Markets jittery as heads roll at troubled Adecco

Investor confidence has been rattled by Adecco's lack of communication Keystone

Two senior managers at the Swiss employment services firm, Adecco, have resigned following Monday’s disclosure of accounting irregularities in North America.

The company’s shares have been caught up in the turmoil, shedding nearly ten per cent in trading on Friday.

The global industry leader said the chief financial officer, Felix Weber, and the CEO of Adecco Staffing North America, Julio Arrieta, were stepping down.

The chairman of the group board, John Bowmer, has moved to take executive control of the company to help resolve the problems that sent shockwaves throughout the market.

And the group’s financial controller, Andres Cano, will take over the function of CFO on an interim basis.

Adecco’s announcement on Monday that it would delay its 2003 results while it checked accounting issues in North America and problems elsewhere prompted a 35 per cent fall in the share price.

There were fears that the company might be facing a scandal on the scale of Enron in the United States or Italy’s Parmalat.

Considerable insecurity

In its first official information since then, the company on Friday said in a statement the board of directors regretted the considerable insecurity among investors and the general public.

It said that while certain material weaknesses in Adecco’s internal controls and practices had been brought to light, the board remained “strongly confident” about the company and its future.

“At the end of 2003, the group’s cash and cash equivalents were some SFr1.4 billion ($1.12 billion), one basis for the board’s confidence in the solidity of the company,” commented Bowmer.

“The board firmly believes firmly in the continuing long-term success of Adecco and is taking energetic measures to cooperate with its auditors, regulators and other stakeholders to resolve the current uncertainties,” he added.

During a conference call later in the day, Bowmer refused to say if fraud was suspected, citing legal restrictions.

Investors saw the call as a missed opportunity to set the record straight, with the company’s shares losing ground immediately after Bowmer’s comments.

Adecco has lost a third of its market value since Monday.

Thomas Veillet, a portfolio manager for Geneva-based Dynacapital, told swissinfo investor confidence had been seriously eroded by the company’s refusal to comment on its problems.

“Investors need transparency,” he said. “Personally, as long as there are no further details, I would recommend selling Adecco shares.”

“Bad news”

Commenting on the resignations, Hilary Cook, director of investment strategy at Barclays Stockbrokers, told swissinfo that they showed some scale of the irregularities discovered.

“It’s always bad news when any company executive has to resign and the fact that two have gone today really does show how serious these problems may be,” she said.

“The fact that two executives’ heads have rolled means that the company is taking its responsibilities seriously. But clearly this is more than just a minor accounting problem,” she added.

Cook also felt that until the real financial figures came out, investors’ fears would not be calmed to any great degree.

“Nobody really believes that the board is strongly confident when two executives have already had to leave the company but on the other hand, it doesn’t look like it’s another Parmalat or Enron,” she commented.

“Material weakness”

The company explained that it had discovered “material weaknesses” in its internal controls in North America.

It added that it had found lack of systematic documentation of agreed rates, billing errors and “lack of segregation of duties” in its branches, increasing the likelihood of undetected errors.

Adecco said that some of the weaknesses in North America had been corrected, while others were being addressed. Other countries involved in its investigation accounted for less than ten per cent of service revenues in 2002, it noted.

In its statement, Adecco said the audit and finance committee had begun introducing measures to help identify any further weaknesses and permanently resolve them.

Some analysts say the company figures may not actually change that much once they are restated, as the North American business only accounts for a small part of the overall profits.

“That’s very important,” said Ronald Wildmann of Bank Leu. “They have to restate the figures, but I don’t believe the restatement should be too much.”

Independent investigation

The committee has also mandated the New York law firm, Paul Weiss, Rifkind, Wharton & Garrison, to conduct an independent investigation.

Adecco, which has its corporate headquarters at Glattbrugg near Zurich, confirmed that the US Securities and Exchange Commission and the US Attorney’s Office for the Southern District of New York were also investigating the situation.

It had assured both authorities of its “strong cooperation”, the statement said.

swissinfo, Robert Brookes with agencies

Key facts

Adecco shares fell on Monday by 35.2 per cent to SFr53 from Friday’s close of SFr81.80.
It has delayed publication of its 2003 results and is conducting an investigation.
The company employs 28,000 people in 5,800 offices worldwide.

In brief

Two senior Adecco executives have resigned: the chief financial officer and the CEO of Adecco Staffing North America.

The board says it is “strongly confident” about the company and its future.

Two bodies in the US have opened inquiries into company activities.