Sharp Rebuke For KPMG over ‘Deterioration’ in Audit Quality
KPMG has been sternly rebuked by the UK accounting watchdog for an “unacceptable deterioration” in the quality of audit work it performs for Britain’s largest publicly traded companies.
The criticism, in a report by the Financial Reporting Council (FRC) published on Monday evening, will intensify pressure on KPMG, which has become embroiled in a series of high-profile scandals over the past 12 months, prompting several international regulators to launch investigations into its work.
When contacted yesterday, KPMG’s Fiji office said they were not authorised to speak to the media. According to the FRC, which is itself under heavy pressure to demonstrate a tougher approach to monitoring the audit market, half of KPMG’s audits of FTSE 350 clients required “more than limited improvements”.
This was a significant decline on last year, when 65 per cent of KPMG’s audits of UK-listed companies required only limited improvements.
The watchdog’s target for all of the “Big Four” firms is that at least 90 per cent of their FTSE 350 audits should require only limited improvements by 2019.
The regulator found the responsibility for the drop in audit quality sat squarely with KPMG’s former management team, rather than just the firm’s individual accountants. The firm changed the heads of its UK business last year amid a mounting series of scandals, including January’s collapse of UK government contractor Carillion, which was audited by KPMG for 19 years.
“The decline in quality over the past five years is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of front line teams,” the FRC said.
Problems at KPMG
It is the second year in a row that the accounting regulator has highlighted problems at KPMG, after finding last year that two of the firm’s 23 audits that were reviewed between February 2016 and January 2017 required “significant improvements”.
In addition to its role in Carillion’s collapse, which remains under investigation by the FRC, KPMG has also been under fire for its role in a sweeping government corruption scandal in South Africa, which has forced the firm to clean house there.
Michelle Hinchliffe, head of audit at KPMG, said: “We are disappointed that our overall audit quality score for our 2016/17 audits has decreased by four per cent and that the steps taken in previous years have not resulted in the necessary improvements to audit quality.
“We are taking action to resolve this. We want all of our audits, regardless of size, to meet the highest standards.”
Ms Hinchliffe said after taking up her role in October 2017, she had started a programme to “transform” the firm’s approach to audit with the full support of its executive committee and board.
This included “greater support and challenge” to audit teams, increased central monitoring and new training requirements for all senior promotion candidates.
Ms Hinchliffe said the audit work appraised by the FRC “principally” related to 2016 year ends before this programme started.
‘Big Four’
KPMG’s performance in terms of audit quality was far worse than that of its rivals in the “Big Four”: Ernst &Young, Deloitte and Pricewaterhouse Coopers (PWC).
PwC — which was last week hit with a record £6.1 million (FJ$16.77m) penalty by the regulator — had the highest percentage of FTSE 350 audits that required only “limited improvements”, with 84 per cent achieving this level.
However this was a decrease on 2016/2017, when 90 per cent of its FTSE 350 audits attained that score. EY came a close second, with 82 per cent of its FTSE 350 audits requiring only limited improvements, down from 92 per cent year on year; while Deloitte came third with 79 per cent of its equivalent audits achieving this score — down from 82 per cent.
The FRC attributed the fall in quality across the “Big Four” to several factors, including a failure to challenge management and show appropriate scepticism across their audits, as well as poorer results for audits of banks.