The future of corporate reporting: from the top. (Financial Reporting).

Eugene D. O'Kelly, Chairman and CEO, KPMG LLP 

Eugene D. O'Kelly took the helm as Chairman and CEO of KPMG LLP last April. A tough time to step into the top spot at a major accounting firm? In an interview with Financial Executive's Managing Editor Ellen M. Heffes, O'Kelly said he doesn't think his job is any tougher than that of any other CEO of a $4 billion-plus company. "The CEO job is always challenging, and I know every CEO in America will tell you it's probably the toughest time to be in this job," he says. Yet, he is apparently enjoying the challenge, saying his background and experience have prepared him well. Moreover, he's confident his firm is moving quickly to adapt to the future.

EH: The flurry of accounting and corporate reporting scandals seem to have cooled some, but still much is happening in Washington and more. What is your thinking -- are there "real" problems with the U.S. financial reporting model?

EO: What has happened is that the reporting model has become so complex and voluminous that the utility of financial reporting to other than extremely sophisticated investors has become irrelevant; the average investor has very little likelihood of really gaining a true appreciation for all the information that has been put together to satisfy the new reporting requirements.

At this time of year, every company is in the process of preparing its annual report -- which is going to be fairly voluminous for 2002. [With] the new disclosure requirements, there is clearly a different standard of materiality that regulators, shareholders and the investing public have imposed on them with regard to what is disclosed in their financial reports.

In addition, there is the process itself -- by which information is gathered, analyzed and acted upon within the company. That process has been significantly improved to the point now where it is comprehensive [and] consistent with the requirements. So, I believe that a great deal of improvement has been made.

EH: It's been quite a year, 2002: the loss in investor confidence, the stock market's continued downward spiral, and the overall changes since Enron, over a year ago. As we begin 2003, what do you expect will happen, in terms of legislation and regulation? Will Sarbanes-Oxley get the job done?

EO: I view Sarbanes-Oxley as directionally correct, and I believe the marketplace deserves some time before anything more is proposed. The implementation of the provisions of Sarbanes-Oxley are being circulated by the SEC as we speak, so as a consequence [it] still remains to be seen, how well it [the Act] gets implemented. Like any piece of legislation, it is far from perfect. I think what the marketplace would say right now is, "Give us a chance to absorb it, and don't go further than this at this point. Give us a chance to implement what's there."

EH: What are you -- at KPMG -- doing differently in light of the new, changed environment?

EO: As a firm, we are obviously trying to be responsive to the current environment. investors want a higher level of confidence today about the audit process, and that translates into ensuring that there's robustness.

We've responded in two ways: first, we have raised the importance of risk [management] throughout our organization. We've had a strong system, but, like anything else, it can be improved. Structurally, one way we've dealt with this is to elevate it to a vice chair position within our firm, with a direct report to me. We've appointed one of our most senior and respected partners to the newly created position of Vice Chair, Risk and Regulatory Matters. He reports directly to me and sits on our Management Committee. I think that signals to our 18,000 people the level of importance that it has.

Second, we've conducted a comprehensive review of all corporate accounting incidents in the last year and asked ourselves, "What can we do to enhance our audit product to make it even stronger?" Our answer is [to] build a forensic element into our audits, beyond what is required currently. And, we will continue to make these kinds of upgrades -- just to ratchet up the scope of the audit.

EH: Specifically, what is KPMG doing differently with client engagements, from the audit perspective, to improve audits, catch problems earlier and bring flags to clients' attention?

EO: In addition to the fact I cited earlier -- that we've added a forensic element to the audit -- we've introduced an ethics hotline for any of our personnel who feel as though there are circumstances in their client organizations that they want to discuss outside their normal chain of command. We've given them a way to voice any concerns that they may have.

Third, as I also said earlier, we've reinforced the importance of risk management at every level in our organization. Having just gone through the partner evaluation and reward process, we've balanced the way we allocate our partner pool of compensation to ensure the partners are appropriately rewarded for their role -- for their technical knowledge and the quality of their audits.

EH: What does it feel like at your firm -- from the inside? How different is it, and what's the impact on KPMG?

EO: The environment is changing in a couple of different ways. First, it's changing in terms of the scope of services we can provide to our audit clients. We are carefully evaluating, from our audit client base, those services that we have historically provided which, given Sarbanes-Oxley going forward, we may not be in a position to provide.

Second, we are evaluating the portion of the market where we don't do audit services -- [to assess] whether there is an opportunity for us to deliver services which those companies have historically bought from their auditors.

So, it's a two-fold strategy: trying to be comprehensive in the service offering to our existing audit clients; and to the degree that there are changes in the market, trying to be aggressive in regard to companies where we don't provide audit services.

EH: Your firm has separated itself from the consulting division, like competitor firms are doing. But you were one that completed the process earlier than necessary.

EO: We announced the decision to monetize our consulting business in August of 1998, and we then separately incorporated our consulting organization, first through incorporation in January 2000, and eventually in an initial public offering of that business in February 2001, which has now become BearingPoint, a separate, publicly held entity. We are, in fact, the only firm to date to take its consulting organization public.

There were principally two reasons for our decision: KPMG's leadership understood that the issue of conflicts [of interest] was increasing and wanted to be proactive in managing it. Secondly, a public company was a more attractive vehicle for retaining and attracting consulting talent than a private partnership -- particularly with wealth creation tools [such as] options.

EH: When you think about accounting these days, you also think international. There's talk about changes to U.S. GAAP, and the FASB is leaning towards some international standards and convergence. What is your perspective about principles-based versus rules-based standards, and do you envision convergence?

EO: I think there is going to be a convergence, but I don't think it is going to be as simple as some people may make it out to be, [and] that it's just going to be "principles based." When you peel back the onion, their system [the European system] is a lot closer to ours in terms of the level of rules. So, personally, I would say that the gap is not as wide as sometimes it is made out to be.

In fact, the European system is more rules-based, perhaps, than is commonly believed to be. But I think the opportunity is to gain convergence around the rules themselves.

What sometimes gets lost in this debate, is that the tort systems in Europe versus the U.S. are quite different. As a consequence, the accounting rules have grown up [in] part responsive to the tort systems in the two geographies. And that's not going to be easily reconciled.

EH: A few years back there was a movement in the U.S. towards merging accounting and law firms -- the "multidisciplinary firm" -- like in many European countries, and KPMG was said to be one of the largest owners of law firms outside the U.S. Where does that movement stand? It doesn't seem like the right climate for this to happen now in the U.S.

EO: As for where that now stands, there are two factors: One, Sarbanes-Oxley prohibits that. So, from a legal standpoint, it's not even possible. But, even prior to that, it would have required changes in the American Bar Association rules, which had not taken place.

So, as a consequence, that model never migrated to the U.S. It's under evaluation currently as to whether the European firms will continue to have legal affiliates, and it's too early to tell what form that will take.

In the U.S., we continue to be committed to a multidisciplinary model. And, what that means for us is: audits, tax and advisory services that are closely connected to risk identification and mitigation.

EH: On a personal note: When just out of college, you started your career with KPMG. This is unique -- that you've stayed with one firm for your entire career. Will you talk about some of the changes you've seen over the years -- in the firm, in your field and in your fellow professionals?

EO: Clearly, it was a much simpler world 30 years ago -- both from the standpoint of the business model, as well as the rulebook -- whether you're talking about accounting or tax. So, it goes without saying that things have gotten much more global and complex over that period of time.

I have tremendous optimism in the future of the profession. Because what I have witnessed is the ability of our firm, and the profession, to weather numerous storms over a period of years, and emerge with a vitality and a strength that continues to grow.

I also have a great deal of confidence in the future, particularly as it relates to our ability as a firm to adapt quickly to change; not to be wedded to practices that no longer work; and to evolve our business model to meet the needs of the investing public -- and our clients. Just having been in an organization and in the same profession for that period of time provides me with that confidence.

EH: In your role, as KPMG's leader, what are your current priorities? EO: I have three: 1) growth, as you would expect; 2) managing our risk, and a subset of that is rebuilding professional credibility. The way you do that is by enhancing the quality of your products; and 3) the people part, which we call "employer of choice."

The three obviously are all linked, but the third -- employer of choice -- is very important. [It relates to] how we attract, develop and retain the talent that it takes to be successful in the profession that we are in.

If I were to look at the relative balance [of the three], I've clearly given more weight to managing risk and being the employer of choice in this environment. Growth continues to be important, but it has always been important. So, it's a matter of just weighing those three and striking an appropriate balance between them.

EH: Following the negative publicity for the profession over the last year, there's been silence from many at the top, including yourself. Why have you been publicly silent?

EO: I think the point may be somewhat overstated. We have been active on the public policy front, and I've had discourse with the major news media. Although the next year is still going to be relatively uncertain and unpredictable on many fronts, I think we're coming up on a time where there's going to be greater receptivity and opportunity to enter into the public debate and be a positive voice in a forum in which opinions can be heard.

Equally important is that we have stayed in contact with our clients throughout this period. That's the crucial channel.

Short-Term Convergence Project The scope of the short-term convergence project is limited to those differneces in which convergence around a high-quality solution appears achievable in the short-term. It is expected that a high-quality solution can be achieved by selecting between existing U.S. GAAP and IFRS (International Financial Reporting Standards). The short-term convergence project is being conducted in three distinct parts.

Part One entails the IASB conducting a project to improve the standards issued by its predecessor, the International Accounting Standards Committee (IASC), known as the "improvements project." The first part of the project would seek to reduce or eliminate some of the differences, including: classification of liabilities on refinancing; classification of liabilities due on demand due to violation of debt covenant; asset ex-changes, voluntary change in accounting policies, financial instruments.

Part Two would seek to reduce or eliminate some of the differences between U.S. GAAP and IFRS that arise from changes in U.S. GAAP made by recently issued FASB statement. These include discontinued operations and accounting costs associated with exit or disposal activities.

Part Three will address some other differences on which convergence appears achievable in the short-term. These include: inventories -- idle capacity and spoilage; accounting policies and changes in accounting estimates; income taxes; financial reporting in hyperinflationary economies; joint ventures and proportionate consolidation; interim financial reporting; and research and development.

To keep up to date, visit the Web sites: www.fei.org; www.fasb.org; and www.iasb.org.uk.

RELATED ARTICLE: domestic

FASB and IASB Each Work Toward Global Convergence

Since October, when the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced an agreement to work together toward convergence, several initiatives have been undertaken. In a recent issue of The FASB Report, Jeffrey J. Johnson outlines some strategies, policies and procedures in place at the FASB to facilitate convergence of U.S. standards with those of the IASB.

Some of the key initiaties include:

* Liason IASB member on site at the FASB offices

* Policies and procedures for FASB monitoring of IASB projects

* The Short-Term Convergence Project

* other joint projects being conducted with the IASB

* The Convergence Research Project

* Explicit consideration of convergence potential in all board agenda decisions.

Due to these and other initiatives, the FASB expects to make significant progress toward international convergence in the next few years. However, because of the volume of differences and the complex nature of some of the issues, many differences will persist well beyond 2005.

international

IASB 2003 Meetings

The IASB will meet in public session on the following dates. Meeting take place in London, UK, unless otherwise noted:

January 22-24, 2003

February 19-21 *

March 19-25

April 24-May 2 **

May 21-23

June 16-20 *, Rome, Italy

July 23-25

September 17-23 **

October 22-24, Toronto, Canada

November 17-21 *

December 17-19

* Includes a meeting with the Standards Advisory Council (SAC).

** Includes meeting with partner national standard-setters.