1 / 26

The Current Environment

Auditing in the Post Enron World Phil Schimmel PIC, Assurance & Advisory Services Western Area (Los Angeles) KPMG LLP Mid-Year Meeting of the Auditing Section of the AAA Huntington Beach, CA January 17, 2003. The Current Environment. The Current Environment.

marcello
Download Presentation

The Current Environment

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Auditing in the Post Enron WorldPhil SchimmelPIC, Assurance & Advisory ServicesWestern Area (Los Angeles) KPMG LLP Mid-Year Meeting of the Auditing Section of the AAAHuntington Beach, CAJanuary 17, 2003

  2. The Current Environment

  3. The Current Environment • Alleged financial reporting crisis – “infectious greed” • More stringent regulation – globally • Rapid change, increasing complexity and disintegration of Arthur Andersen • Tarnished image of the profession

  4. The Current Environment • Restatements up dramatically • Approaching 4% of NYSE-listed companies and 3% of NASDAQ-listed companies (Projected)

  5. The Current Environment • Percent Restatements by Reason, 1997 – June 2002 • Revenue……………………………………… 37.9% • Cost/expense………………………………… 15.7% • Restructuring/assets/inventory…………….. 8.9% • Acquisition/merger………………………….. 5.9% • Securities-related……………………………. 5.4% • Reclassification……………………………… 5.1% • IPR&D………………………………………… 3.6% • Related-party transactions…………………. 3.0% • Other………………………………………….. 14.5%

  6. The Current Environment • Market Cap (Decrease) Increase by Reason, 1997 – March 27, 2002 (In Billions) • Revenue……………………………………… (56.4) • Cost/expense………………………………... (4.8) • Restructuring/assets/inventory…………….. 2.9 • Acquisition/merger………………………….. (19.3) • Securities-related…………………………… (2.3) • Reclassification……………………………… (1.2) • IPR&D………………………………………… (4.4) • Related-party transactions…………………. (2.1) • Other………………………………………….(12.6)

  7. The Current Environment • Regulatory trends (global): • More independent regulatory bodies with more power • Improved corporate governance and “transparent” financial reporting • Auditor independence (scope of services, partner rotation, firm rotation, partners/employees joining clients, etc.) • Expanded auditor responsibilities (fraud, internal controls, laws/regulation compliance, etc.) • Tougher standards for Firm quality controls and inspection by others for compliance • Harsher disciplinary proceedings and sanctions impacting firms and individuals

  8. The Current Environment • Increasing complexity for auditors • Difficult worldwide economy • Rapidly changing business models • Troubled and rapidly changing industries • Increasingly complex transactions • Tracked by increasingly complex systems • Accounted for by increasingly complex rules • Pressure for increasingly quick audit sign-offs

  9. Market Demands

  10. Market Demands on Public Companies • Corporate integrity • Severe penalties for wrongdoing • Ethical corporate governance for benefit of shareholders and other stakeholders, not management • Improved audit committee oversight of financial reporting & audit processes • “Transparent” financial disclosure • Reported earnings that reflect reality • Reformed executive compensation and incentives, including expensing stock options • More timely and accurate information, including non-financial information

  11. Market Demands on Auditors • No audit failures • Detect fraud and senior management misconduct • “Transparent” financial disclosure • Reported earnings that reflect reality • Assurance on internal controls • Greater independence in appearance as well as fact

  12. What This Means to Audit Firms

  13. What This Means to Audit Firms • High media/public profile • Cost of future audit failure • Protection from catastrophic events • Audit relationship shift • Effective and independent audit • Increased audit consultation with CEOs & audit committees • Increased legal consideration • Audit scope & fee increases

  14. What This Means to Audit Firms: Expectations of CEO • Auditor assurances to support CEO certification • Low/no tolerance for restatements • Expanded quarterly reviews • Expanded internal controls assurance • Assurance on non-financial information in SEC filings • Increased consultation • Creation of appropriate “tone at the top” • Risk identification and risk management processes • Systems and controls to manage risks

  15. What This Means to Audit Firms: Expectations of Audit Committee • The Committee is the client; hires and fires the auditors • Real dialogue and tough questions • Consultations on business risks, audit risks & audit scope required to reduce audit risk to a low level • Frequent communications on interim audit findings & interim changes to audit scope • Information/assurance on - • Critical accounting policy choices • Financial reporting quality • Resolution of issues with management • Senior management integrity and misconduct • Completeness of information from management • Internal controls

  16. Causes of Audit Failures

  17. Causes of Audit Failure Audit failures frequently relate to inadequate industry expertise Failure to - Industry-related • Understand the entity’s business model • Understand changes in the entity’s operating environment • Fully understand the nature and business purpose of transactions • Perform appropriate client acceptance/continuance procedures • Reconsider prior year judgments or assumptions • Involve specialists Other • Be sufficiently firm with client • Corroborate explanations given by client • Appropriately consider corporate governance • Consult on issues and judgments • Arrange realistic deadlines Audit failures are generally execution failures, not methodology failures

  18. KPMG’s Response – Post Enron

  19. KPMG’s Response – Post Enron • Task force of senior partners (U.S. and International) to took a fresh look at KPMG’s BMP audit methodology in the light of current environment and professional issues Task force conclusion: “BMP methodology is sound and even more appropriate in today’s environment.” “Focus should be on continuous improvements to execution.”

  20. Other KPMG Responses • Increase professional skepticism • Learn from audit failures – ours and those of our competitors • Expand audit program that addresses risk of fraud • Adapt controls evaluation and testing methods, policies and procedures for attestation on management’s reporting on internal controls • New model for audit committee collaborations & deliverables • More involvement of experienced audit team members • More involvement of specialists, particularly IT and Forensic specialists • Recruit, develop and retain the best people • More hours more fees

  21. Proposed Authoritative GuidanceAligns GAAS with BMP

  22. Proposed Guidance Aligns GAAS With BMP • Exposure draft on Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatement • Examples of proposed requirements under the ED aligned with BMP’s business modeling, strategic analysis and process analysis methodologies: • Obtain understanding of: • Objectives and strategies and the related business risks, including the entity’s risk assessment process • Industry, regulatory & other external factors • Measurement & review of the entity’s financial performance (KPIs) • Controls relating to operations & compliance pertaining to data the auditor uses in applying analytical procedures • How transactions are generated within the entity’s business processes

  23. Proposed Guidance Aligns GAAS With BMP • ED also: • Recognizes that information obtained and evaluated to assess the risk of material misstatement constitutes audit evidence • Requires iterative revisions to risk assessments when additional audit evidence contradicts prior assessments • Requires exchange of information about risk assessments through discussions among audit team members to achieve shared awareness • Requires the auditor to document the: • understanding obtained through risk assessment • discussions among audit team members and how and when they occur • risks identified • results of the risk assessment • linkages between identified risks and additional audit procedures

  24. Support for Higher Education • KPMG Foundation Programs – • Matching gifts • PhD Project • Minority Doctoral Scholarships • Sponsorship of Key Conferences & Organizations • KPMG/UIUC Business Measurement Case Develop & Research Program

  25. Support for Higher Education • Cases are available from the KPMG/University of Illinois Business Measurement Case Development & Research Program to assist you in helping students develop the critical systems-thinking and business analysis skills needed to perform risk assessment effectively in today’s complex audit environment. • To-date, over 70,000 copies of the cases have been downloaded from the Program’s web site. MBUSI – 10,522 Reiter – 4,883 Trigon – 2,980 Loblaws – 7,295 Lincoln S&L – 4,332 Qantas – 4,826 IDEC – 5,412 CVS – 17,300 U.S. Prem. Beef – 1.034 Wells Fargo – 8,706 VCC – 3,268

  26. Thank You

More Related