KPMG

STUART FIELDHOUSE
Originally published in the April 2011 issue

In response to changing marketing conditions and evolving regulation, KPMG’s offshore hedge funds audit practice is expanding. According to Rob Mirsky, KPMG’s UK hedge funds leader, the firm is on a ‘recruitment drive’ of sorts including the recent appointment of Dan Roman as a tax partner. The expansion is evidence of increasing demand for KPMG’s hedge funds audit services, not only in London, but also Dublin and the Channel Islands.

KPMG’s hedge fund practice has undoubtedly benefited from the size and expertise of both its audit and tax practice. The success of the practice stems from the fact that it is more than just an audit or tax practice. First and foremost, it is a hedge funds team that specialises in servicing alternative investment funds. The group brings a broad skill set to hedge funds advice, of which tax and audit are a significant part, but by no means the only part.

“We are agnostic about which ‘service line’ people sit in within the firm – be it audit, tax or advisory,” explains Mirsky. “We are hedge fund guys first and foremost.”

The team in London carries out UK-based fund audits as well as management entity audits. Ultimately, the hedge fund audit is carried out wherever the books and records are held. The presence of a sizeable team in the UK, including accountants qualified for IFRS and US GAAP, means KPMG is equipped to get to grips with a wide variety of requirements without anyoneneeding to board a plane. This is a big bonus for many of the European hedge funds that call London home.

Outside London, KPMG also has one of Dublin’s leading hedge funds audit practices. “We’re very strong on the regulated side in Ireland as well,” says Mirsky. “Again, it should not be seen as purely an audit practice.” Complementing London and Dublin is the team in the Channel Islands, with a tax, advisory and audit presence in both Guernsey and Jersey.

Back office expertise
KPMG’s close relationship with hedge fund administrators is key to the group’s success. “We spend a lot of time going to see the administrators,” says Mirsky. “We look very closely at how they have been independently tested. We know them really well, and we make sure that when we come in and work with them to complete an audit, it goes as smoothly as possible. It needs to be done right, and it needs to happen at a reasonable pace.”

Ireland, of course, has always been a tough place to hang on to staff in the alternative fund services business. The runaway success of the International Financial Services Centre (IFSC) and the increasing demand for experienced tax and legal personnel that occurred, in parallel with the growth of the offshore hedge funds industry since the mid-1990s, has made it hard to keep experienced fund audit teams together. KPMG has done well in this respect by making staff retention a priority. “We have far lower turnover than the other firms,” explains Mirsky. “KPMG has been ranked as one of the best places in the world to work. We have a culture of flexibility which has contributed heavily towards our ability to keep the top professionals.”

SAS 70 opinion
KPMG’s role in the back office is becoming more demanding. The financial crisis in 2008 and the subsequent Madoff blow-up have placed increased emphasis on the quality of the auditor and on the oversight of back office processes. The SAS 70 reviews of processes and controls have been taken on as additional service offerings by the audit firms, and KPMG has been active in its role as service auditor, carrying out tests and providing an ‘assurance’ opinion. Accountancy firms are naturally well-placed to provide additional operational oversight.

The SAS 70 opinion will tend to cover three main areas, namely whether the controls described by management are fairly stated; whether the controls are suitably designed; and whether the controls are operating effectively. SAS 70 testing is becoming much more widely demanded by the hedge funds investing community, and KPMG has been seeing a commensurate growth in this side of its audit business.

SAS 70 reporting can feature in one of two types of report. A Type I report is issued “as at a point in time”, and provides an opinion on the statement and design of controls as outlined above. These are often issued at the year-end date for the issuing firm.

A Type II report covers a period of time (minimum of six months but usually for annual periods), and provides an opinion on all three elements of the SAS 70 designation, including the effective operation of controls.

KPMG’s main role under SAS 70 is as a service auditor. The work is carried out separately to the financial statements audit, but can be run in parallel. This will usually employ the same team in situations where KPMG is already acting as the audit firm.

“We have other clients where we only perform the role of service auditor for the SAS 70 and do not audit the financial statements,” says David Yim, director in KPMG’s hedge funds advisory practice. “We also spend a significant amount of time acting in an advisory capacity to our clients looking to issue a SAS 70 for the first time.”
KPMG works with clients to help them scope their report and advising them on the reporting framework to adopt (this might, for instance, be the AAF, the UK equivalent of the SAS 70, or the new international standard, the ISAE3402). KPMG willwork with the client to draft the process and controls to be included in the report. It has a specialist advisory team that assists clients with the advisory aspects of these reports, helping to ensure the process runs smoothly, and avoiding many of the most common pitfalls.

SAS 70 as a reporting standard is due to cease in June of this year, to be replaced by the internationally-recognised International Standards on Assurance Engagements 3402, which will apply to all reports ending on or after 15th June this year.

“Undoubtedly people will still be asking for SAS 70 reports over the coming years as they come to terms with the terminology,” says Yim.

A new world order
But with a hedge funds industry more focused than ever on independent and trustworthy oversight, firms like KPMG are now in a good position to offer the benchmarks of assurance and veracity investors are seeking in a more uncertain world.

But beyond audit services, the firm is also positioned to provide the services of its highly experienced consulting team, which has a broad range of expertise, from regulation to technology to corporate finance.

For example, KPMG’s close proximity to the fund administration sector means it gets asked a lot about who the best providers are. “We have a good feel for the administrators because we deal with them every day,” observes Mirsky. “It gives us some pretty good insights.”

At the end of the day, success in this business boils down to having good relationships with clients and with service providers. KPMG’s ability to retain staff translates into longer continuous relationships. There are now offshore hedge funds with European-based portfolio management activities that have trading records stretching back to the early 1990s if not beyond. For many of these, this represents a potential service provider relationship, be it with auditor, prime broker, or administrator, stretching across two decades. To be able to sustain this requires the ability to deliver a service which is consistently high. KPMG is working in some capacity with a majority of the top 50 single manager hedge fund firms in Europe, a hallmark of the high levels of service quality it has been able to deliver consistently to one of the most demanding segments of the financial services industry.

Biographies

ROBERT MIRSKY
UK head of hedge funds

Robert is a partner in KPMG’s financial services practice and head of the UK hedge funds practice. He has over 14 years’ experience advising financial services companies and hedge funds. Robert joined the firm from Laven Partners, a specialist investment management consultancy, where he was managing director and oversaw the creation of a UCITS platform. A US-trained lawyer, Robert was previously a partner with Ernst & Young.

Robert has worked with Big Four firms in London, New York and Washington DC, Milan, Bangkok, and the Cayman Islands. He has considerable experience in the establishment, operation and structuring of both offshore and onshore hedge funds. He has handled the tax aspects of cross-border financings, financial products, international mergers and acquisitions, insurance, and project financings. He is also chairman and founder of the industry-supported charity Hedge Funds Care UK which works towards the treatment and prevention of child abuse.

JON MILLS
UK head of audit, investment management and the funds practice
Jon is a partner in KPMG’s financial sector practice and is responsible for the provision of audit and risk advisory services to clients with a particular emphasis on investment management and funds. He is a member of KPMG’s UK, Europe and Global investment management and funds practice groups. He also sits on the ICAEW’s Investment Management Committee.

Jon leads KPMG’s client service teams for a number of major investment management, fund and hedge fund assignments. He has extensive experience in AAF 01/06 and SAS 70 reporting and FSA regulatory reporting engagements. Jon is also concurring partner on many of KPMG’s Investment Trust Company audits. He has more than 15 years’ experience in the financial sector, having joined KPMG in 1991. He has worked with global organisations across numerous jurisdictions, including four years spent on secondment to KPMG Bermuda.

TOM BROWN
EMA Head of Investment Management

Tom has been a partner in KPMG’s financial sector practice in London since 1999. He heads the investment management team in EMA and is the Vice Chairman of the Global practice. He has spearheaded KPMG’s successful focus on alternative investments, including hedge funds. As well as leading KPMG’s investment management practice, Tom spends most of his time working with clients. He is the audit partner for a number of significant investment managers, hedge funds and pension funds. He also leads advisory assignments including operational and process reviews, as well as transactions and listings. Tom is a regular speaker at industry conferences, he is the author of After the Credit Crunch: the Impact and Lessons Learned for Investment Managers, and the semi-annual publication State of the Investment Management Industry in Europe. He works actively with AIMA (where he is a member of the Sound Practices Committee), the Hedge Fund Standards Board, and the NAPF.

NEALE JEHAN
ChanneI Islands head of alternatives

Neale is a partner in KPMG’s Channel Islands offices, having returned to Guernsey from KPMG’s London financial services practice in 2003. He has over 16 years’ experience of working with both onshore and offshore funds and their managers having joined KPMG in 1994. Neale leads KPMG’s services to the alternatives sector in the Channel Islands.

Whilst in London Neale worked with a number of large investment houses with diverse asset allocations including private equity, structured debt and property and assisted clients with regulatory applications and controls reporting engagements. In the Channel Islands, Neale has a portfolio of clients including directly invested hedge funds, funds of funds, private equity and more esoteric asset classes including forestry, renewable energy and sustainable technology. KPMG in Guernsey audit approximately 50% of the fund assets under management in the island. Neale is a member of KPMG’s EMA Investment Management Leadership Team, KPMG’s global fund centres leadership team and KPMG’s global alternative investment leadership team and formed and led KPMG’s Level 1 global working group on the AIFM directive. He chairs the Guernsey Investment Fund Association’s Technical Committee and is a regular speaker at industry events on behalf of both KPMG and the Channel Islands.

BRIAN CLAVIN
Dublin Head of Alternatives

Brian is a partner in KPMG’s financial sector practice in Ireland where he is responsible for the provision of audit and risk advisory services to clients with particular emphasis on investment management and funds. He is in charge of the development of KPMG’s Alternative investments practice in Dublin. Brian leads KPMG’s client service teams for a number of major mutual and alternative investment management groups and also leads our teams on a number of major fund administrators and custodians. He also has extensive experience in SAS 70 reporting.

He has more than 20 years’ experience in the financial sector having joined KPMG in 1987. He has worked with major financial services groups across multiple jurisdictions including two years spent with KPMG New York. He is the former chairman of the Technical Committee of the Irish Funds Industry Association.