” market in Vietnam
Successfully distanced KPMG from negative perceptions
Adapt to regulatory and client restrictions on work post Enron
Project 17 – Did we succeed?
“2 + 2 = ?”
Discussion Discussion