When officials at the Public Company Accounting Oversight Board speak of improvements in audit inspection results at some firms, they likely are not speaking of KPMG.
The PCAOB has published its 2014 report for KPMG showing inspectors selected 52 audits for inspection and found fault with 28 of them, or 54 percent. It marks the first time inspectors found problems with more than half of the audits they selected at a Big 4 firm.
KPMG is the last of the Big 4 firms to see its 2014 inspection report published, and it’s the only Big 4 firm to see its deficiency rate rise rather than fall from the year before. In its 2014 report, Deloitte posted a deficiency rate of 21 percent, down from 28 percent in 2013. PwC landed at 29 percent, down from 32 percent; and EY at 36 percent, down from 49 percent.
In fact, KPMG’s rate has crept upward every year since 2009 when the PCAOB first began providing data with its reports. The firm’s deficiency rate was 13 percent that year, followed by 22 percent in 2010, 23 percent in 2011, 34 percent in 2012, and 46 percent in 2013.
The PCAOB cautions against drawing overall conclusions about audit quality at a given firm based on inspection findings, saying it follows a risk-based approach to search out likely trouble spots in audit work. Indeed, one-fourth of all the audits selected for inspection at KPMG came from entities in the financial services sector, and nearly half of the individual audit deficiencies throughout the inspection involved financial services companies.
Problems with the audit of internal control over financial reporting feature prominently in KPMG’s latest inspection report, as it has across all the major firms the past few years in particular. Of the 28 audits found to have deficiencies at KPMG, 27 of them contained errors in the audit of internal control, many of the audits containing multiple errors. The problems emerged with controls covering several different accounting areas, but they were clustered primarily around inventory and related reserves, loans and allowances for loan losses, and revenue recognition.
In a dozen of the 28 deficient audits, inspectors said auditors failed to respond appropriately to risks of material misstatement. In nine audits, auditors failed to properly follow standards around auditing accounting estimates, inspectors reported.
KPMG attached a letter to the inspection report signed by Lynne Doughtie, chairman and CEO of the firm, and Scott Marcello, vice chair of the audit practice. They said the firm conducted a thorough evaluation of the concerns raised and acted under PCAOB standards and the firm’s policies to address them. “We remain dedicated to evaluating and improving our system of audit quality control, including monitoring audit quality and implementing changes to our policies and practices in order to enhance audit quality,“ they wrote.
A KPMG spokesman said the firm has made significant investments in resources, technology, root cause analysis, internal monitoring, communications, and training that will become more apparent in future inspection results. “These efforts, as well as additional initiatives undertaken since the 2014 inspections were completed over a year ago, have led to significant improvements which will be reflected in future inspection reports,” the spokesman said.