The Public Company Accounting Oversight Board (PCAOB), which oversees auditing regulations in the US, says it found a series of deficiencies in 22 percent of examined audits carried out by accounting company KPMG last year, including problems with loan loss allowances, cash flow associated with troubled loans, and more.
The audit failures turned up in the PCAOB’s latest annual inspection of audits performed by the so-called Big Four auditing firms: KPMG, Ernst & Young, PwC and Deloitte Touche Tohmatsu.
The board’s examination of KPMG covered 52 audits from November 2010 to October 2011, plus two audits where KPMG was not the main auditor. The inspection included visits by board staff to 31 of KPMG’s 82 field offices in the US, plus the auditing firm’s national offices.
The number of KPMG audit failures found in the PCAOB’s 2011 inspection period is the same as in the 2010 inspection period, but still higher than the eight failures detected in 2009, when 60 audits were inspected. The failure rate in 2009 was significantly lower, at about 13 percent.
The board, which is overseen by the SEC, says its inspection team ‘considered certain of the deficiencies it observed to be audit failures. Specifically, certain of the identified deficiencies were of such significance that it appeared the firm, at the time it issued its audit report, had failed to obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements and/or on the effectiveness of internal control over financial reporting.’
Other issues identified in the series of audits include the failure to ‘sufficiently test certain controls over fixed assets’, to ‘evaluate the reasonableness of certain significant assumptions underlying the cash flow projections’, and to ‘appropriately evaluate the severity of the identified control deficiency related to the mortgage-repurchase.’
In a response to the PCAOB’s report, KPMG does not contest the conclusions, adding that it ‘addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures.’
‘We remain dedicated to evaluating our system of quality control, monitoring audit quality and implementing changes to our policies and practices in order to enhance audit quality,’ writes James Liddy, KPMG’s vice chairman for audits, in a letter attached to the report. ‘We are mindful of our responsibility to the capital markets and are committed to continually improving our firm and the profession and working constructively with the PCAOB to improve audit quality.’
The PCAOB does not name the firms that were audited by KPMG, according to tradition, and has withheld from public release a section of the report dedicated to KPMG’s quality controls. That section will be permanently withheld from public viewing if KPMG addresses its findings within a year.
Reports on the regulator’s inspection of audits performed by the rest of the Big Four auditing firms are yet to be released.
