KPMG at Center of Siemens Storm

The Siemens bribery scandal is bigger than KPMG or any of the firms, but since this is a blog about the Big 4, I’ll try to put their current status in perspective.

Recent news has highlighted that the former CFO of Siemens, Heinz-Joachim Neubürger who stepped down from Siemens sometime between March and May (accounts differ), is now named as a suspect in the scandal.

By Richard Milne in Frankfurt for the Financial Times
Published: January 11 2007 20:07
“The investigation into the €420m bribery scandal at Siemens reached the highest level yet on Thursday as the company’s former chief financial officer was named as a suspect. The investigation of Heinz-Joachim Neubürger, who stepped down in April after being passed over as chief executive of Europe’s largest engineering group, came as the current head of Siemens, Klaus Kleinfeld, warned that the probe threatened the company’s survival.”

I wrote a blog entry a couple of weeks ago about the recent phenomenon of companies being less circumspect when executives step down these days when that executive may be a source of trouble for the firm in the future. Companies are also being more blunt about their service providers, as Vitesse was about firing KPMG after they decided to sue them. However, in this case, if Siemens knew that Neubürger may be a suspect, they were still allowing the genteel European ways to prevail in their press releases and comments to the press.

Surprise as Siemens CFO quits
By Patrick Jenkins in Frankfurt, sitePublished: Mar 22, 2006
“The respected finance chief of German engineering heavyweight Siemens resigned unexpectedly on Wednesday, depriving the group of a key guiding force behind its huge conglomerate structure. Heinz-Joachim Neubürger, 53, had more than a year to run on his contract but said on Wednesday he was going early “for personal reasons”. People close to him said that after eight years in the job, and two years after a split from his wife, he wanted to rebuild his personal life.
Ben Uglow, analyst at Morgan Stanley in London, said: “It’s a big disappointment. He was one of the best CFOs in Europe. And he was a very senior figure at Siemens, far more so than other CFOs at other companies.” Mr Neubürger, a former investment banker with JPMorgan in Germany and Japan, had been widely seen as a likely successor to Heinrich von Pierer, who moved from chief executive to non-executive chairman in 2004….Mr Neubürger’s impressive reputation made him a leading favourite to succeed Josef Ackermann, chief executive of Deutsche Bank, who last year considered resigning over the controversial Mannesmann trial in which he stands accused of approving controversial bonuses.”
Notice the glowing terms being used to describe Mr Neubürger by the FT reporter (not the same as the one who reported his being named a suspect on Friday.) Also, ironically, they mention that Mr. Neubürger was potentially a candidate to bring clean living to Deutsche Bank. In retrospect, that would have caused the same giant choking sound we heard at Boeing when it was revealed that their new CEO, the married grandpa Harry Stonecipher, had sent inappropriate sexy emails on the company system to a female executive at Boeing. Harry was supposed to be the cleanup guy after the defense department scandals that had brought down their previous CEO and CFO.
Recent press releases and articles that demonstrate Siemens’ actions to address the bribery charges mention several different actions being taken, including hiring an outside law firm to conduct an “independent and comprehensive investigation of the compliance and control systems of Siemens.”
However, in this account, dated December 11, 2006, they state:
“In this connection, the Audit Committee of the Siemens Supervisory Board decided to retain the leading international law firm Debevoise & Plimpton LLP. …The Audit Committee has instructed the attorneys of Debevoise to conduct an independent and comprehensive investigation of the compliance and control system of Siemens, including the clarification of recent cases. KPMG, Siemens’ independent auditor, will support Debevoise in its efforts. Results of the investigation will be reported directly to the Audit Committee. In addition, Debevoise will commission an independent auditor to support the investigation of Siemens’ internal control systems and individual cases with forensic accounting experts. ”

Debevoise had not yet hired Deloitte, but they knew deep down that at some very early point, KPMG would probably have to become independent of the investigation. It would be very uncomfortable if it was found, for example, that Neubürger or others had not withheld information or lied to KPMG but that KPMG personnel could instead be construed as negligent or, at worst, complicit in the illegal activities. Déjà vu re: Vitesse all over again…

Debevoise and Deloitte to start their work at Siemens, from the Siemens website
Head of Audit Committee is fully supporting the investigations
Munich, Dec 22, 2006 (Only eleven days later…)
Debevoise & Plimpton LLP – the law firm retained by the Audit Committee of the Supervisory Board of Siemens AG in connection with current investigations by the Munich Department of Public Prosecution – has already begun their work. They will be assisted by forensic accountants from the international organization Deloitte Touche Tomahtsu. Both companies have committed large and experienced teams to this investigation. Dr. Gerhard Cromme, Chairman of the Siemens Audit Committee, …reiterated that the Audit Committee has mandated Debevoise as the independent counsel to conduct an independent and comprehensive investigation to determine whether anti-corruption regulations have been violated and to conduct an independent and comprehensive assessment of the compliance and control systems of Siemens. He further stated that the independent quality of this investigation is very important. Debevoise will report exclusively to the Audit Committee.”

PricewaterhouseCoopers (PwC) or Ernst &Young (E&Y) could have theoretically been chosen by Debevoise for the work given to Deloitte. However, PwC has extensive consulting engagements and business alliance relationships with Siemens, in particular in Europe, that probably made both sides consider them not independent and objective.
Ernst &Young may also have a conflict… But it may be just a case of the Deloitte Investigations partner having a close relationship with the Debevoise partner that got the business.

An interesting corporate governance blog writer uses the Siemens case as an example of bribery gone wild and predicts a deeper, wider scandal.

“Things have just got a lot worse for the German conglomerate Siemens which makes everything from cell phone components to light bulbs and trams. Rocked by investigations in Germany, Italy and Switzerland over money taken from corporate accounts and allegedly put into slush funds to pay bribes to help land telecommunications deals, the company is now being investigating for allegedly paying bribes to Saddam Hussein!…The significant part of this story is that the investigation is focusing on a string of Siemens divisions: Medical Solutions, Power Generation, and Power Transmission and Distribution. Until now, the probe had focused on bribery allegations in the communications division, Com. That suggests the problem of corruption might run quite deep in the conglomerate.”

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Trackbacks & Pingbacks

  1. […] 8. Big 4 firms should NEVER be asked to conduct internal investigations into alleged illegal activities for their audit clients. But companies continue to pull them into messy situations. A whistle-blower, allegations of illegalities or improprieties, concern about corruption in a business unit… An auditor may be part of the problem. That means embarrassing and costly lack of independence. (Read, “E&Y at Lehman” or “KPMG at Siemens”). […]

  2. […] I called this one more than a month ago! Glad to see the Wall Slow Journal is finally catching up…Would the WSJ have sat on the story so KPMG could enjoy, for a little while longer, the “oral pleasure” they received the week before? […]

  3. […] million. Did long time auditor, KPMG, help outside counsel Hogan and Hartson in its investigations, like they initially did in the Siemen’s bribery case? KPMG and Hogan and Hartson seem to have a good relationship with each […]

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