BearingPoint CEO Blames Former Management
By Ellen McCarthy, Staff Writer
Thursday, February 2, 2006
Harry L. You, the new chief executive of BearingPoint Inc.,
said yesterday that most of the financial and legal problems
now plaguing the McLean consulting firm can be traced to a
former management team inherited from KPMG LLP that "didn't
know what they were doing."
A voluminous report filed with the Securities and Exchange
Commission on Tuesday night and subsequent interviews with
the company's new executives paint a picture of a firm
riddled with inept managers, a lax ethical environment --
and a serious hangover from the deal that separated it from
KPMG in 2000.
BearingPoint Inc. has faced lawsuits and government
investigations, some stemming from its days as part of KPMG
LLP. They include:
Peregrine Systems Inc. -- BearingPoint has
been subpoenaed by the Securities and Exchange Commission
and named in civil lawsuits in connection with allegations
that, while part of KPMG, it was involved in helping the
California software company inflate its stock price.
Government Contracting -- The company was
served with what it called an "extraordinarily broad"
subpoena in December 2004 over 12 government contracts.
BearingPoint said the investigation involves its billing
practices and commission payments, but it is not certain
whether any suspected violations are civil or criminal.
Securities and Exchange Commission -- The
company disclosed last year that the SEC had opened an
investigation of its accounting practices.
Travel Rebates -- Another holdover from KPMG:
BearingPoint recently agreed to pay the U.S. government
$15.5 million to settle allegations that it overbilled for
travel expenses on government contracts.
Core Financial Logistics System -- The
company has been subpoenaed twice in connection with an
inspector general's investigation into problems with a
computer management system BearingPoint helped create for a
Department of Veterans Affairs center in Florida.
"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," You said in an interview
yesterday. Along with accounting problems, the spinoff left
the company saddled with two lawsuits that will cost it more
than $50 million in settlements and about $36 million that
KPMG is trying to collect from BearingPoint for leases and
According to analysts, the company also owes $10 million to
Microsoft for failing to meet sales quotas under an
agreement crafted by KPMG in 1997.
Most of the leadership brought to BearingPoint after it was
spun off has since been swept away, including former chief
executive Randolph C. Blazer. Although Blazer's sudden
departure in November 2004 had previously been characterized
as a resignation, You in a conference call with analysts
Tuesday said he had been "asked to leave."
Blazer yesterday did not return calls seeking comment.
The disclosures come as BearingPoint attempts to fix its
financial problems, reporting its long-overdue results for
2004 and correcting erroneous statements for the previous
three years -- a project that cost the firm more than $100
Analysts said this week's filing represents an important
milestone in the new management team's attempt to turn the
company around. Shares of BearingPoint, which went public
in 2001, rose 67 cents yesterday, or about 8 percent, to
close at $8.89.
But there was also a sense that the extent of the company's
restatement was greater than expected, wiping out more than
$97.8 million in profit between 2002 and 2004.
The nearly 2,000-page filing was "quite messy," analysts
from investment firm Stifel, Nicolaus & Co. wrote in a
research report. While some of the firm's outstanding
issues were settled, others emerged, and investors "may
wonder when these will all finally be put to bed," analysts
Many of the company's problems, according to the filing,
resulted from a weak system of accounting controls. In
BearingPoint's Australia subsidiary, for instance, a senior
employee was able to falsely record as "current" bills for
work that were never sent to clients, thus exaggerating the
employee's total billings, the company reported.
In China, some BearingPoint employees, who were compensated
based on the number of hours they reported working, inflated
their "utilization rates" to get more money from the
company. Though You said the misconduct was limited to
"several handfuls" of employees, the company's audit
committee found it was indicative of a "tone at the top"
that encouraged employees to bypass routine accounting
Tuesday's SEC filing also said the company may be exposed to
liability under the Foreign Corrupt Practices Act because of
payments a subcontractor may have made to officials at
state-owned organizations in China. You said yesterday that
the firm's employees gave gifts such as pens and fruit
baskets to employees of state-run companies, a practice that
didn't violate anti-bribery laws but has since been barred
to avoid the appearance of impropriety.
Many of the company's financial errors resulted from the
implementation of a new computerized accounting program --
something made more embarrassing by the fact that the
company promotes itself as an expert in financial systems.
Tuesday's filing said the previous management team put the
new OneGlobe system in place prematurely and did not
adequately train employees to use it.
Eventually, BearingPoint concluded that it had to review
billing and other data for all of its more than 6,000 U.S.
"What the [filing] makes clear is how bad the management
team was before," said Adam B. Frisch, an analyst with UBS
In the 11 months since You joined the company, he has
replaced 15 of its top 20 executives, bringing in a new
chief accounting officer, marketing director and vice
president of Asia-Pacific operations.
Not all of the former executives have gone quietly.
BearingPoint's former chief operating officer, Michael J.
Donahue, filed suit against the company and alleges that his
termination agreement was violated. David W. Black, the
firm's longtime general counsel, is in dispute with
BearingPoint over a $2.56 million payment he received in
anticipation of his termination. You said Black was fired
for violating the company's code of conduct.
Black could not be reached. Donahue did not return calls