KPMG flunks US overseas audit inspections twice as often as rivals

US regulators were twice as likely to find flaws in audits conducted by the overseas affiliates of KPMG than those of any other Big Four accounting firm, an analysis of inspection data shows.

The findings raise further questions over KPMG’s ability to enforce common standards across its global network after a string of run-ins with regulators and internal controversies.

They also come as the US audit regulator, the Public Company Accounting Oversight Board, steps up enforcement action and vows to hold non-US affiliates of global firms to American standards. Just on Wednesday, the PCAOB fined the Italian, Dutch and Canadian arms of KPMG for concealing the outsourcing of some audit work to unregulated firms.

The PCAOB has the power to inspect the audit of any company listed in the US, regardless of where its auditor is based. Between 2018 and 2020, it examined 80 audits involving KPMG’s non-US affiliates and found deficiencies in their work in 55 per cent of cases.

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That compared with between 20 and 28 per cent of inspected audits at the non-US affiliates of other Big Four firms, according to an analysis of PCAOB inspection reports by the Financial Times (FT) and the data provider Audit Analytics.

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The large global accounting firms are structured as a network of local partnerships operating under a single brand.

KPMG pointed out PCAOB data are published with a lag and the agency does not distinguish between serious and minor deficiencies. The firm said it was rolling out a new system to standardise its audit process across geographies, which included measures to ensure compliance with US standards.

“The most recent inspection results reflect audits completed prior to implementation of major advances in technology, learning and development, and monitoring that are driving quality audits today,” it added.

The PCAOB said on Wednesday that three of KPMG’s overseas affiliates had used unregistered entities in Poland or Romania to carry out parts of their audits while telling the regulator they had used a different, registered entity. KPMG Canada paid $150,000 over the infraction regarding the audit of the manufacturer Celestica; KPMG Italy paid $75,000 over work for luxury furniture maker Natuzzi; and KPMG Netherlands paid $50,000 over its audit of ING, the bank.

KPMG did not admit or deny the findings.

KPMG was called out by the UK’s Financial Reporting Council in 2021 for weaknesses in its audit processes after receiving the worst score among the Big Four in that regulator’s inspections. However, the FRC’s latest annual report showed the firm’s scores significantly improving, something the agency called “promising, but... not yet a trend”.

Recent reporting by the FT has revealed turmoil at KPMG affiliates in the Middle East, where staff have spoken out about governance at its Lower Gulf arm and working conditions in Saudi Arabia.

PCAOB board member Christina Ho last month called attention to higher deficiency rates at non-US affiliates of the global accounting firms, saying that they had not kept up with the improvements in the US.

Lynn Turner, a former chief accountant at the US Securities and Exchange Commission, said that explanations included laxer enforcement by regulators in other countries and a greater chance of investor lawsuits in the US. “The firms in the US are looking over their shoulder more so than their affiliates internationally.”

PCAOB chair Erica Williams said in an interview with the FT this month that the agency “will hold any firms to account, including affiliates, that break our rules, and we recently enhanced our ‘other auditors’ rules to make that even more clear”.

The FT/Audit Analytics analysis of PCAOB inspection data showed that Deloitte had the second-worst deficiency rate at its non-US affiliates of the Big Four from 2018 to 2020. It also had the biggest gap between the deficiency rates of its US and non-US firms, largely reflecting a big improvement in the US. The deficiency rate for Deloitte US fell from 12 per cent in 2018 to 4 per cent in 2020.

“We are confident that when inspection reports are available for the current performance cycle — 2021 — they will reflect the positive results of the comprehensive quality investments we have made, including a closing of the gap in results outside the US,” Deloitte said. — Copyright The Financial Times Limited 2022