Seven Years Later: KPMG Accuses Barings Auditors of Incompetence

Also, why were fewer dot-com employees laid off in September? And what's going on at Nortel now?


Two auditors were deemed “incompetent” by Britain’s High Court in a case involving the most famous derivatives trader in history, Nick Leeson.

Both auditors are being sued for failing to spot Leeson’s unauthorized trades on the Singapore Monetary Exchange (SIMEX) in 1994. Leeson’s bets ended up costing his employer, Barings Bank, $1.4 billion. Those losses ultimately forced the storied UK bank into bankruptcy. Barings was later bought by Dutch banking giant ING.

The auditors in question are the British and Singapore branches of Coopers & Lybrand (now part of PricewaterhouseCoopers LLP) and the Singapore branch of Deloitte & Touche LLP.

“Flagrant window-dressing” of financial information by Leeson “should not have escaped even a newly qualified accountant,” remarked Charles Aldous of KPMG, attorney for the bank’s liquidators, to Britain’s High Court. There was, said Aldous, “no excuse” for not spotting Leeson’s unauthorized trades.

“If this basic audit failing had not happened none of this would have occurred and Barings would still be here today,” he added. “It is our case that it was through Coopers & Lybrand’s and Deloitte & Touche’s negligence that Leeson’s fraud was not detected and reported to Barings.”

“Their duties were to plan and carry out the audits just so, as to be able to detect just the sort of wrongdoings that Leeson perpetrated,” Aldous said. But, he argued they bore a “heavy responsibility” for failing to do this.

KPMG is seeking $1.47 billion in damages from the two auditors in a court action expected to last more than a year.

As of last night, however, KPMG’s lawyers were seeking an out-of-court settlement, according to The lawyers are thought to have been locked in talks with PricewaterhouseCoopers, the main defendant in the action, reports the Financial Times’s Web site. The site notes that Deloitte & Touche is not involved.

Andersen Buys PwC’s French Business

Last week, Andersen bought the French consultancy Price Waterhouse Management Consultants S.A.S.

“Their decision to join us comes at a time when we are aggressively investing in building our firm,” said Joseph F. Berardino, Andersen’s chief executive officer, in a company statement.

A letter of agreement was signed last Thursday, following a vote of PWMC partners to convert their ownership interest in PWMC to a partnership interest in Andersen in France. The combined interest will employ 900 consultants and generate annual fees of $140 million, under the direction of Olivier Chatin, the consultancy’s newly appointed managing partner.

“Our partners are eager to participate in Andersen’s integrated international network,” said Yves Jarlaud, PWMC’s current managing partner. “This was a deliberate choice reflecting our strong belief that this is a winning combination for our clients and our people.”

The integrated teams will be part of Andersen’s Business Consulting practice, which has global fees of more than $1.6 billion.

Financing News

While economists debate whether the Fed’s latest half-point interest rate cut will jump-start the near-recessionary economy, one thing is for sure: The corporate bond market, already experiencing record issuance, should enjoy an even more active calendar as companies rush to lock in the lowest rates in decades.

Meanwhile, a number of banks predictably rushed to cut the prime rate — the key rate reserved for their most credit-worthy customers — to 5.5 percent from 6 percent after the Fed did its thing. The banks include Bank of America Corp., J.P. Morgan Chase & Co.’s Chase Manhattan Bank and Morgan Guarantee Trust, FleetBoston Financial Corp. and Banc One Corp.

Even foreign governments are taking advantage of the low US rates. On Tuesday, representatives of the country of Chile filed a shelf registration to periodically issue up to $2 billion in debt securities and warrants. According to the filing, the Chilean government plans to use the net proceeds for general purposes, including financial investment and, also, the refinancing, repurchase, or retiring of domestic and external debt.

Meanwhile, companies continued to rush sizable debt issues to market. Detroit Edison Co., a subsidiary of DTE Energy Co., placed $700 million in two-part first-mortgage notes, led by Salomon Smith Barney Inc., Barclays Capital, and Banc One Capital Markets Inc.

The utility borrowed $200 million in four-year notes priced to yield 5.091 percent, or 132 basis points over Treasurys. The power provider also placed $500 million of nine- year notes priced to yield 6.128 percent, or 160 points over the benchmark. Both issues were rated a3 by Moody’s Investors Service and A-minus by Standard & Poor’s Corp.

Arizona Public Service, a subsidiary of Phoenix-based Pinnacle West Capital Corp., launched a $400 million debt offering. Underwriting for the 10-year senior notes was led by Credit Suisse First Boston Corp. and J.P. Morgan.

Old National Bank, a unit of Old National Bancorp, issued $150 million in 10-year subordinated bank notes, led by Credit Suisse First Boston. The subordinated debt was priced to yield 6.768 percent, or 225 points over Treasurys, and was rated Baa1/BBB-plus.

Nortel Cans Another 10,000; Promotes CFO

It just goes from bad to worse for North America’s telecommunications companies.

Management at Nortel Networks Corp. said late Tuesday it will eliminate yet another 10,000 jobs and warned that the company will rack up a $3.6 billion net loss in the third quarter on revenue of $3.5 billion. The loss — excluding charges and acquisition-related expenses- – is estimated to be about $910 million.

Keep in mind that Nortel already announced 10,000 workers will be leaving the company payroll, as their divisions are being sold. And, another 30,000 jobs have previously been cut. As a result, the company will be left with 45,000 employees, less than half its peak work force.

Company management also said Chief Financial Officer Frank Dunn would replace John Roth as chief executive, effective Nov. 1. Terry Hungle, former president of finance, succeeds Dunn.

In Other Layoff News…

  • Fewer than 3,000 Internet jobs were cut in September, a 14-month low, according to outplacement firm Challenger, Gray & Christmas, which tracks company layoffs.

September saw 2,986 jobs cut in the Web world. That’s a lot fewer cuts than in August, when 4,889 dot-com workers were let go. It’s also 38 percent fewer pink slips than September 2000.

The reason for the slowdown? There’s hardly anybody left to lay off. According to the Challenger report, nearly 127,000 dot-com jobs have been eliminated since July 2000.

  • Rexhall Industries Inc., maker of motor homes, said last week that it canned about 200 employees, more than half of the company’s work force, due to an order slowdown during late August and September.
  • Stride Rite Corp. said it will cut 120 jobs, or about 6 percent of its work force.
  • Air Wisconsin Airlines Corp. intends to cut payroll by more than 10 percent after paring its flight schedule.
  • Chicago-based Shedd Aquarium, the world’s largest indoor aquarium, is laying off 44 employees, or 16 percent of its staff, due to a decline in tourism since the terrorist attacks.

In Brief

  • AOL Time Warner Inc. chairman Steve Case said Tuesday he feels that the Internet sector, the economy, and the country have reached a bottom following the September terrorist attacks. “I can’t predict that it is an absolute bottom, but it feels like it will be up from here,” said Case during a Goldman Sachs & Co. conference in New York. “I’m taking a little bit of comfort in that things got difficult, that people are taking a step back, and people are reassessing.”
  • Continental Airlines Inc. is the first airline to follow United Air Lines Inc.’s lead and, in an effort to boost traffic, offer business travelers discounts of up to 50 percent on air fares.
  • Jack Welch, who retired as chairman and chief executive of General Electric Co. last month, has joined the buyout firm of Clayton, Dubilier & Rice Inc. as a special partner. He will work on strategic issues related to current and future investments, as well as offer counsel on the firm’s global expansion.

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