Still MIA: 2016 inspection report on KPMG

Audit regulators remain mum on when, if ever, they will publish a report on their 2016 inspection of Big 4 audit firm KPMG.

The Public Company Accounting Oversight Board published its 2016 inspection results for Deloitte in December 2017 followed by reports for EY and PwC in January 2018, but it has yet to publish a final 2016 report for KPMG. Soon after the three Big 4 reports were published, the Department of Justice and the Securities and Exchange Commission revealed charges of fraud and conspiracy against ousted audit leaders at KPMG and a dismissed inspection staffer at the PCAOB over allegations of cheating at KPMG on the inspection process.

Dan Goelzer, senior counsel at law firm Baker McKenzie and a former member of the PCAOB, notes the average deficiency rate across the Big 4 in 2016 is improved over 2015, but that’s without KPMG’s results because they have not been released by the PCAOB. In 2015, the four firms delivered an average deficiency rate of 28 percent, with KPMG’s the highest at 38 percent. In 2016, the rate has fallen to 24 percent, but that reflects no data on KPMG.

“No report has yet been issued with respect to the 2016 inspection of the fourth firm, KPMG, and it is unclear when, if ever, the 2016 KPMG inspection report will be issued,” Goelzer wrote in his bi-monthly client alert on audit developments.

Goelzer says he has no insight into what may or may not be happening at the PCAOB with respect to the KPMG report. “ It’s been almost nine months since the last of the other large firm reports were issued, so it’s not clear to me what’s going on,” he says.

Based on the timing of inspections and the allegations described in the SEC and DOJ releases, it appears the PCAOB completed at least one inspection cycle, and possibly more than one, while KPMG auditors possessed ill-gotten confidential information about which of its audits would be selected for inspection. That would give auditors an opportunity to double check their work before PCAOB inspectors would begin poring over audit files.

When the cheating scandal erupted, the PCAOB would not comment on what measures it may have taken, if any, to mitigate the effect of the cheating scandal to ensure the integrity of the inspection process. PCAOB spokesman Colleen Brennan says she still cannot comment on the status of KPMG’s 2016 inspection report.

Goelzer says the Sarbanes-Oxley Act, which created the PCAOB and the audit regulatory regime, requires the PCAOB to issue a report when they perform an inspection. “On the other hand, they could perhaps take the view that, if the integrity of the process is compromised, there was no real inspection in the statutory sense and, therefore no report can, or must, be issued,” he says.

Yet another possibility would be for the PCAOB to issue some kind of combined report on both 2016 and 2017 inspections, Goelzer says. “All just speculation on my part,” he says.