Painful and costly as a major corporate financial scandal can be, it can ultimately help a company grow stronger if executives can unearth the problems that spurred the crisis and fix them. That was the result of a process that began when 250 Munich police officers raided the corporate offices of Siemens, a Germany-based multinational conglomerate, on November 15, 2006, according to Joe Kaeser, the company’s CFO.
In December 2008, when Siemens reached a resolution with German and U.S. authorities arising from charges against it of bribing public officials, the company emerged from an ordeal that had muddied its financial statements going back to 1999 and resulted in it paying about €1 billion (about $1.4 billion today) in total fines and penalties. In Washington, D.C., the company, a U.S. issuer, pleaded guilty to federal charges of knowingly circumventing and failing to maintain adequate internal controls and failing to comply with the books and records provisions of the U.S. Foreign Corrupt Practices Act.
But “only a fraction” of the company’s wrongdoing stemmed from actual bribes during the course of a two-and-a-half year internal investigation, Kaeser told attendees at the CFO Rising conference in Orlando on Monday. Over the course of the scandal, the company received about €3.4 billion ($4.6 billion) of so-called doubtful payments. Of that, about €3 billion ($4 billion) were ill-gotten tax benefits.
What troubled Kaeser was that the company’s later findings made it clear that bribe payments of as much as €2.3 billion ($3 billion) were a possibility. Fortunately, that never materialized, whether through dumb luck or the incompetence of the fraudsters. But the fact that the level of bribery was so low “is not what matters,” he said. “What matters is that due to a lack of internal controls [a much higher level of bribery]” could have happened.
By the time the company’s investigation was complete, according to Kaeser, 100 million documents, 127 million transactions, and 40 million banking records had been reviewed, and €870 million ($1.2 billion) had been spent on compliance advice. All that self-probing “was painful, challenging, and necessary,” he said. “If we had not gotten to a clean start, this company would not exist.”
Even before it had overcome its legal hurdles, however, Siemens had embarked on an effort to “kill the beast and conquer the princess,” according to the finance chief. That meant fixing the flaws in its corporate organization and internal controls that caused the problems and embracing a higher standard of governance.
To a certain extent, killing the beast has meant eviscerating organizational complexity. In a move aimed at harmonizing and streamlining its finance processes, Siemens will slash the number of its companies from 170 to 17 on September 10. It has already cut down the number of its internal-management reporting units from 900 to 400. “Complexity is the biggest enemy of internal controls,” said Kaeser.
In January 2008, Siemens launched a series of new principles aimed at cleaning up its organizational structure. One tenet was to vest more accountability in the chief executive officer, said Kaeser, who noted that unlike U.S. companies, which favor powerful CEOs, German companies tend to disperse accountability among senior management teams.
Another guiding principle was the necessity to set up a clear chain of command within the company’s CFO structure. In what Kaeser called “the old Siemens,” the CFOs of business units and divisions reported to the CEOs of those units. Now, the CFO of the business unit reports to the CFO of the division, who reports “straight up to the central CFO, so there is no excuse for not elevating [information about a serious suspected lapse in controls],” he said. “You have to make sure there’s enough power in the CFO unit so that information goes straight up. No excuses. No surprises.”