Risk & Compliance

Crisis? What Crisis?

As a textbook example of how to mislead and vex investors, it's hard to beat Adecco's scandal that never was.
Jason KaraianJuly 27, 2004

In years to come, the Swiss staffing firm Adecco may well take its place on the syllabuses of business schools around the world. As a textbook example of how to mislead and vex investors, it’s hard to beat this scandal that never was.

The story dates back to January 12, when Adecco announced in a terse press release that its auditor, Ernst & Young, had refused to sign off the company’s 2003 accounts, blaming “material weaknesses in internal controls in its North American operations.” All this was happening at a time when the markets were unusually jittery, thanks in no small part to the fact that the news of Parmalat’s implosion a few weeks earlier was still being digested. Fearing the worst, investors sent Adecco’s shares down 35 percent that day.

The following day, Adecco CFO Felix Weber was interviewed in the International Herald Tribune, asserting that the audit delay “doesn’t mean you have irregularities, but that the control environment is not so good.” Come again? In the same article, an Adecco spokesperson said no one at the company was authorized to comment on the matter due to “legal restrictions.”

Three days later, another curt communiqué disclosed Weber’s resignation. The chief of the American business unit, Julio Arrieta, was also out. In a bid to limit the damage, the firm scheduled conference calls with analysts, investors and the media that afternoon. Joining chairman John Bowmer on the call was legal counsel Alex Cohen of the London office of Latham & Watkins.

But far from shedding light on the turmoil, things went from bad to worse. Because Adecco is an ADR issuer on the New York Stock Exchange, talk was dominated by the firm’s responsibilities for internal controls under Sarbanes-Oxley. But Bowmer batted away all questions regarding the delayed audit, noting, “I’ve got a lawyer here who has got this button and his finger poised over the button to stop [the call].”

Listeners were none the wiser. “The calls were a real disaster,” says Ronald Wildmann, head of Swiss equity research at Bank Leu in Zurich. Indeed, Adecco’s shares shed another 10 percent in value by the end of that day.

After a slow trickle of unilluminating press releases, the firm released its 2003 results on June 1, some four months overdue. The good — and somewhat surprising — news: there were no restatements to be made to previous years’ accounts. The bad news: the “extensive audit work, litigation, and investigations” had cost Adecco an eye-watering €100m ($121 million). The largest chunk, €40m, went to Ernst & Young for more than 160,000 hours of forensic accounting work. The remaining €60m will be split among other advisers and consultants working on the investigation, which involved over 22 million pages of documents and more than 150 interviews with company managers.

The cost to Adecco doesn’t stop there, however. At press time, shares in the firm were still trading more than 20 percent lower than pre-crisis levels, investigations by U.S. and Swiss regulators were under way, and a class-action shareholder lawsuit had been filed in the United States.

But with no restatements, was this drama all for nothing? Chris Burger, an analyst at Bank Vontobel in Zurich, thinks the lesson for Adecco’s new executive team — including new CFO Jim Fredholm, formerly of Deutsche Post — is simple. “The operating business is performing well, so now they just have to do their jobs, with no more mixed messages,” he says.

And every cloud has a silver lining, adds Bank Leu’s Wildmann. After that über-audit, “you can now trust Adecco’s figures the most out of all the stocks traded in the world.” Some consolation.