Leah is the audit engagement partner for Towerfield,
an SEC audit client. Christian, a managing director
in advisory previously provided services to Towerfield’s
parent company, Camton Ridge, Inc. Advisory performed
a gap assessment of Camton Ridge’s current state system,
processes and controls against applicable regulatory
requirements and leading practices. In response to KPMG’s
high-level observations and recommendations from that
engagement, the CEO of Camton Ridge asked KPMG to perform a
similar gap assessment engagement and to design a system to
help measure the ESG data of both Towerfield and Towerfield’s
sister affiliate, Kensworth & Co. Christian, excited to
win more work with the client reached out to Leah about
possible service options.
Christian: So the CEO of Camton Ridge wants us to design a
technology solution to help measure the ESG data of both
Towerfield and Kensworth & Co., after we’ve performed the gap
assessment services.
Leah: hmm
Christian: What do you think?
Leah: Well, I know that because we can’t audit our own work,
we aren’t able to provide financial information or risk
management systems design and implementation services to SEC
audit clients.
Christian: Oh, I didn’t know ESG systems fell into that category.
Leah: They do. But, we may be able to provide this service to
Towerfield’s affiliate Kensworth, if it meets the
‘reasonable to conclude’ exception.
Christian: I don’t understand. Why would we be able to
provide the service to an affiliate of Towerfield, and not
Towerfield itself?
Leah: Well, we can only apply the reasonable to conclude
exception to affiliates, such as sister or upstream affiliates of
SEC audit clients where the results of our services won’t
be subject to our audit procedures. Just remember, the
exception can never be applied to the audit client itself, or
its subsidiaries.
Christian: Well, the CEO of their parent company, Camton Ridge
requested we provide the services to both entities. If the
exception can be applied to Kensworth, I’m sure it’s not a
big deal if we provide the same service to Towerfield.
Leah’s not fully clear if the reasonable to conclude
exception can be applied in this case and determines that
to make an informed decision around the permissibility of
the proposed services, she needs to collect additional
information and connect with the Independence Group. After
receiving their guidance, she reframes the discussion with
Christian to focus the scope of the engagement on what is
permissible and in the best interest of both Towerfield
and KPMG.
Leah: And with the right guardrails in place, there’s a lot
we can do for SEC audit clients and their affiliates. But we
need to be mindful of where those guardrails are.
Christian: What do you mean?
Leah: Financial information or risk management systems
design and implementation services are one of the SEC’s ten
prohibited services. We can never perform those services for
our direct SEC audit clients - like Towerfield. But we can
apply the reasonable to conclude exception to provide the
services to Kensworth & Co.
Christian: Okay- good to know, but how did you get to that decision?
Leah: After getting clarification from Independence. It’s
reasonable to conclude the information generated by the
technology solution we would design for Kensworth will not
be subject to Towerfield’s financial statement audit, so
we can proceed with the engagement for Kensworth.
Christian: So, if we provided the services directly to Towerfield,
the results would be subject to your team’s audit.
Leah: Right. If we went outside the guardrails and incurred an
independence violation, Towerfield’s Audit Committee might
lose trust in KPMG’s ability to maintain our independence.
We could not only lose future advisory work, but also our
audit work with Towerfield, if they were required to find
another audit service provider due to independence violations.
Christian: Wow. Okay, so I guess KPMG performing the ESG
design and implementation services for both entities would
be a big deal.
Leah: Yes, it definitely would.
Christian: So- we can still provide non-audit services to our
audit clients, but we have the opportunity to provide more
services to some affiliates by applying the reasonable to
conclude exception.
Leah: Exactly.
Christian: Can we apply the reasonable to conclude exception
to all the SEC’s ten prohibited services?
Leah: No, it can only be applied to five of the ten
prohibited services. Services that would constitute
performing a management function or providing HR, broker-dealer,
legal, or expert services - would always remain prohibited.
Christian: It seems like determining if you can apply the
reasonable to conclude exception can be complicated.
Leah: Yes, very, there are a lot of things to consider. Just
make sure you always speak with the Sentinel Lead Partner so
they can determine if the exception can be applied.
Christian: Got it.
Leah: Great. And even though we can’t design the technology
solution for Towerfield, we can still support them in
finding a solution.
Christian: How so?
Leah: Well, your team can provide vendor selection assistance
services to Towerfield.
Christian: So instead of designing a system to measure Towerfield’s
ESG data ourselves, we can help them find an
alternate vendor?
Leah: Right. We can do the market research and present
the pros and cons of various vendors based on Towerfield’s
selection criteria, then provide them with information they
can use to decide who’ll design the technology.
Christian: Sounds like a plan. I think that once I explain
the independence rules to Camton Ridge’s CEO, they’ll
understand why we can perform the ESG design and
implementation services for Kensworth - but not Towerfield.
Leah: Agreed. They’ll appreciate that we still have the
ability to help Towerfield, just in a different way.