Risk, potential impact and mitigations

Appropriateness of our clients and services

Acceptance of clients that are inappropriate to our brand and/or delivery of services which are either illegal, unethical, contravene professional standards, or are otherwise perceived by investors, regulators or other stakeholders as inappropriate.

Potential impact

• Reputation in the marketplace impacted by working for the wrong clients or delivering the wrong service
• Regulatory sanctions including temporary loss of licence
• Loss of major clients

Mitigation

Our internal quality control system including:

• Our client and engagement acceptance procedures
• Our proprietary system which checks for conflicts of interest
• Detailed policies and procedures around auditor independence
• Strict new products and services approval processes
• Our routine compliance programmes
• Our Code of Conduct and Values

Regulatory relationships

Failure to maintain good relationships with audit regulators or deal with any adverse findings from regulatory inspections to the regulators satisfaction

Potential impact

• Loss of major audit clients
• The inability to attract new talent into ouir ELLP firms

Mitigation

• Nominated individuals responsible for interation with regulatory authorities on a country basis and a clear KPMG Europe LLP framework for understanding local regulatory matters
• Majority of ELLP Board are "Qualified Individuals" with appropriate audit training and background

Audit Failure

Major or multiple audit failures (as a consequence of signing an incorrect audit opinion and/or poor quality auditing) resulting in litigation and/or regulatory action.

Potential impact

• The loss of a number of audit clients due to reputational damage
• The inability to attract new talent
• Regulatory fines and/or temporary or permanent loss of audit licence

Mitigation

Our audit quality controls include:

• A tone at the top which emphasises quality, ethics and integrity
• Our client and engagement acceptance procedures
• Clear standards and robust audit methodology and tools
• Controls over recruitment, development and assignment of our professionals
• Commitment to technical excellence
• Controls to deliver an effective and efficient audit
• Commitment to continuous improvement through monitoring

Major litigation

Major litigation, particularly cross-border litigation, arising where we have either delivered services directly in another jurisdiction or are working as part of an engagement with other firms within the KPMG network and that engagement results in litigation.

Potential impact

• Significant defence costs and/or settlement costs incurred
• Reputational damage caused resulting regulatory scrutiny
• Excessive use of leadership time in resolving legal issues

Mitigation

• Default position of engagement contracts being prepared under local law and jurisdiction
• Rigorous and robust inter-firm contracting protocols when working with other KPMG member firms
• Detailed policy, guidance and approvals for delivering services in overseas jurisdictions

Pricing

Tough economic conditions mean clients are seeking more innovative pricing models and becoming more value conscious in their purchasing.

Potential impact

• Losing out to competitors on price - impacting ability to retain market share
• Increased incentive for our professionals to cut corners - impacting on quality
• Existing resources will need to work harder - with consequences for morale and talent management
  

Mitigation

• Engagement recovery considered as part of acceptance process
• Specific pricing panels in operation in parts of our group
• Compliance programmes monitor engagement quality
• Increasing use of resource in lower cost territories to support delivery

Regulatory change

Major changes in regulation impacting on our business model including regulatory action proposed by the European Commission including:

• Audit only firms
• Mandatory tendering and audit firm rotation
• Prohibit or severely restrict auditors from providing non-audit services to their audit clients
  

Potential impact

• Fundamental impact on our business model
• Making it more difficult to achieve audit quality
• Undermines our ability to deliver multidisciplinary solutions to our clients
• Reduction in audit quality
  

Mitigation

Processes and procedures established to mitigate the risk include:

• An established plan within KPMG Europe LLP for regulatory liaison
• Scenario planning for potential medium-to long-term outcomes arising from regulatory change
• Contingency planning for key potential changes arising from the recent EU proposals on Audit Policy and the impact of other foreseeable regulatory change

Data loss

Failure to protect client confidential or personal data

Potential Impact

• Reputational damage
• Loss of clients
• Potential litigation
  

Mitigation

• Robust IT security policies and processes
• ISO 27001 accreditation in our largest firms
• Ongoing training

Reacting on new trends

Inability to quickly and effectively match key skills to growth areas due to organisational barriers; skills shortages; slowness in identifying/recruiting appropriate skills; or a lack of staff mobility and/or flexibility.

Potential Impact

• Failure to quickly and fully exploit growth opportunities resulting in loss of revenue
• Failure to match resource to demand could result in an excessive cost base in areas of reducing demand
• Failure to develop future leaders with the right experience and international mindset
• Quality implications of having the wrong people deliver services
  

Mitigation

• Monitoring of resource levels and functional hot spots
• Partner career paths and development Partner succession planning
• Global mobility programme in place
  

People engagement

Reduced morale potentially caused by high workloads impacting work life balance; poor internal communications; uncertainty around career development; and reward packages being perceived as uncompetitive.

Potential impact

• Demotivated staff leading to service delivery issues and a reduction in quality
• Lower productivity
• Loss of key talent
• Loss of reputation in marketplace as an employer of choice
  

Mitigation

• An embedded group of People Management Leaders
• Sophisticated appraisal and reward processes
• Ongoing review of global performance management
• Ongoing initiatives to address feedback from people surveys

Talent management

Inability to recruit and retain sufficiently qualified, motivated and experienced people.

Potential Impact

• Loss of talent leading to service delivery issues and a reduction in quality
• Loss of reputation in marketplace with clients
• Succession planning fails
  

Mitigation

• Special training programme in place focusing on leaders of the future
• Annual promotion process and pay review
• Defined partner career paths and development
• Partner succession planning