This is not a paywall.

Register for free to continue reading.

The news sucks. But your reading experience doesn't have to. Help us improve that for you by registering for free.

Please create a password or click to receive a login link.

Please enter your password or get a login link if you’ve forgotten

Open Sesame! Thanks for registering.

First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

A South African Hero: You

There’s a 99.7% chance that this isn’t for you. Only 0.3% of our readers have responded to this call for action.

Those 0.3% of our readers are our hidden heroes, who are fuelling our work and impacting the lives of every South African in doing so. They’re the people who contribute to keep Daily Maverick free for all, including you.

We need so many more of our readers to join them. The equation is quite simple: the more members we have, the more reporting and investigations we can do, and the greater the impact on the country. We are inundated with tip-offs; we know where to look and what to do with the information when we have it – we just need the means to help us keep doing this work.

Be part of that 0.3%. Be a Maverick. Be a Maverick Insider.

Support Daily Maverick→
Payment options


Accounting standards

UK auditing watchdog slams KPMG’s decline in quality

Archive Photo: The KPMG logo is seen at the company's head offices in Parktown, Johannesburg, South Africa, September 15, 2017. REUTERS/Siphiwe Sibeko

Global auditing giant, KPMG, has suffered another body blow after the UK accounting watchdog, the Financial Reporting Council, slammed its tardy auditing standards.

In a report issued on Monday, the Financial Reporting Council, a UK public oversight body aimed at “promoting integrity and transparency” in business, slammed the “unacceptable deterioration” of the quality of KPMG’s auditing, performed for some of that country’s biggest publicly traded companies.

In the report, the council, in the aftermath of a 2017/18 inspection of KPMG LLP and KPMG Audit PLC, found that the “overall quality of the audits inspected in the year, and indeed 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 frontline teams”.

The FRC’s key concern, the report noted, was “the extent of challenge of management and exercise of professional scepticism by audit teams, both being critical attributes of an effective audit, and more generally the inconsistent execution of audits within the firm”.

The overall results of the FRC’s review of KPMG’s audits indicated that 61 percent were assessed as requiring no more than limited improvements, compared with 65 percent in 2016/17.

Of the FTSE 350 audits we reviewed this year, we assessed 50 percent as achieving this standard compared with 65 percent in 2016/17. The FRC’s target is that at least 90 percent of these audits should meet this standard by 2018/19. There is substantially more for the firm to do to achieve this.”

The deterioration in KPMG’s drop in audit quality, the report found, could be attributed to the firm’s former management team rather than individual accountants employed by the auditing giant.

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 frontline teams,” the FRC found.

While KPMG’s senior management had changed during 2017, the firm accepted the FRC’s concerns.

In response, they have established a Board sub-committee to oversee audit quality, greater central review of and support for a number of audits, and the introduction of mandated procedures in key audit areas. We are reviewing in detail the firm’s plans and related processes, and are monitoring their implementation,” noted the report.

In the light of the FRC’s 2017/18 inspection results “and the longer term downward trend in inspection results, we have also increased by 25 percent the number of KPMG audits that we plan to inspect in 2018/19”.

Responding to the report’s findings, KPMG said that after assuming office in July 2017, chairperson Bill Michael had recognised that “previous actions were not delivering change sufficiently quickly or consistently, and commenced a programme to transform our audit approach to ensure that all of our audits are delivered to the same standards as those which achieve the highest grade from the AQR (Audit Quality Report)”.

KPMG added that it was “changing our core processes relating to recruitment and people development” as well as the firm’s “client acceptance process” to ensure that it only performed engagements “where we have the right capacity to deliver them to the highest standards”.

As an example, all experienced auditors (those with three years or more experience) will attend an additional mandatory three-day training programme during 2018 to ensure that they are fully up to date in all of our recent audit developments and aligned with our new approach to audit delivery.”

The auditing and consulting profession globally is under pressure and has suffered huge reputational damage after revelations of alleged impropriety including the collapse of Carillion, a multinational facilities management and construction services company and a UK government contractor, audited by KPMG.

KPMG’s role in “State Capture” in South Africa has also been globally highlighted and has led to a severe restructuring of the firm in South Africa as clients balked at KPMG’s implication in industrial-scale corruption.

In another report also released on Monday, the FRC found the audit practices of the “Big Four”– KPMG, PwC, Deloitte and Ernst&Young – needed to swiftly “reverse the decline in this year’s audit inspection results if they are to achieve the targets for audit quality set by the Financial Reporting Council”.  DM


Please peer review 3 community comments before your comment can be posted