Auditing at the Speed of Change

Henry Keizer is the global head of audit for KPMG International and U.S. vice chair of audit for KPMG LLP. He also is a member of the AICPA board of directors. He spoke with JofA Publisher and Editor-in-Chief Joanne Fiore following the AICPA’s board of directors meeting in August and in a follow-up e-mail interview. The following are excerpts from those conversations:

JofA: What were the top challenges you faced this past year and how did you meet them?

Keizer: Most of the top challenges I’ve faced fall under the umbrella of the economic crisis. To begin, the truly amazing speed of the deterioration of the economy and major corporations was a challenge for everyone. With markets evolving quarter to quarter, this often led to reassessments of and modifications to valuation approaches based on the new facts and circumstances, or on guidance from FASB and the SEC.

Another significant challenge was determining reasonable and informed judgments given the circumstances, and developing an understanding of the factors and market characteristics that were impacting asset valuations. These—and other factors—resulted in more expansive discussions among auditors and our clients … and I can tell you we’ve been working very closely with all parties involved in the auditing process—management, audit committees, outside constituencies and regulators—to really review and evaluate these complex issues, some of which had little or no precedent. We’ve had to work through some thorny questions, like how do you value complex securities in an illiquid market? How do you ensure the right judgments are being made when markets are behaving in ways seldom seen before?

As we looked at those challenges, we also needed to study the changing risk profile of our clients. How would we evolve our audits to respond to the economic crisis that was being presented? It required us to move information through our network of member firms at a far greater pace than we had ever done before.

JofA: You mentioned information dissemination in response to the economic crisis. Did you set up new systems or have new approaches?

Keizer: We use a variety of different means to cascade information through KPMG’s member firms. For example, we set up weekly global conference calls in our financial services line of business to allow individuals to hear about the issues that were affecting engagement teams and clients and what the response was to those issues. We also set up mechanisms for teams to escalate issues within their country leadership, so the appropriate resources from a national level could be brought in to assist engagement teams, arrive at appropriate conclusions and analyze the information, making sure the most current knowledge was brought to bear.

We also took a look at the use of specialist resources on engagement teams, particularly in the valuation area. We also encouraged more proactive dialogue among our clients, engagement teams and specialist resources to enhance our overall understanding of circumstances impacting the financial markets, and the performance of specific instruments within such markets.

JofA: What’s been the most difficult aspect of the financial crisis?

Keizer: I think the most difficult aspect for auditors was dealing with rapidly changing financial markets and assessing the commensurate impact on asset valuations. The situation required auditors to rethink their audit approach, to gather new and different information, and to analyze such information more quickly to facilitate dialogue with our clients regarding the reasonableness of valuation processes and the output from such processes. If you think about the challenge of dealing with valuation and impairment considerations in a market that reacted in a way never seen before, it required our auditors to rethink risk assessment with clients, to change procedures, and to use valuation specialists more broadly than they had been used previously—specialists that could understand very complex instruments and look at the marketplace in a new way.

JofA: What do you view as the role of fair value in the current economic crisis?

Keizer: When you talk about the role of fair value in the economic crisis, you really must understand that fair value accounting did not cause the economic crisis. It was the convention used to measure the economic crisis.

Whenever you have a standard, it’s important to consider the related disclosures and the totality of information presented to investors. It’s also important whenever you discuss standards to recognize the importance that standard setters have in maintaining their independence from any political influence or oversight. This was clearly a significant lesson when you consider the pressure that existed around the standard setters as the economic crisis unfolded.

I think as we look to the convergence that’s expected to occur as we move t IFRS that we have the highest degree of consistency and transparency in those standards so that all investors, regardless of the country that they’re in, can have the same model and be able to have comparability across geographies and borders.

JofA: What are the key skills and experiences you evaluate as associates build their careers at KPMG?

Keizer: We map their skills to our strategic priorities. I start with our first: professionalism and integrity. Do our professionals have the ethical fiber of the highest degree? Do they embrace our core values? Do they have the skills, competency and experience to provide and perform quality audits? Do they have a thirst to acquire that knowledge?

We look at their people skills. Our strategic priority is to make sure we have the best people and that they’re afforded a terrific opportunity to build an outstanding career. Do they know how to coach, teach and supervise individuals? Do they want to collaborate within a high-performance team?

We also look at their skills around growth. In a professional services organization, it’s important that each member has the opportunity to grow and rise in that organization as their careers are built. We look at their appreciation for global skills and competencies. It’s critically important that our professionals have experience working in global settings and appreciate the diversity of cultures.

Watch Henry Keizer discuss sustainability and accounting for cap-and-trade programs at journalofaccountancy.com/Multimedia/Keizer.