The last of the Big 4 inspection reports from audit regulators, this one on KPMG, shows another modest improvement in audit errors, although no one is yet jumping for joy over deficiency findings.
The 2015 inspection report for KPMG says inspectors selected a total of 52 audit files to inspect and found deficiencies in 20 of them significant enough to call out, for an failure rate of 38 percent. That’s more than one-third of the audits selected, but an improvement nonetheless over the 50-percent error rate found at KPMG in its 2014 inspection.
Consistent with findings at other major firms and in prior year reports, the PCAOB hammered hard on internal control over financial reporting. The report says 17 of the 20 audits called out with deficiencies contained problems with the audit of internal control. The board tallied up 37 separate instances across the 20 problem audits where auditors had trouble adhering to Auditing Standard No. 5, which governs the internal control audit.
The most common problem in internal control audits involved failures to test the design or operating effectiveness of controls selected for testing, failure to properly test the accuracy and completeness of data or reports produced by the company, and failures based on over-reliance on controls. Problems were most prevalent in controls involving revenue recognition and allowances for loan losses.
Results at EY were similar to those at KPMG, where the error rate from 2014 declined in 2015, although not by any enormous measure. At EY, the improvement was from 36 percent to 29 percent. At Deloitte, inspectors reported an uptick in the error rate, beginning from a low among the Big 4 in 2014 of 21 percent to a rate of 24 percent in 2015.
At PwC, the results are more mixed. On the one hand, the firm reduced its error rate from 29 percent in 2014 to 22 percent in 2015. That improvement is tempered, however, by a spike in the seriousness of audit failures. The firm’s 2015 report says half of the blown audits called out by inspectors ultimately led to restatements either of the financial statements or the internal control audit opinion.
In a statement, KPMG said the PCAOB inspection process is improving audit quality. “We’re pleased with the positive progress seen in our 2015 PCAOB report and look forward to building on these improvements through continued focus and investment,” the firm said. “This includes robust monitoring and support programs, extensive root cause analyses of issues identified by the PCAOB and our own monitoring process, deployment of new resources and technology, increased training, and tailored communications to support our people as they set priorities to deliver quality audits.”