After sorting through the effects of a scandalous confidential information leak that compromised the regulatory process, the Public Company Accounting Oversight Board delivered blistering reports on KPMG, describing high levels of deficient audit work and mismanagement of the audit practice.
The PCAOB published new inspection findings for KPMG for 2016 and 2017, plus revised inspection reports for 2014 and 2015 to list concerns about the firm’s system of quality control over its audit practice. After altering the inspection plan following allegations of fraud and conspiracy in the inspections process, the PCAOB called out 43 percent of inspected audits in 2016 as containing deficiencies serious enough to undermine the audit opinion, followed by 50 percent of audits in 2017.
The PCAOB says it altered its 2016 inspection plan after learning of the confidential information leak by tossing out 11 audits of entities in financial services and replacing them with 10 new inspections of different financial institutions. The board says it found deficiencies in 22 of the 51 total engagements covered by the 2016 report (43 percent). The report notes deficiencies were also identified in three of the engagements that were tossed out. The results are even worse in 2017, where the board called out 26 of 52 audits as having deficiencies suggesting auditors did not obtain evidence to support the opinions they issued.
In addition to pointing out large numbers of deficiencies, the PCAOB also criticized audit quality control practices at KPMG with the republishing of the 2014 and 2015 reports. The 2014 report calls out tone at the top, indicating the firm communicates a commitment to audit quality, yet “certain of its actions and messaging, however, are inconsistent with this premise.” The report says the firm’s partner evaluation process did not attribute any negative audit quality incidents to any partner at any level and provided no rationale for how it arrived at such a conclusion.
In the expanded 2015 report, the PCAOB says it had concerns about the ability of auditors to follow standards and properly exercise professional skepticism, especially with respect to complex areas of accounting and those areas requiring estimates. The report raises concerns about guidance, training, supervision, work flow, engagement quality reviews, and partner accountability.
KPMG has turned out the highest deficiency rates across major firms the past several years. Its 43 percent rate stacks up against PwC’s 20 percent, Deloitte’s 24 percent, and EY’s 27 percent. For 2017, the board has published Deloitte’s report showing a 20 percent deficiency rate but has not yet published reports for EY or PwC.
In early 2017, the Department of Justice brought charges against the highest levels of KPMG’s U.S. audit leadership, along with a staff member at the PCAOB, regarding the advance notice of the board’s inspection plan, which permitted auditors an opportunity to double-check their work before inspections began. Some of the accused have settled charges while others are awaiting trial in February.
KPMG provided a lengthy statement in the republished reports. “We take seriously our failure to timely address these criticisms,” reads the letter, signed by Lynne Doughtie, chairman and CEO, and Frank Casal, vice chair of audit for the firm. The letter indicates the firm has installed new leadership to replace those accused of fraud and conspiracy and has taken measures to address accountability, monitoring, professional skepticism, supervision and review, engagement quality reviews, and its audit performance in internal controls and estimates.
Separately, the firm also said in a prepared statement that audit quality is a top priority at all levels. “We are committed to improving our performance and our system of audit quality control to ensure that we provide consistently high-quality audits,” the firm said. “The firm has made – and will continue to make – significant investments in our people, technology and governance, to achieve this goal.”
The statement also indicates the firm welcomes and respects the PCAOB’s role. “We understand and appreciate our responsibility to our stakeholders and are committed to working constructively with the PCAOB in the months and years to come,” the firm said.