Since May of 2021, an advisory engagement team had
been providing managed technology services to a healthcare
company. The services primarily consisted of managing the
entity’s enterprise resource planning system, which was
permissible at the time as the entity was not an audit
client or an affiliate of an audit client.
In April of 2023, our audit client, a private equity firm,
announced it was acquiring a majority stake in the
healthcare company. As a result, the healthcare company
would become an affiliate of our audit client upon closing
of the acquisition. At the time of the announcement, my team
created a new entity in Sentinel and added it to our audit
client’s Sentinel family tree.
The acquisition closed in June of 2023
During our quarterly independence procedures, we discovered
that there was a duplicate of the healthcare company within
Sentinel and after performing a service history review, our
team identified the ongoing managed technology services for
the healthcare company that was no longer permissible now
that they were an SEC restricted entity.
Initially, my team used the Sentinel Entity Management Tool,
to add the healthcare company to our client’s Sentinel
family tree. However, the team overlooked the potential
matches provided by the tool, which would have alerted us to
the existence of the entity already in the system. Instead
of linking the existing entity into our audit client’s
Sentinel family tree (and running a service history report
which would have identified the managed services), my team
inadvertently created a new entity, allowing the
impermissible services to continue.
Once my team identified the issue, KPMG immediately
terminated the impermissible services. However, this
oversight resulted in a prohibited management function
violation that needed to be communicated to our client’s
Audit Committee and I was assessed a Category 2 sanction
under our firm policy.
This experience taught me that although we have systems in
place that are designed to help teams get it right, we must
still be diligent in performing procedures appropriately.
Had we been more thorough during our review of potential
matches in Sentinel, we could have exited the impermissible
services ahead of the acquisition, avoided incurring a
violation and needing to have a difficult conversation with
our client’s Audit Committee, potentially damaging the
valued relationship.