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One Accounting Firm's Response to Addressing Risk,
Post Sarbanes-Oxley

The evolution of risk management through the lens of KPMG was the focus of Scott Showalter's October 28th presentation to the Accountancy Lyceum. Showalter, a partner at KPMG, LLP, explained that risk management, post Enron, is taken more seriously and has become institutionalized. "We have a vice chairman of risk and regulatory matters, [a position] that did not even exist before Enron."

Quote from Scott Showalter.During a brief overview of the company's risk management structure, Showalter cited the importance of KPMG's security division, which is headed by a former CIA operative. Not only do employees undergo background checks, but such scrutiny is given to management of public company clients of KPMG as well. "One of the things we did, before Enron, was require background checks of major clients. You'd be surprised how some CFO's have bounced from company to company and they've done it to every company they've been with-where they falsify the forms. If a CFO of a company has been involved in a major re-statement, we will not accept that client."

KPMG's system of quality controls is all encompassing and has become an accepted part of the company's structure. "If you walk up to a public accounting firm and ask them about risk management, they will miss 90% of what I'm going to tell you because it's so much built into what they do that they don't recognize it as risk management."

Among the cogs in KPMG's engine of quality control are:

  • the compliance and ethics hotline, a reporting system for any illegal or unethical activity within the company

  • KICS, KPMG's independent compliance system, which reports all of the firm's investments

  • a policy of dispute resolution, which is a defined process on how to deal with professional disagreements

  • an online, international global conflict system called Sentinel that monitors the independence of partners and their clients and tracks the securities of the firm's partners

Showalter elaborated on Sentinel's emergence as a tool for quality control. "We must be able to monitor the services and the conflicts globally. While all of us say we're global firms, we are not actually global organizations; we're actually a holding company that, in KPMG's circumstance, has 135 member firms around the world that agree to work on their common structure. But each one of us, legally and structurally, is independent in the countries that we sit in. "

Thus, explains Showalter, the Sentinel program became absolutely necessary in tracking who the other 134 member firms are serving. "We record what services we provide to clients because, under Sarbanes-Oxley, I have to get approval to be able to perform certain services. When you extend a non-audit service to a client who is not approved by the audit committee, both the audit committee and the auditor is at risk."

Sentinel offers features that facilitate prevention and management. An automatic email, for example, is usually sent to the lead partner for a client when an account is opened that outlines the client's overall risk to KPMG. Partners can also use Sentinel to perform queries on everything from client location to the services that KPMG is providing.

Sarbanes-Oxley has also impacted personnel management at accountancy firms. "With the Sarbanes-Oxley mandate that prevents the partner assigned to an account and the internal reviewing partner from working an account for more than five years in either role, we have had to put someone in charge of overseeing partner rotation or the cycling of partners from one case to another when their five years are up."

KPMG's continual monitoring of its clients has sparked an increase in the number of clients that the firm has dropped. "We've looked at our risk portfolio, we don't like some of the risks we've had, and we're acting on that. Washington isn't happy with the number of clients the Big Four firms have resigned from."

The federal government's campaign to uphold the ethics in business has Showalter's support. "The world has really changed a lot, I think for the positive. My oldest son is beginning in the profession so I hope I'm leaving him a good impression with all of this."

D. Scott Showalter is presently a partner in the Department of Professional Practice at KPMG LLP. He has served on numerous leadership councils within the firm and since joining KPMG in 1975, he has worked as a technical advisor and lead partner to many of the company's largest and most complex public sector clients. He co-teaches several accountancy classes at the U of I. Showalter currently resides in New York.

--Michael Romain
November 2004