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  1. 1. Warrick Cleine, Partner   December 2002 kpmg © 2002 KPMG Limited, the Vietnam member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
  2. 2. Outline <ul><li>Introductions </li></ul><ul><li>The Audit Industry </li></ul><ul><li>What happened to Andersen </li></ul><ul><li>Andersen and KPMG in Vietnam </li></ul><ul><li>“ Project 17” </li></ul>
  3. 3. Introductions – Who Am I? <ul><li>Partner in KPMG since August 2001 </li></ul><ul><li>Employee of KPMG since March 1995 </li></ul><ul><li>Resident in Vietnam since March 1998 </li></ul><ul><li>Graduate in Commerce (Taxation Law and Accountancy) from the University of Canterbury in February 1992 (B.Com.)‏ </li></ul><ul><li>Admitted to Membership of the New Zealand Institute of Chartered Accountants in October 1992 (C.A.)‏ </li></ul><ul><li>Registered Auditor, Ministry of Finance, Vietnam, November 1998 (C.P.A.)‏ </li></ul>
  4. 4. Introductions – Who Are We? <ul><li>KPMG was formed in 1987, and was the culmination of centuries of mergers and acquisitions, commencing from the founding firms: </li></ul><ul><ul><li>K stands for Klynveld. Piet Klynveld founded an accounting firm in Amsterdam in 1917. </li></ul></ul><ul><ul><li>P is for Peat. William Barclay Peat founded an accounting firm in London in 1870. </li></ul></ul><ul><ul><li>M stands for Marwick. James Marwick founded an accounting firm in New York City in 1897. </li></ul></ul><ul><ul><li>G is for Goerdeler. Dr. Reinhard Goerdeler was for many years chairman of Deutsche Treuhand-Gesellschaft and later chairman of KPMG. </li></ul></ul><ul><li>100,000 staff, 6,000 partners in 150 countries </li></ul>
  5. 5. Introductions – Who Are We? <ul><li>KPMG Limited, Vietnam </li></ul><ul><li>Advisory firm </li></ul><ul><li>Audit, Tax & Corporate Services, Advisory </li></ul><ul><li>Licensed as a 100% Foreign Invested Enterprise in 1996 </li></ul><ul><li>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 </li></ul><ul><li>240 employees and 3 partners in Vietnam and another 1,400 in the Business Unit </li></ul>
  6. 6. Introductions – Why are we here? <ul><li>Because we were generously invited to tell our story </li></ul><ul><li>Because contribution and participation in our community is part of our business philosophy </li></ul><ul><li>Because we did something interesting in 2002 </li></ul><ul><li>Because we think you will benefit from knowing about it </li></ul><ul><li>Because we like talking to strangers! </li></ul>
  7. 7. Introductions – What did we do? <ul><li>“ Combined” with Andersen Vietnam Ltd </li></ul><ul><li>Achieved the benefits of a “merger” without merging </li></ul><ul><li>Changed the shape of our firm in Vietnam </li></ul><ul><li>Changed our place in the industry </li></ul><ul><li>Secured our futures </li></ul><ul><li>Learnt a lot </li></ul>
  8. 8. Introductions – What did we do? <ul><li>Tried to answer the ultimate M&A question … </li></ul><ul><li>“ 2 + 2 = ?” </li></ul>
  9. 9. The Audit Industry <ul><li>Also called the “Assurance” industry </li></ul><ul><li>Term is a misnomer – the major firms provide a range of professional services using the skills and relationships they possess: </li></ul><ul><ul><li>Tax & Legal Consulting </li></ul></ul><ul><ul><li>Business Advisory </li></ul></ul><ul><ul><li>Information Technology Consulting </li></ul></ul><ul><ul><li>Financial Advisory Services </li></ul></ul>
  10. 10. The Audit Industry <ul><li>What is “Auditing” </li></ul><ul><ul><li>An independent review of financial and other information </li></ul></ul><ul><ul><li>Reporting to stakeholders (e.g. shareholders, creditors, governments, donors, employees)‏ </li></ul></ul><ul><ul><li>Reporting to management </li></ul></ul><ul><ul><li>Statutory reporting and non-statutory reporting </li></ul></ul><ul><ul><li>Generally focused on “truth and fairness” of information, but special audits may at other matters (e.g. forensic audits, etc)‏ </li></ul></ul>
  11. 11. The Audit Industry <ul><li>In common with other professions, Audit/Public Accountancy is considered to have a “public good” element. An effective audit industry is essential to: </li></ul><ul><ul><li>The operation of efficient and honest capital markets </li></ul></ul><ul><ul><li>The protection of the investing public, private and institutional investors who rely on management information (the “Agency Concept” of management and corporate governance)‏ </li></ul></ul><ul><ul><li>The management of the State (e.g. by collection of tax revenues, compilation of statistics necessary for public policy decisions, etc)‏ </li></ul></ul><ul><li>The industry is therefore subject to both State and self regulation </li></ul>
  12. 12. The Audit Industry <ul><li>Global industry now said to be dominated by the “Big 4” audit firms </li></ul><ul><li>Formerly also included Andersen Worldwide (ex Arthur Andersen) to make up the “Big 5”, and before that the “Big 6” </li></ul><ul><li>Two major issues facing the industry today: competition and independence, both stemming from the collapse of Andersen </li></ul>
  13. 13. The Audit Industry <ul><li>Various arguments mitigating the assertion that there is a lack of competition in the industry: </li></ul><ul><ul><li>Global multinationals still have multiple options </li></ul></ul><ul><ul><li>National or local firms are significant in each country </li></ul></ul><ul><ul><li>Broadening of service lines also broadens competition </li></ul></ul><ul><ul><ul><li>Investment Banks and Securities Firms </li></ul></ul></ul><ul><ul><ul><li>Law Firms </li></ul></ul></ul><ul><ul><ul><li>Strategic Consulting Firms </li></ul></ul></ul><ul><li>Nevertheless, the removal of Andersen has heightened global concerns </li></ul>
  14. 14. The Audit Industry <ul><li>Various arguments against the assertion that audit firms have failed to remain independent of their audit clients to the detriment of the community: </li></ul><ul><ul><li>Professionalism and an ethical approach can overcome “independence” concerns </li></ul></ul><ul><ul><li>Technical knowledge and skills are enhanced by the ability to offer a broad range of services to an audit client </li></ul></ul><ul><ul><li>No or limited evidence that problems maintaining independence spread beyond Andersen </li></ul></ul><ul><li>Notwithstanding these observations, regulators and companies have moved to enforce auditor independence rules </li></ul>
  15. 15. What Happened to Andersen? <ul><li>Andersen Worldwide was one of the World’s largest accounting and consulting firms </li></ul><ul><li>At the time of its collapse, it had around 85,000 employees and US$9 billion in revenue </li></ul><ul><li>Reputed to have the strongest “corporate” culture out of the “Big 5” </li></ul><ul><li>Centrally controlled with a reputation for homogeneous service worldwide and a strong brand identity </li></ul><ul><li>Employees had a reputation for “excellence, tinged with arrogance” </li></ul>
  16. 16. What Happened to Andersen? <ul><li>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. </li></ul><ul><li>Nov. 8 -- Enron revises financial statements for previous five years to account for $586 million in losses. </li></ul><ul><li>Dec. 2 -- Enron files for Chapter 11 bankruptcy protection. </li></ul><ul><li>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. </li></ul>
  17. 17. What Happened to Andersen? <ul><li>Jan. 10, 2002 -- Andersen discloses in Washington that its employees destroyed &quot;significant&quot; number of Enron-related documents. </li></ul><ul><li>Jan. 15 -- Andersen fires chief Enron auditor David Duncan. </li></ul><ul><li>Jan. 17 -- Enron fires Andersen as auditor. </li></ul><ul><li>Jan. 28 -- Berardino insists the firm can survive without a merger and isn't pursuing one. </li></ul><ul><li>Feb. 4 -- Andersen hires former Federal Reserve chairman Paul Volcker to chair an independent oversight board with power to make reforms at Andersen. </li></ul>
  18. 18. What Happened to Andersen? <ul><li>March 14 -- Government announces indictment of Andersen by federal grand jury for alleged obstruction of justice for destroying Enron documents. </li></ul><ul><li>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. </li></ul><ul><li>March 26 -- Berardino resigns amid exodus of clients, overseas partners. </li></ul><ul><li>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. </li></ul>
  19. 19. What Happened to Andersen? <ul><li>April 4 -- Andersen initiates breakup of its U.S. operations </li></ul><ul><li>April 8 -- Andersen announces 7,000 layoffs planned over next several months, more than a quarter of U.S. work force. </li></ul><ul><li>April 9 -- Duncan pleads guilty to an obstruction charge for shredding documents, agrees to cooperate with prosecutors. </li></ul><ul><li>April 26 -- The Justice Department rejects a last ditch effort by Andersen to settle obstruction case. </li></ul><ul><li>May 7 -- Opening statements begin in Andersen's obstruction of justice trial. </li></ul>
  20. 20. What Happened to Andersen? <ul><li>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. </li></ul><ul><li>May 13 -- Duncan begins nearly five days of testimony. </li></ul><ul><li>June 5 -- The jury is handed the case; deliberations begin the next day. </li></ul><ul><li>June 12 -- The jury says it's deadlocked. But the judge tells them to resume their discussions the next day. </li></ul><ul><li>June 15 -- Jury finds Arthur Andersen guilty. </li></ul>
  21. 21. What Happened to Andersen? <ul><li>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 </li></ul><ul><li>Over the following months, Andersen Worldwide member firms in many countries announced combinations with other “Big 5” firms </li></ul><ul><li>Andersen was banned from auditing in a number of states in the US </li></ul><ul><li>The “Andersen” name disappeared from the world auditing and consulting scene during the second and third quarters of 2002 </li></ul>
  22. 22. Audit Industry in Vietnam <ul><li>Regulated by the Ministry of Finance </li></ul><ul><li>Segregated market – foreign and local audit companies </li></ul><ul><li>Very competitive market, widely divergent participants </li></ul><ul><ul><li>Size </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Client base </li></ul></ul><ul><ul><li>Price </li></ul></ul>
  23. 23. Audit Industry in Vietnam Source: Ministry of Finance, as at 30 April 2002 100 Andersen Vietnam 50 Hanoi Co 19 VAE JSC 28 BHP 11 Kien Hung 15 Thuy Chung 20 VAA 100 HAACO 15 Saigon Audit 106 PwC-AISC 40 Hong Duc 28 AAC 15 AnViet 159 A & C 12 DTL Auditing 203 AFC Saigon 20 Pioneer Management 177 KPMG 30 Asia International 132 PricewaterhouseCoopers 15 Polaris Auditing Co 95 AISC 15 HP Audit 167 Ernst & Young 16 AS Audit 17 SCCT 10 Loan Le 250 AASC 57 GT 304 VACO Staff No Audit firm Staff No Audit firm
  24. 24. Andersen in Vietnam <ul><li>100% FIE </li></ul><ul><li>Smallest of the “Big 4” audit firms operating in Vietnam </li></ul><ul><li>100 employees (80 in HCMC, 20 in Hanoi) and one Partner </li></ul><ul><li>Three divisions (Assurance, Tax & Corporate Services, Business Consulting)‏ </li></ul><ul><li>Owned and funded by Andersen in the US </li></ul>
  25. 25. Andersen in Vietnam <ul><li>By the end of the first quarter of 2002, Andersen Vietnam realised that it did not have an independent future </li></ul><ul><ul><li>No more funding </li></ul></ul><ul><ul><li>Too small to have strategic importance to the Andersen network </li></ul></ul><ul><li>Needed to face domestic and international obligations </li></ul><ul><li>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)‏ </li></ul>
  26. 26. Andersen in Vietnam <ul><li>Various options considered, with key considerations for management being: </li></ul><ul><ul><li>Future opportunities for Andersen people </li></ul></ul><ul><ul><li>Staff retention </li></ul></ul><ul><ul><li>Allocation of management positions </li></ul></ul><ul><ul><li>Future profitability/success of combined business </li></ul></ul><ul><ul><li>Client retention </li></ul></ul><ul><ul><li>Decisions of other Andersen offices </li></ul></ul><ul><li>Forced to move quickly to achieve objectives and maximise advantages </li></ul><ul><li>Pressure of bankruptcy also influenced management decisions </li></ul>
  27. 27. KPMG in Vietnam <ul><li>No “crisis” imperative – doing nothing was an option </li></ul><ul><li>Assessed opportunity to combine in terms of alternatives: </li></ul><ul><ul><li>Organic growth: targeting clients and staff of Andersen </li></ul></ul><ul><ul><li>Alternative acquisition: convincing another firm to change </li></ul></ul><ul><li>Assessed inherent risks and ability to manage those risks: </li></ul><ul><ul><li>Financial risk </li></ul></ul><ul><ul><li>Reputational risk </li></ul></ul>
  28. 28. KPMG in Vietnam <ul><li>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” </li></ul><ul><li>Commenced negotiations with Andersen management </li></ul><ul><li>Looked for “synergies” and ways to minimise financial and reputational risks </li></ul><ul><li>Began building support within broader KPMG network for a risky transaction with medium/long term benefits </li></ul>
  29. 29. Project 17 <ul><li>Negotiations commenced in March 2002 </li></ul><ul><li>Major challenge – other Andersen offices defecting to competitor firms </li></ul><ul><ul><li>PwC in China, Deloitte in Taiwan/Korea, EY in Singapore, etc </li></ul></ul><ul><li>Recognised early that delay could be fatal – needed to move quickly </li></ul><ul><ul><li>Andersen to meet objectives of staff security </li></ul></ul><ul><ul><li>KPMG to forestall competitors and preserve client opportunities </li></ul></ul><ul><li>Andersen Worldwide was now in “meltdown” losing clients and staff </li></ul>
  30. 30. Project 17 <ul><li>Concluded a Memorandum of Understanding in May 2002 </li></ul><ul><li>Transaction dates set for 17 June 2002 </li></ul><ul><li>Established “Project 17” teams to implement the combination </li></ul><ul><ul><li>Members from both firms to utilise skills and knowledge, and to maximise “buy in” from all sides </li></ul></ul><ul><ul><li>Legal, Premises, Public Relations, Information Technology, Marketing, Human Resources, Finance, Risk Management </li></ul></ul>
  31. 31. Project 17 <ul><li>Most significant issue to resolve was financial exposure </li></ul><ul><li>Andersen Vietnam was a member of Andersen Worldwide, which had significant potential liabilities, and KPMG Vietnam is a member of KPMG International </li></ul><ul><li>Two potential legal exposures: </li></ul><ul><ul><li>Vietnamese law: a merger involves the assumption of “rights and obligations” of the merging firms </li></ul></ul><ul><ul><li>United States law: a company “assuming the business” of another company may be liable to its liabilities </li></ul></ul>
  32. 32. Project 17 <ul><li>Decided the two firms could not utilise the “merger” provisions of Vietnamese law – the risk was too great </li></ul><ul><li>Instead executed separate agreements: </li></ul><ul><ul><li>Made offers to some former Andersen employees </li></ul></ul><ul><ul><li>Executed an Asset Sale and Purchase Agreement for fixed assets </li></ul></ul><ul><li>Andersen Vietnam Ltd would go into liquidation pursuant to the Law on Foreign Investment </li></ul><ul><li>Potential liabilities were effectively isolated in the old entity </li></ul>
  33. 33. Project 17 <ul><li>Moved to reassure clients </li></ul><ul><ul><li>Potential for backlash from KPMG clients because of reputation </li></ul></ul><ul><ul><li>Competitor activity for ex-Andersen clients </li></ul></ul><ul><li>Also staff pressure because of uncertainty </li></ul><ul><li>Attacked these two issues on multiple fronts: </li></ul><ul><ul><li>Active staff communication, involvement and socialising </li></ul></ul><ul><ul><li>Aggressive branding campaign – seminars, HTV documentary, advertising – to relaunch KPMG brand and firm in Vietnam </li></ul></ul>
  34. 34. Project 17 – Did we succeed? <ul><ul><li>Client retention </li></ul></ul><ul><ul><ul><li>In line with expectations, but pressure remains </li></ul></ul></ul><ul><ul><ul><li>Significant competitor activity </li></ul></ul></ul><ul><ul><li>Market image and perception </li></ul></ul><ul><ul><ul><li>Clear recognition as one of the two largest firms </li></ul></ul></ul><ul><ul><ul><li>Excellent media coverage and profile so far </li></ul></ul></ul><ul><ul><ul><li>Good client response </li></ul></ul></ul>
  35. 35. Project 17 – Did we succeed? <ul><ul><li>Asserting our new role in Vietnam </li></ul></ul><ul><ul><ul><li>Bigger firm = different market image </li></ul></ul></ul><ul><ul><ul><li>“ Global Ideas, Local Understanding” </li></ul></ul></ul><ul><ul><li>The new “Big 3” market in Vietnam </li></ul></ul><ul><ul><ul><li>Successfully distanced KPMG from negative perceptions </li></ul></ul></ul><ul><ul><ul><li>Adapt to regulatory and client restrictions on work post Enron </li></ul></ul></ul>
  36. 36. Project 17 – Did we succeed? <ul><li>“ 2 + 2 = ?” </li></ul>