Accounting News Roundup: KPMG’s Auditing and Diversity Problems | 05.20.16

KPMG's auditing

Last fall, the PCAOB released its inspection report for KPMG and the results were not so good. Their 54% deficiency rate placed the firm 4th out of the Big 4. Unfortunately for KPMG UK, the findings of its audit regulator that came out yesterday are similar:

KPMG has fallen behind its rivals in an annual check by the UK watchdog on audit quality, adding pressure to the big four professional services firm that is currently being investigated by the watchdog for three of its audits.

The Financial Reporting Council said on Thursday that of the 22 individual KPMG audits it reviewed in 2015-16, two required “significant improvements”. It was the only one of the six firms surveyed whose audits required significant improvements.

But despite KPMG bringing up the rear, audit quality in the UK is supposedly improving:    

The FRC is on a push to improve audit quality and has set a target that, by 2019, at least 90 per cent of FTSE 350 audits reviewed will be assessed as requiring no more than limited improvements.

This year’s review, which covered KPMG, PwC, Deloitte, EY, BDO and Grant Thornton, showed continued signs of improvement in quality. Seventy-seven per cent of audits were assessed as requiring no more than limited improvements, up from 70 per cent last year.

I think it's interesting that the FRC has set benchmarks for audit quality. One of the frustrating things about PCAOB inspection results is that there's very little guidance on how to interpret them. The few people who do read them go straight to the details, draw their own conclusions and report those. And maybe that's the preferred way to do things, I don't know. But the FRC seems to set the pace of what they expect and tracks firms' progress towards those goals. The PCAOB, as far as I'm aware, doesn't do anything like that. Would it help? Again, I'm not sure, but as I've said before, there's something to be said for salesmanship, especially for a topic that most people don't care to think about.

CPA firms and diversity

I almost skipped this article but I'm glad I didn't, if only for this paragraph: 

As a profession, accounting values conformity to standards more than creative thinking. To achieve a diversity of perspectives, and thereby enrich discussions and debates and reach the better decisions that result from the consideration of different points of view, accounting professionals must challenge existing paradigms. It will not be enough for firms to attract and retain people who meet the traditional definition of diversity. The industry must engage those who will challenge the constraints of the prevailing perspectives of their firms — and be open to new thought processes and opinions.

This more or less explains the embarrassing number of women and minority partners in accounting firms. It really is as simple as that.

Non-GAAP worries

This is a strong case against the evils of non-GAAP reporting but ultimately it falls short for me:

Non-GAAP supporters have argued for years that a company’s homegrown performance indicators are often more meaningful than GAAP numbers. That may be true for the company’s managers, who are focused almost exclusively on the inner workings of their firm. But investors need to compare a firm to its peers and to companies in other industries and countries. They can’t do that if each company uses its own metrics. Moreover, auditors don’t audit non-GAAP financial information. If investors want assurance that the numbers are accurate, they’ll just have to take management’s word for it.

Just like we take GAAP's word for it? Or the auditors' word? Let me know if you're sick of hearing this, but the idea that GAAP is some unimpeachable set of rules is just as silly as the suggestion that homegrown non-GAAP measures are the best way to understand a company's true performance. And don't get me started on auditors. If non-GAAP info was audited, would it really give anyone additional comfort? If 90% of companies are reporting non-GAAP metrics, it seems to me that everyone's just fine with the fact that they're unaudited.  

Previously, on Going Concern…

I wished out loud for a photo of Phil Mickelson and ex-KPMG partner Scott London. And in Open Items, someone wants to know if they're well positioned for a credit ratings agency.

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