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'Pivotal role' for accounting firms in improving risk controls

By  Bi Xiaoning (China Daily)
Updated: 2009-06-01 16:18

The risk management flaws exposed by the outbreak of the global credit crisis are forcing financial institutions and corporations around the world to revise their business models and shape up their managements.

At the center of this reshuffle that could reshape the global business environment are international accounting firms that also provide highly influential management consultant services.

In an interview with China Business Weekly, Timothy Flynn, chairman of KPMG International, one of the world's four biggest accounting firms, said that the crisis has presented corporate executives with a host of "strategic possibilities".

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His advice to the major international corporations, most of them clients of the "big four" accounting firms, was to do a thorough and comprehensive review of their business models, operations, compensation incentive packages, and, more importantly, risk management status.

Since the outbreak of the financial crisis last year, KPMG, as well as its peers, have all strengthened their corporate advisory capabilities and focused especially on risk management services. These include the redefining of risk management structures, achieving better cash management procedures, optimizing returns on capital and asset, restructuring debt, and improving the transparency of financial reporting.

"We need to bring risk management front and center into the new system," Flynn said. "Organizations that have effective risk management processes are likely to be the ones that are successful in these unprecedented economic times, and raise the level of trust both inside and outside their businesses," he said.

Flynn said he was encouraged by the G20 summit in London in April, which brought world leaders together to coordinate international efforts in strengthening the regulatory framework to minimize risks and enhance transparency.

"These are very encouraging signs to me that the world would be very different when we come out of the crisis," Flynn said. "It is important to recognize that what we are experiencing is not a cycle, but a fundamental resetting of the global economy and the way we do business," he said.

Being cautious

Despite his confidence in the future of the global economy, especially that of China, Flynn was cautious in predicting the duration of the financial turmoil. For that reason, he has taken some cost-cutting initiatives in KPMG.

Based on talks with numerous chief executives of major banks and corporations, "we have another 12 to 24 months before we can see a real recovery", Flynn said.

Like many other accounting firms, KPMG business related to initial public offerings and mergers and acquisitions has dropped significantly in line with the decline in the number of transactions because of poor market sentiment.

The firm has devised several flexible programs to achieve the sometimes conflicting goals of cutting costs and retaining key talent. In China, for instance, KPMG recently implemented a Part Pay Leave (PPL) program, which encourages staff to take up to forty days leave at 20 percent of their salary in 12 months.

"It's a voluntary choice for staff and over 80 percent of our people in China have joined the program. We hope that we will not have to make staff redundant," said Flynn.

KPMG currently has around 9,000 employees in China. It plans to recruit 1,900 fresh graduates and experts this year, approximately the same number as in 2008.

"We are optimistic about China's future growth and believe China will be one of the first countries to rebound and hopefully lead the rest of the world to early recovery," said Flynn.

Bucking the global trend, KPMG announced that it had experienced strong growth in emerging markets in 2008, including China, Russia, Brazil and India. In China, its business jumped over 25 percent year-on-year. Looking ahead, Flynn is confident that KPMG China can achieve double-digit growth this year.

To take advantage of the upturn when it comes, KPMG China is also actively preparing for the resumption of new share issues on mainland bourses.

"The Chinese securities regulator stopped the approval of new IPOs in September last year, but our preparatory work hasn't stopped. We are working with about 60 companies that are preparing to get listed at home or abroad. We are also very excited by the to-be launched NASDAQ-style second board, since some of our clients are interested in getting listed on it," said Flynn.