UK audit regulator finds KPMG's audit quality `unacceptable
20 Jun 2018
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Britain’s accounting regulator Financial Reporting Council (FRC) has called for an overhaul of KPMG’s audit work in the UK, which it said, is of an unacceptable standard, fuelling calls to reform the industry, including dismantling the “Big Four” accounting firms.
The FRC said auditors at KPMG don’t challenge management enough, aren’t sufficiently sceptical and are inconsistent in their execution of audits, pointing to an unprecedented decline in audit quality.
The regulator noted that the decline in quality has been more evident over the last five years, adding, “is unacceptable and reflects badly” on efforts by previous leadership to improve the work.
“This is further evidence that problems at KPMG are profoundly systemic,” said Atul Shah, professor of accounting and finance at the University of Suffolk. “They are a profit-maximising business rather than a professional firm with standards of independence, character and integrity. To reform the Big Four we must address these cultural problems and conflicts of interest.”
The FRC had earlier pulled up PricewaterhouseCoopers and KPMG for misconduct on past audits and fined both.
The Big Four’s business model tends to overlap accounting with management consulting, tax advice, information technology and many other services that have conflicting claims on their primary business.
“The Big Four firms are breeding grounds for future finance directors and corporate leaders,” Shah said. “If that breeding is culturally deficient you can imagine how far the cancer spreads.”
The increased scrutiny comes amidst calls for competition authorities to consider a breakup of the businesses of the `Big Four’ accounting firms in a way that do not overlap.
A parliamentary report last month criticised KPMG, Deloitte, EY and PwC, along with banks and other advisers, for poor oversight of Carillion Plc, a collapsed British firm that constructed and managed government projects.
KPMG is “disappointed” its audit-quality score has declined and is acting to resolve the issue, Michelle Hinchliffe, head of audit at the firm since 2017, said in a statement on Tuesday.
The firm has begun work “to ensure the highest standards of consistency and rigor are applied across all of our audits,” she said. This includes ensuring senior candidates for promotion spend time at the company’s Audit Centre of Excellence. The audit work appraised by the FRC dates “principally” from 2016, she said.
The regulator said it will increase the number of KPMG audits it inspects in the current financial year by 25 per cent after a review of 16 audits carried out on firms in the FTSE 350 index found that half required some or significant improvement.
The FRC this month fined PwC £6.5 million ($8.6 million) and severely reprimanded the firm for misconduct related to two 2014 audits. KPMG was fined £3.15 million pounds over a 2013 audit.
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