'Unacceptable deterioration' in auditing sees KPMG censured by FRC
The Financial Reporting Council has taken unprecedented steps to monitor the auditing work of KPMG. Citing a decline in the quality of audits by the Big Four as a whole, the accounting watchdog singled KPMG out in particular for closer scrutiny, and will now inspect a quarter of all audits by KPMG for the current financial year.
The auditing work of the professional services world's Big Four has been on the receiving end of a stinging criticism from the accounting industry ombudsman, following a string of errors which have allegedly led to the collapse of companies in the UK. In 2017, the Financial Reporting Council (FRC) slapped each of the Big Four firms with large fines for accounting failures – with PwC notably hit by a £5 million fine for its role with collapsed outsourcer Connaught amounting to the largest fine ever meted out by the FRC at the time.
Fellow Big Four member EY was also the target of a misconduct probe from the FRC late in 2017. In that case, the UK’s accounting watchdog fined EY £1.8 million relating to its audit of the British unit of a global tech distributor, while earlier in 2018, Deloitte learned that it was to face a tribunal for a $5 billion accounting scandal, with the FRC to bring a case for the firm’s work for collapsed IT firm Autonomy.
Every year the FRC reviews the audits of Britain's biggest companies to ensure they meet certain standards, and following this litany of failures, the FRC noted problems at all of the Big Four. The watchdog further stated that the accounting and consulting firms – which FRC Chief Executive Stephen Haddrill recently suggested should be broken up to prevent conflicts of interest impairing auditing work – need to reverse the decline in their standards.
Remarking on the latest review from the FRC, Stephen Haddrill added, "At a time when public trust in business and in audit is in the spotlight, the Big Four must improve the quality of their audits and do so quickly… They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances."
However, while each of the gang of four was barracked for their shortcomings, KPMG was singled out in particular for the apparent poor quality of its work. According to the FRC, last year KPMG audits showed an "unacceptable deterioration", and will now be subject to closer supervision. The increased scrutiny regarding KPMG, which is unparalleled at the time of writing, will see 25% of the Big Four firm’s auditing work examined by the FRC during the 2018-19 financial year, the first time the FRC has taken such action.
Elaborating on the firm’s reported deterioration, a statement from the FRC said, "50% of KPMG's FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year."
“Disappointed”
Commenting on the news, Michelle Hinchcliffe, Head of Audit at KPMG, said, “We are disappointed that our overall audit quality score for our 2016/17 audits has decreased by 4% 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."
2018 has seen the FRC repeatedly mark out the firm for criticism, having already been understood to be “looking closely” at KPMG after a litany of accounting bungles led to the collapse of Conviviality in March. KPMG had acted as the alcohol retailer’s auditor since 2015, and according to an FRC spokesperson, "If the relevant threshold tests are met in relation to accountants at the company and/or its auditors a formal investigation may be opened.”
The auditor was also recently fined £3.2 million by the watchdog over its audit of insurance firm Quindell, and both those cases followed on the heels of an investigation being launched into the collapse of construction firm Carillion. The probe was announced to examine whether the organisation’s auditor failed to adhere ethical and technical industry criteria. On the back of this, MPs recently called on the UK government to break up the hold that the Big Four of KPMG, PwC, EY and Deloitte have on the UK's company audit market – an opinion the additional controversy of the FRC’s latest review will do little to assuage. The Big Four’s share of FTSE 350 auditing has increased from 95% to 98% over the past five years.
