Please ensure Javascript is enabled for purposes of website accessibility

KPMG’s PCAOB Inspection Report Is Out and It’s Not Good

Posted on by Caleb Newquist

Oh boy, KPMG's PCAOB inspection report is finally out. Michael Rapoport at the Wall Street Journal has the lowdown:

The 28 deficient audits were out of 52 KPMG audits and partial audits reviewed by the Public Company Accounting Oversight Board in its annual inspection report issued Tuesday, for a deficiency rate of 54%. That is up from a year ago, when PCAOB inspectors found 23 deficient audits out of 50 reviewed, for a rate of 46%.

He didn't mention this, directly from the report, but it's worth noting:

[I]n one of the audits described below, after the primary inspection procedures, the Firm revised its opinion on the effectiveness of the issuer's internal control over financial reporting ("ICFR") to express an adverse opinion.

Alright, so not very good. If you're scoring at home (and Texas A&M Professor Mike Shaub definitely is), that puts the House of Klynveld in 4th place of the Big 4 by quite a bit:

  • Deloitte: 21%
  • PwC: 29%
  • EY: 36%
  • KPMG: 54%

Rapoport reports that the average deficiency rate for all the Big 4 was 35% for 2014, an improvement from 39% last year. That's something. Right?

Now, you probably won't be surprised when I tell you that AS No. 5 (Integrated) was an issue on 27 of those 28 audits. But the fact that those 27 issuers had a 73 total deficiencies might be surprising. Is that a lot? Full disclosure: I used to work at KPMG, never had an engagement subject to PCAOB inspection and think 73 deficiencies is a lot.

Besides good ol' AS No. 5, AS No. 13 (Responses to Risks of Material Misstatement), AU 342 (Estimates) and AU 350 (Sampling) gave them fits, too. Financial Services was the industry with the most problems, followed by Industrials and Information Technology was pretty bad, also.

As for the financial reporting areas, inventory was an area that got lots of marks, but loans (along with their reserves) and revenue recognition by far had the most dings.

The firm's response says they take the inspections seriously, that they will help them improve, committed to improving audit quality, investors etc. etc. In other words, they'll get 'em next time.

Audit Regulator Finds 28 Deficient Audits By KPMG in Annual Report [WSJ]
KPMG 2014 [PCAOB]

Related Posts

It Sounds Like KPMG Is *ThisClose* to Jumping Ernst & Young in Revenues

Not sure how we missed this story but thanks to the random commenter who brought it to our attention. New KPMG Global Chairman Michael Andrew was recently interviewed by The Australian and it sounds like KPMG had a pretty kickass fiscal 2011.

We’re still waiting for the official revenue numbers (I’m guessing they’ll be out next week) but Drew kinda spilled the beans already:

New KPMG global chairman Michael Andrew revealed to The Weekend Australian yesterday that the company had recorded a 10.1 per cent increase in revenue in the past financial year, to $22.7 billion. The numbers are due to be released officially later this month.

“If we had not had the Japanese earthquake, I suspect we would have gone past Ernst & Young. Japan is a good market for us. We had really good growth in the Americas and really good growth in tax,” he said yesterday.

FUCKING JAPAN AND YOUR EPIC NATURAL DISASTER! You just cost one of the premier professional services firms on EARTH the chance to leave a rival in the dust. Since there was enormous death and destruction, I guess everyone at the firm will let this go but they’re trying really hard not to throw out some pro forma numbers just for the sake of argument. ANYWAY, for those of you scoring at home, the $22.7 bil puts the House of Klynveld slightly behind E&Y who racked up $22.9 billion for FY ’11. It will also make for the second straight year of a bumper crop of Omaha Steaks for the employees at the firm.

But despite earthquakes and actual hard numbers, Mike is calling it like he sees it:

“We are basically equal No 3. There is still a big gap to PwC and Deloitte, which have been buying large consulting practices in the systems implementation area.”

In other words, if all things were equal, KPMG would probably be the largest firm. They’re just keeping their heads about it.

KPMG grows to match rival Ernst & Young [The Australian]

What’s With This AADB Investigation of KPMG?

Yesterday, the Accountancy and Actuarial Discipline Board (AADB) in the UK announced that they would be reviewing a decade’s worth of audits performed by KPMG for BAE Systems, the British Defense Contractor.

You see, the defense industry revels in some dark corners of the business world and BAE is no exception. The company plead guilty back in February that involved some “commissions” (some may call them “bribes”) paid to “third party agents” (some may call them “arms dealers”) to secure some business in various countries. Even though this was all settled recently the company was probably hopinforgotten about the whole thing:

The accounting probe threatens to reopen a damaging chapter in BAE’s history, eight months after the company paid almost $450m to settle a high-profile, transatlantic bribery investigation by the US Department of Justice and the UK’s Serious Fraud Office.

Right. So now, presumably because they thought it would be fun, the AADB is curious about what KPMG knew about these “commissions” and “third parties”:

AADB said it would investigate KPMG’s advice to BAE on the operations of three of its offshore companies, Red Diamond Trading, Poseidon Trading Investments and Novelmight.

“The regulator is looking specifically at the audit of commissions paid by BAE to outside agents, any tax advice given by KPMG on commission payments and the status of three offshore companies linked to BAE … penalties could include an unlimited fine for KPMG,” said Credit Agricole analyst Thomas Mesmin.

Well! The prospect for unlimited fine is interesting, to say the least. For their part, KPMG is cooperating with the investigation because, well, what else are they going to do? A spokesman told Reuters, “[T]he firm does not believe there has been any act of misconduct [and that] it will be cooperating fully with the AADB to ensure that the matter is brought to a swift conclusion,” which, as we all know, runs on an audio loop on the firm’s automated press inquiries line.

Meanwhile, some people are just tickled pink with these developments:

Campaign Against the Arms Trade spokeswoman Kaye Stearman told the Star: “We are delighted to see that the AADB is investigating KPMG audits of BAE, even so belatedly. These subsidiary companies were crucial in channelling so-called commission payments. It is vital that this investigation is done thoroughly and well and that any fraud and collusion uncovered is severely punished.”

The thing is, KPMG’s (or any accounting firm) involvement with BAE (or any defense contractor) has to be one of mixed feelings.

On the one hand, you’ve got extremely profitable international businesses that build all these cool toys that fly, blow things up and go into space.

On the other, a lot of their customers are the shifty type, they probably keep lots of secrets and – OH YEAH – their products are designed to kill people.

But once you get passed all that, you realize it’s simply a business needing professional services and who better to provide it than a Big 4 firm, amiright?

KPMG in UK probe over BAE accounts [FT]
KPMG to be investigated over BAE Systems audits [Reuters]
Warm response for KPMG investigation [Morning Star]

UANI Goes After KPMG for Iran Ties

[caption id="attachment_6035" align="alignright" width="260" caption="There\'s no connection. See? Iran is way over here. "][/caption]

It’s hard enough to be a Big 4 firm these days that you don’t need this. New York-based United Against Nuclear Iran (UANI) is a little upset with any and all companies that are doing business in Iran and just because you claim that you are a protector of the capital markets, that doesn’t earn you a free pass.

The Financial Times reports that UANI’s latest target is none other than the House of Klynveld and the lobby group sent a letter to Tim Flynn stating their displeasure with KPMG’s ties to their independent member firm in Iran, Bayat Rayan.


Flynn, who is stepping down as the Chairman of KPMG this summer, probably isn’t too psyched to have the firm lumped into the cross-hairs of UANI, who has relentlessly pressured companies to stop doing business in Iran.

The FT reported that the UANI set its sights on KPMG “after [a] week-long campaign against Ingersoll Rand ended with the Dublin-based diversified industrial company announcing on March 8 it was instructing its subsidiaries not to sell products ultimately destined for Iran.”

We contacted KPMG for comment but have not yet heard back regarding a response from the firm.

According to the letter, UANI will take “any and all action we deem necessary to hold KPMG accountable for its inappropriate business relationships with Iran,” which sounds pretty serious. Although we’re not sure what ‘any and all action’ will entail but for T Fly’s sake, we suggest he gets this resolved sooner rather than later. If he doesn’t, he can expect calls from Bill O’Reilly and his mug next to Ahmadinejad’s on the Factor.

KPMG is latest target for activists seeking to cut corporate ties to Iran [FT]