Swiss watchdog probes Adecco insider trading
BY HAIG SIMONIAN IN ZURICH
Switzerland's Federal Banking Commission on Monday confirmed it had opened an investigation into possible insider trading at Adecco, the world's biggest temporary employment group.
The EBK denied it had been stung into action by the US Securities and Exchange Commission and the US Attorney's Office in New York, which are conducting investigations, and said it had previously had no reason to take the initiative.
The EBK said it had acted after information from the SWX Swiss stock exchange, the self-regulating market for which it is ultimately responsible.
However, following the decision in 2001 to set up virt-x, the new London-based exchange for trading in Swiss blue chips, dealings at the Zurich-based SWX have been restricted to derivatives.
That means any investigation into alleged anomalies in Adecco shares is, strictly speaking, up to the UK's Financial Services Authority. The EBK on Monday said it had, as a matter of course, informed the FSA.
Separately, information emerged on Monday of internal conflicts that could have contributed to the procedural failures that emerged at Adecco in the past week.
The differences centred on frictions between Felix Weber, 53, who resigned last Friday as chief financial officer, and Jerome Caille, its 37-year-old chief executive.
"Frankly, Felix thought he should have become the boss, and didn't always hide that," said one analyst. "There was a certain level of animosity."
The tension between the two men may have been inevitable given their notably different personalities and backgrounds, said analysts who have closely watched the company in recent years.
Mr Weber joined Adecco from McKinsey, the consulting group, six years ago and quickly gained a reputation as a formidable strategist, as well as an adroit and energetic communicator.
Mr Caille, by contrast, had a background almost entirely in operations. A Frenchman, his meteoric career at Adecco began at the age of 23, when he ran a branch office in Barcelona.
Mr Caille's reputation rose after taking over Adecco's Italian arm in 1997, which he expanded into one of the group's most important European operations. He was also seen as the driving force behind the company's highly successful IT platform.
Differences between the two reached a head when Mr Weber was passed over for the job of chief executive following the appointment of John Bowmer, Adecco's driving force, as chairman. While Mr Caille and Mr Weber appeared collegial on the surface, the differences between them were widely known.
The lack of mutual sympathy may have had no obvious bearing on the problems that came to light this month. But well-informed observers said the top-level frictions certainly contributed to the lack of transparency criticised by many fund managers.
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Financial Times
19 January 2004
COMMENT
Europe's auditors should give us the bad news
By PAUL KOSTER
As if the Parmalat scandal were not bad enough, Europe's investors are now having to worry whether Adecco's numbers add up. The Swiss-based staffing group last week indicated that there were accounting irregularities in some of its operations. As investors pore over its financial statements, they are asking two questions. Are more such shocks lurking in corporate Europe? And do auditors have the right procedures to detect fraud and impropriety?
Following recent scandals, including those at Ahold and Parmalat, auditors have stated that they have followed proper procedures and claimed they were duped. This line of defence indicates that current procedures do not help auditors to detect fraud, even one apparently as brazen as Parmalat's. It is imperative that the audit profession plugs this gaping hole in its approach.
Accounting firms, according to a recent study that looked at the demise of Arthur Andersen following the Enron scandal in the US*, are there to enhance the financial credibility of companies and the companies need independent audits to attract outside capital. This is the added value that justifies the expense of hiring outside auditors. But if investors cannot rely on signed financial statements - as they could not at Ahold and Parmalat - this added value disappears.
The Parmalat debacle must make accountants even more determined to pay attention to red flags during their audits of European companies' 2003 financial statements. This obviously raises the stakes. If the 2003 audit is done properly, the financial markets should know by the middle of this year the extent of Europe's financial scandals. Of course, there is a risk that, by pointing to problems in 2003, auditors will make themselves liable for problems in previous audit years. As a result, accountants may not have much incentive to divulge all the bad news in one year. But in this they need to show courage and prevent Europe being plagued by more business scandals over the next few years.
Following the collapse of Enron in 2001, and the subsequent demise of Andersen, significant efforts have been made by the accounting profession, as well as by legislators and regulators, to restore investor confidence. The Parmalat scandal, however, shows that such measures are not always effective.
For example, audit firm rotation (a legal requirement in Italy that is to be introduced in the rest of Europe and the US) did nothing to uncover the problems at Parmalat until they had assumed vast proportions. International accounting firms should agree on minimum due diligence procedures to be performed by incoming auditors in the rotation process. These should be designed to catch wrongdoing that the outgoing auditor may have missed.
But this is only one point for improvement. How should the profession meet the desperate need for accounts to be cleaned up in 2004? First, accounting firms need to collaborate on an in-depth review and analysis of recent incidents and improve their procedures to detect material fraud. This implies a willingness on their part to challenge existing procedures and come up with industry-wide standards. The firms should also look at their own governance. The circumstances in which they operate these days have made the traditional partnership structure obsolete. Instead, they should consider introducing supervisory boards.
Second, companies' shareholders and management will have to accept higher audit fees in 2004 to cover the cost of intensified audit procedures. In return, they will be able to rely on the audit to uncover weaknesses in internal control. Since Enron, the financial markets' response to surprises has been unforgiving. Sharp share price declines can destroy in a matter of hours the market value built up over years of careful strategy, so the rationale for higher audit fees - as insurance against such shocks - seems apparent.
Last, regulators should set up a high-level committee, within the European Committee of Securities Regulators, to co-ordinate the response to the accounting regulatory issues highlighted by the big European cases.
Cross-border co-operation is essential if Europe is to make sustainable improvements in the accounting industry and maintain investor confidence - even if this makes 2004 the year of unpleasant surprises.
*Was Arthur Andersen Different?, Theodore Eisenberg and Jonathan Macey (Cornell University)
The writer is a member of the executive board of the Netherlands Authority for the Financial Markets
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Financial Times 19 January 2004
Regulator makes plea on audit practices.
By IAN BICKERTON
The Dutch securities regulator has called for a comprehensive review and overhaul by the audit profession of its procedures for detecting fraud in the wake of a spate of European corporate scandals.
In an article published in today's Financial Times, Paul Koster, a member of the executive board of the Netherlands' Authority for Financial Markets, says recent financial scandals have shown existing procedures to be inadequate.
"It is imperative that the audit profession plugs this gaping hole in its approach," Mr Koster writes.
Efforts by legislators, regulators and accountants to restore investor confidence - including audit firm rotation - have been undermined by events at Parmalat, he says.
He wants the introduction of minimum due diligence procedures by incoming auditors "to catch wrongdoing that the outgoing auditor may have missed".
He also urges a comprehensive review of recent incidents by international accounting firms "to challenge existing procedures and come up with industry-wide standards".
Mr Koster says audit firms should consider introducing supervisory boards to replace the "obsolete" partnership structure.
Finally, he suggests that a top-level committee, within the European Committee of Securities Regulators, should co-ordinate and focus the response to accounting regulatory issues highlighted by Ahold, Parmalat and Adecco.
The call comes as the regulator considers an investigation into Parmalat's subsidiaries in the Netherlands and Netherlands Antilles.
AFM has been gathering information that suggests the Dutch units have violated securities laws in relation to the majority of more than Euros 5bn in bond issues. It is likely to decide at a board meeting tomorrow that a formal probe is justified. See Editorial Comment
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Financial Times 19 January 2004
Investors 'will hate' damaged Adecco
By HAIG SIMONIAN
Adecco's business reputation and credibility in the financial markets could have suffered irreparable damage in the wake of its bungled attempts to explain accounting problems, leading fund managers and analysts have warned.
The fall-out could be negative, irrespective of whether the problems plaguing the world's biggest temporary employment group ultimately prove to be less severe than feared.
The potential backlash deepened yesterday when three US law firms filed class-action suits against the company, alleging violations of US securities law, mainly relating to the quality of financial information and internal controls.
"(The defendants) failed to disclose . . . that the company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the company," said Philadelphia-based Schiffrin & Barroway, one of the three firms.
Investors have complained about the group's continuing failure to quantify the effect of the irregularities and procedural problems at its US operation.
"The management are all going to be viewed as complicit in how this unfolded," said Karl Green of Dresdner Kleinwort Wasserstein. "They have caused damage that is very, very difficult to repair."
"It is difficult to see how investors can be persuaded to come back to this stock," said a Zurich analyst who declined to be named. "American investors will hate the stock for at least a year."
The criticisms came as SonntagsZeitung, a Swiss Sunday newspaper, claimed the company would have to restate its earnings by Euros 40m- Euros 50m (Dollars 50m-Dollars 62m).
The result would be to reduce Adecco's earnings before interest, tax and depreciation of Euros 411m in the first nine months of last year by about 10 per cent. A restatement of that magnitude could, the paper claimed, endanger a Euros 580m bank credit line.
Adecco officials were unavailable or unwilling to comment yesterday.
Exacerbating the selective information policy of recent days that has enraged investors, the same newspaper interviewed Conrad Meyer, Adecco's deputy chairman.
Mr Meyer appeared to recognise a threat to Adecco's financing as a result of the terms of the bank credit, which, he said, were "in every contract".
The appearance in the media of Mr Meyer, an accounting and legal expert, will inflame criticism of Adecco's information policy, which is already under attack after Felix Weber, the group's former finance director, last week spoke to the International Herald Tribune.
In further comments to the same paper at the weekend, Mr Weber, whose resignation was announced on Friday, said he regretted having broken the company's policy by speaking about its problems.
Mr Meyer's remarks are particularly untimely, as he is also a member of an expert committee of the Swiss stock exchange on corporate reporting.
Exchange officials last week denied any need for an investigation into Adecco's activities, in spite of the marked swings in its share price, but may now have been forced into action following investigations by the US Securities and Exchange Commission and the US Attorney's Office in New York.
Swiss and foreign-based analysts have commented adversely on the failure of the Swiss Federal Banking Commission, the self-regulating stock market's ultimate watchdog, to adopt a more robust approach.
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