TowerGroup Comments on New Report That Faults KPMG in New Century Collapse

Business Wire, March 31, 2008

NEEDHAM, Mass. -- A recent report prepared for the US Department of Justice finds fault with accounting firm KPMG for contributing to the April 2007 collapse and bankruptcy of subprime mortgage lender New Century Financial Corporation. KPMG strenuously denies it ignored accounting rules in its auditing for the company, which resulted in senior New Century executives benefiting from generous bonuses that would otherwise not have been paid - and which otherwise masked the real financial condition of the lender.

"Regardless of the truth in this matter, the appearance of sins, whether of omission (error) or commission (fraud), can sully the reputation of any professional services firm," said Rodney Nelsestuen, senior analyst at TowerGroup.

Inci Kaya, a quantitative analyst at TowerGroup, cited reputation risks to both financial institutions and their hired consulting firms because of the challenges of satisfying customers in a marketplace where consultancy work is increasingly competitive. "The pressure to find in favor of those who hire your firm creates an opening and, in some cases, an incentive for moral lapse," she said.

Both Nelsestuen and Kaya noted that Arthur Andersen's involvement in the Enron scandal exposed fundamental flaws in the consulting sector, and served as a wake-up call to the industry. The scandal resulted in the establishment of more rigorous reporting standards and the separation of the accounting and advisory services arms of professional services and consulting companies. Yet TowerGroup has found that, over time, these lines of separation have again begun to blur.

For financial institutions, TowerGroup stresses the importance of avoiding situations that may lead to conflicts of interest or put undue pressure on their professional services providers. Beyond specific areas of concern such as accounting, the following steps are fundamental elements of a comprehensive approach to integrated risk management. At the core, it is a Board-level responsibility to demand that the institution:

* Maintain strong internal controls with independence and with arm's-length audit processes, whether internally or externally provided

* Avoid complacency with chosen providers by maintaining a rigorous selection process

* Demand high levels of integrity from key officers

* Maintain a policy of rewarding whistle-blowing instead of allowing a culture of fear to permeate the institution

* Insist on the conservative application of accounting rules instead of accommodating a more liberal interpretation in the face of pressure to demonstrate improved financial results

* Understand that while fiduciary responsibility may uncover devastating news about an institution's finances, early intervention is still the best hope for taking corrective measures to remedy the situation both internally and externally

TowerGroup's Nelsestuen and Kaya are both available for comment on this topic. Please contact Thea Linscott at 1-917-595-3061 or tlinscott@cooperkatz.com. Members of the press may also request a copy of a recent report authored by the analysts regarding professional services and consulting firms in the financial services sector, titled "Professional Services and Consulting in 2008 and Beyond: The Inevitable Rise of IT Consultancies."

About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world's leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit www.towergroup.com for more information.