The final days of Danish software
company IT Factory reads more like a pulp fiction thriller than the
country’s largest corporate fraud scandal. Nicholas Moody and Jason
Hesse report on how two of Denmark’s Big Four firms have been
tarnished by the country’s most serious fraud case.
This year KPMG and Ernst & Young have had a high public profile
in Denmark for all the wrong reasons thanks to IT Factory’s former
chief executive, Stein Bagger, who stole almost $157 million from a
host of Scandinavian lessors and banks.
KPMG Denmark, IT Factory’s auditor from
2005-2007, is likely to be sued for not picking up irregularities
in IT Factory’s accounts, particularly around the company’s lease
Ernst & Young (E&Y) Denmark were also
left red-faced when it briefly named Bagger as Denmark’s 2008
Entrepreneur of the Year, before swiftly stripping him of the
At the centre of the fraud is Bagger, a
42-year-old former bodybuilder who had rapidly become a Danish
Between 2003 and 2007, Bagger was responsible
for growing IT Factory’s revenue 69 times and its profit by an even
more impressive 288 times, to reach DKK121 million ($23 million) in
But the bubble burst on 1 December last year
when IT Factory was declared bankrupt by its chairman Asger Jensby
following revelations that at least 90 percent of all revenue was
invented by Bagger.
Bagger eventually handed himself into the Los
Angeles Police Department on 6 December 2008, nine days after he
went missing from his hotel in Dubai. In total, Bagger admitted to
defrauding companies of DKK831 million.
Last month, the former high flier appeared in
court to answer to 61 counts of forgery and falsifying signatures
on contracts, which helped him fraudulently sell and lease back
non-existent software products to some of Scandinavia’s biggest
banks and lessors. He was sentenced to seven years in prison.
KPMG Denmark now faces a civil case to clear
its name after court-appointed bankruptcy lawyers indicated in a
report on 1 April they would launch a suit against the firm and the
defunct company’s board of directors.
IT Factory’s state-appointed liquidator Boris
Frederiksen said the plaintiffs would look to issue a writ as soon
as July but has yet to outline how much they might seek. About
DKK220 million remains unaccounted for.
KPMG Denmark senior partner Jesper Koefoed is
confident the firm won’t be liable for any significant damages
primarily because many of the claims against KPMG are based on
contracts with forged signatures.
Koefoed said there are also at least seven
fictitious documents using KPMG’s name. The auditor also claims to
have received many more forged documents.
In several instances, Bagger forged bank
signatures to satisfy KPMG’s interest when it carried out its
audits and also falsified KPMG’s signatures, primarily to present
to banks and leasing companies who apparently were seeking
assurance from IT Factory’s auditors.
“If we sent him a letter, he took out the
original content of the letter and replaced them with statements
that he would see fit in order to satisfy requests from
shareholders, banks and leasing companies etc,” Koefoed says.
KPMG also denies it made technical faults and
omissions during its audits, in contrast to the bankruptcy estate’s
Frederiksen said he would not have initiated
legal proceedings unless he was optimistic.
“It’s a fact that KPMG was aware that IT
Factory had entered into a number of leasing agreements, but they
didn’t show the debt that was connected to those leasing agreements
in IT Factory’s 2005, 2006 and 2007 annual accounts,” he says.
E&Y is another to suffer unwanted public
attention. Before the IT Factory fraud was exposed, the firm named
Bagger Denmark’s 2008 Entrepreneur of the Year.
E&Y Denmark partner and director of its
entrepreneur of the year programme Søren Strøm says the firm took
back the award as soon as it was informed of Bagger’s
disappearance, just days after naming him winner.
Strøm defends the firm’s examination process,
which in Bagger’s case was based on analysing publicly available
information, filtering the responses to a 25 page questionnaire and
conducting a three hour face-to-face interview with Bagger himself
attended by one of E&Y’s IT advisory experts.
“We try to go behind the entrepreneur and
understand what is driving them [but] he has been able to tell his
story to everybody and everyone has believed it,” Strøm says.
IT Factory fraud – how it
• November 2008
– IT Factory chairman Asger Jensby and another
board member ask if they can speak to IT Factory managers, but
Stein Bagger tells them that this is impossible because several of
them are travelling on business.
• 26 November 2008
– Bagger travels to Dubai with his wife on
• 27 November 2008
– Ernst & Young (E&Y) award IT Factory
the “Danish Growth Champion” award, and name Bagger the
“Entrepreneur of the Year” .
– In Dubai, Bagger leaves his seat during
dinner and does not return. He withdraws DKK23,000 ($4,350) twice,
rents a car and drives through the desert to Abu Dhabi.
• 28 November 2008
– Bagger flies out of Abu Dhabi and arrives in
New York the same day, where he borrows a business associate’s
credit card and car to drive across the US.
• 1 December 2008
– Jensby publicly declares that IT Factory is
bankrupt, and that the “vast majority” of its business was
– E&Y strip Bagger and IT Factory of their
• 6 December 2008
– Bagger turns himself in to the Los Angeles
Police Department and is arrested after a warrant is issued by
• 27 March 2009
– At a court hearing, Bagger admits to
committing fraud worth DKK831 million.
• 1 April 2009
– Court appointed bankruptcy lawyers indicate
they will launch a case against KPMG Denmark and the defunct
company’s board of directors.
• 12 June 2009
– Bagger is sentenced to seven years in
Source: International Accounting