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BearingPoint CEO Blames Former Management
By Ellen McCarthy, Staff Writer
Washington Post
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.

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Under Investigation

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.
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"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 technical services.

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 million.

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 wrote.

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 procedures.

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 poor
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. contracts.

"What the [filing] makes clear is how bad the management team was before," said Adam B. Frisch, an analyst with UBS AG.

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 seeking comment.

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