Tower Group comments on new reoprt that faults KPMG in New Century collapseMortgagePress.comNew Century, Tower Group, KPMG, U.S. Department of Justice, Rodney Nelsestuen, Inci Kaya
A recent report prepared for the U.S. Department of Justice has
found fault with accounting firm KPMG for contributing to the April
2007 collapse and bankruptcy of sub-prime mortgage lender New
Century Financial Corporation. KPMG denies that it ignored
accounting rules in its auditing for the company, which resulted in
senior New Century executives benefiting from generous bonuses that
would otherwise not have been paid, and which otherwise masked the
real financial condition of the lender.
Regardless of the truth in this matter, the appearance of sins,
whether of omission (error) or commission (fraud), can sully the
reputation of any professional services firm, said Rodney
Nelsestuen, senior analyst at TowerGroup.
Inci Kaya, a quantitative analyst at TowerGroup, cited
reputation risks to both financial institutions and their hired
consulting firms because of the challenges of satisfying customers
in a marketplace where consultancy work is increasingly
competitive. The pressure to find in favor of those who hire your
firm creates an opening and, in some cases, an incentive for moral
lapse, she said.
Both Nelsestuen and Kaya noted that Arthur Andersens involvement
in the Enron scandal exposed fundamental flaws in the consulting
sector, and served as a wake-up call to the industry. The scandal
resulted in the establishment of more rigorous reporting standards
and the separation of the accounting and advisory services arms of
professional services and consulting companies. Yet TowerGroup has
found that, over time, these lines of separation have again begun
to blur.
For financial institutions, TowerGroup stresses the importance
of avoiding situations that may lead to conflicts of interest or
put undue pressure on their professional services providers. Beyond
specific areas of concern such as accounting, the following steps
are fundamental elements of a comprehensive approach to integrated
risk management. At the core, it is a Board-level responsibility to
demand that the institution:
1. Maintain strong internal controls with independence and with
arms-length audit processes, whether internally or externally
provided;
2. Avoid complacency with chosen providers by maintaining a
rigorous selection process;
3. Demand high levels of integrity from key officers;
4. Maintain a policy of rewarding whistle-blowing instead of
allowing a culture of fear to permeate the institution;
5. Insist on the conservative application of accounting rules
instead of accommodating a more liberal interpretation in the face
of pressure to demonstrate improved financial results; and
6. Understand that while fiduciary responsibility may uncover
devastating news about an institutions finances, early intervention
is still the best hope for taking corrective measures to remedy the
situation both internally and externally.
For more information, visit www.towergroup.com.
