KPMG

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”


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.


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.


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.


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.


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.


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


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


“2 + 2 = ?”

Discussion Discussion

KPMG

Business

Transcript of KPMG