Tony Oliver says his hair started going grey in 2004. Given that he is the UK finance director of recruitment company Adecco, you can understand why stress has left its mark. The Swiss group, listed on the New York Stock Exchange, recently became the first high-profile corporate victim of auditor and investor jitters post-Enron and WorldCom.
Adecco’s problems began in January 2004, when its auditors Ernst & Young refused to sign off its 2003 accounts because there were material weaknesses in the internal controls of Adecco’s US operations. The saga ended five months later after a substantive audit and an internal investigation failed to find anything materially wrong with the group’s accounts. Ernst & Young finally signed off Adecco’s accounts on 1 June 2004 and Adecco was presented with a bill for EUR100m by the auditors, banks and lawyers for cleaning up the controls – a figure roughly equivalent to one-third of Adecco’s 2003 profits.
In the UK, Oliver and his finance team were subject to the same gold-plated audit even though he says there have always been good controls in the UK. Oliver had to keep the books open for five months, co-operate with auditor and lawyer demands, and communicate with clients and financial advisors – all while trying to run the business.
‘It was a huge distraction for the finance function, and for me personally,’ Oliver says. ‘We were on a permanent audit so we were permanently reviewing calculations, provisions and estimates. And then Ernst & Young pushed through additional requests globally, so that meant additional work and testing.’
The internal investigation, audit and the looming spectre of Sarbanes-Oxley has meant that in the UK alone Adecco has devoted between 4,000 and 5,000 man-hours to compliance over the past year.
So what exactly was so wrong with the company’s internal controls? Oliver says there were some issues in the US that needed to be addressed, such as IT systems security, reconciliation of payroll bank accounts, accounts receivable and a lack of segregation of duties in its US branches. But the real problem was timing. ‘They (Ernst & Young) were right to raise an issue if they thought there were material weaknesses in control in the US,’ Oliver says. ‘At the time, the uncertainty – especially against the backdrop of recent situations – created a supposition that delays to accounts equalled a failing balance sheet. But that wasn’t the case, so it was unfortunate and expensive.’
E&Y had replaced Arthur Andersen – the firm at the heart of the Enron and WorldCom scandals – as Adecco’s auditors in 2003. Twitchiness over accounting scandals, fuelled by Sarbanes-Oxley section 404 (on internal controls), meant that E&Y subjected Adecco to a more thorough audit than they were accustomed to.
‘I think the standards and expectations of audit had changed as a result of Enron and WorldCom, therefore, what may have been OK for Arthur Andersen was not (for Ernst & Young). Things had moved on,’ Oliver says.
After the news that E&Y had refused to sign off its accounts, Adecco’s share price fell by nearly 40%. Adecco management launched the investigation, called in an independent legal counsel to help reassure markets there had been no financial wrongdoing and replaced its group CFO.
But did Adecco handle the situation badly? Some commentators have said the company adopted a policy of silence and failed to communicate properly with shareholders. Adecco is also facing a class-action lawsuit from investors, who allege its management breached securities regulation concerning the publication of its financial results between March 2000 and January 2004.
Oliver says it is never easy to communicate at times of crisis, and he believes that Adecco did everything possible to reassure investors. ‘The difficulty is how do you communicate to the markets in a period of uncertainty? It’s a challenge. The markets want reassurance that the outcome from the extra audit work will mean no material adjustment to the accounts. But until the process has been exhausted, you can’t say that,’ he says.
In the UK, Oliver made sure that communication with clients and stakeholders was his first priority after he was briefed about the control issues. While Adecco’s global finance team was talking to the group’s lenders renegotiating its syndicated loans, Oliver was on the telephone to his key financial stakeholders.
‘We (in the UK) were briefed by conference call. The first thing I did was ring my audit partner and the banks. Communication was the most important thing,’ Oliver says.
‘I spoke to the bankers within half an hour, so the relationship director at Barclays could proactively approach his risk committee to discuss it with them. He wasn’t finding out through the press. I have always had strong relationships with bank and audit, and it’s at times like this that it actually shows,’ Oliver says. ‘I started with a strong relationship with our auditors and I exited with an even stronger relationship. As an FD if you aren’t close enough to your audit partner to actually understand their needs and concerns, and vice versa, then it’s a risk to the company.’
Oliver spent the following months working with lawyers and auditors and had to realign downwards, to ensure the additional auditor’s demands were dealt with smoothly.
‘The audit had to be the priority for the finance function. We tried to minimise the impact on the rest of the business,’ he says. ‘Again, communication was important. My financial controller was under a lot of pressure, so we had to manage priorities and choices, and flex the resource where it was needed. We tried to spread the additional workload as widely as possible.’
Oliver outsourced a lot of the extra administration to other functions within the business, which gave his team enough flexibility to continue running the finances of the company. ‘We made choices. We had top-down bottom-up communications, so if there were a choice where we should be doing something with the auditors or for another part of the business we had to manage expectations,’ Oliver says.
‘It was a constant cycle to keep the whole thing on track in terms of both compliance with the audit and actually managing the business. I think we managed it quite well, but it was hard and relentless.’
Despite having spent a lot of time and resource, in essence, uncovering nothing, Oliver is keen to stress that Adecco’s problems have made him and his team better at their jobs, even if they suffered along the way.
‘Sure, everyone has pressure. I think when you’ve got sustained pressure over five months, that’s different,’ Oliver says. ‘If anyone goes through this they learn a lot. And even though they will not have enjoyed it, they will have learned a lot about themselves.’
Oliver says that Adecco’s internal controls and business processes have improved immeasurably – even if he hasn’t had time to spend on the operational and commercial side of the business. ‘I guess what really suffered was my focus and the strategic stuff,’ he says.
As a sales-driven business that was perhaps not as open to finance-driven initiatives before the investigation, Adecco has now embraced compliance throughout the group. ‘As a company globally and as a function it really provided a stimulus to us. We’ve got a strengthened audit committee, main board and a new CFO. We’ve got a tighter processing framework for managing global controlled compliance. We’re becoming a world-class finance function,’ Oliver says.
And with Sarbanes compliance around the corner, all Oliver has to do is wave the flag of compliance and his sales team buy in immediately. ‘Now I just say we have no choice, this is Sarbanes-Oxley, so that’s it.’
Adecco now takes a global approach to managing risk and Oliver sits on the group’s new CFO council, comprising CFOs from the major business units, the head of its audit committee, the group heads of tax, legal, treasury and Adecco’s compliance and business ethics officer. ‘The council has been in place about three or four months and is a great step forward because you’re preserving the strength of the local empowerment in local markets while also managing overall global risk.’
‘Local empowerment’ means that Oliver acts as finance director of a standalone company and not a glorified financial controller. He has taken charge of IT, property, procurement and legal issues in the UK, and has also assumed responsibility for setting up financial departments in Adecco’s new businesses in Nigeria, India and South Africa – areas where strong controls are vital.
‘The control framework is key. So you have sign-off limits, and you’ve got a reporting and control process so you can actually ensure that everything is done as it should. You also have to make periodic visits,’ he says. ‘But you have to get the right people in the key control compliance roles – a CFO you can trust.’
A year after Adecco’s problems broke, Oliver can get back to running the business. He still has Sarbanes-Oxley to contend with, but recent history has already ensured that his control frameworks are top-notch. ‘I think we have already learned the lessons,’ he says. And as Adecco is a Swiss and not EU-listed company, Oliver doesn’t have to contend with international financial reporting standards, which he says is a relief: ‘I wouldn’t fancy both (IFRS and Sarbanes) at the same time. We could do with a period of stability.’
Having learned the hard way, Oliver has some advice for other FDs on how to cope during a crisis. The first is to make sure you communicate properly and engender trust with your key stakeholders. The second is to have cash in the bank to pay the legal bills.
The third is to get your priorities between your work and personal life in perspective. Oliver has a small cottage in Norfolk, where he retreats to most weekends. He also has a strict rule about turning off his mobile telephone and handheld computer when he leaves the office. He says that in the event the company needs him urgently, the board members have his home phone number.
‘I’m quite pleased I went through it because I can stand back and look at myself and how I dealt with sustained pressure. What it taught me was that the work-life balance is important,’ he says. ‘I think I was reasonably good (at my job) beforehand, but I’m a damned sight better after having gone through this.’
This feature first apeared in the February edition of Financial Director magazine. CURRICULUM VITAE
Name: Tony Oliver
2000-: Financial and information systems director, Adecco UK
1986-2000: Financial accountant and finance operations manager, Whitbread
1984-86: Audit manager, Deloitte Haskins & Sells (New Zealand)
1981-84: Trainee accountant, Deloitte & Touche
Getting the balance right between control and empowerment, pitching it just right so your people are empowered to do their jobs and haven’t got 150 different compliance issues to deal with. Too much compliance stifles initiative.
I would say Sarbanes-Oxley. It’s only short term, but it’s probably the truth. It’s all under control, though.
Which company would you like to be FD of?
A company where I can really make a difference. I like an open, honest supportive yet challenging culture, with very little politics. I know politics is inevitable, but I hate wasting time on it.