The last of the 2021 Big 4 PCAOB inspection reports belongs to KPMG, which has had the highest audit deficiency rate of the four firms for six out of the previous seven years—the lone exception being 2019. Make that seven out of the last eight:
In the 2021 inspection of KPMG LLP, the PCAOB assessed the firm’s compliance with laws, rules, and professional standards applicable to the audits of public companies.
We selected for review 54 audits of issuers with fiscal years generally ending in 2020. For each issuer audit selected, we reviewed a portion of the audit. We also evaluated elements of the firm’s system of quality control.
We also selected for review two reviews of interim financial information (“interim reviews”). Our reviews were performed to gain a timely understanding of emerging financial reporting and auditing risks associated with issuers that were formed by mergers between non-public operating companies and special purpose acquisition companies (SPACs). We did not identify any instances of non-compliance with PCAOB standards related to the interim reviews that we reviewed.
Fourteen of the 54 audits we reviewed in 2021 are included in Part I.A of this report due to the significance of the deficiencies identified. The identified deficiencies primarily related to the firm’s testing of controls over and/or substantive testing of revenue and related accounts, allowance for credit losses, inventory, and going concern.
So that’s an error rate of 26%, which is behind EY’s 21.4%, Deloitte’s 13%, and PwC’s 3.6%. The good news for KPMG is its deficient rate for 2021 was slightly better than the one in its 2020 auditing report card—26% vs. 26.4%.
For 2021, eight audits had problems in both internal control over financial reporting and in the financial statement, two had deficiencies in the financial statement only, and four had deficiencies in ICFR only. The most common Part I.A deficiencies related to testing the design or operating effectiveness of controls selected for testing, testing controls over the accuracy and completeness of data or reports used in the operation of controls, testing data or reports used in substantive testing, and in some cases the resulting overreliance on controls when performing substantive testing, according to the PCAOB.
The five main trouble spots for KPMG auditors were:
- Revenue and related accounts: The deficiencies in 2021 (as well as in 2020 and 2019) related to substantive testing of, and testing controls over, revenue.
- Allowance for credit losses: The deficiencies in 2021 primarily related to testing controls over the allowance for credit losses.
- Inventory: The deficiencies in 2021 primarily related to testing controls over the existence of inventory.
- Going concern: The deficiencies in 2021 primarily related to substantive testing of the evaluation of an issuer’s ability to continue as a going concern.
- Investment securities: The deficiency in 2021 related to testing a control over the evaluation of investment securities for possible impairment.
KPMG failed five of its nine audits for issuers in the financials sector, while mistakes were found in three of the seven audits of issuers in the consumer discretionary sector, three of the 12 audits of issuers in the industrials sector, two of the seven audits of issuers in the IT sector, and in one of the four audits of issuers in the energy sector. KPMG did get a passing grade in its audits of issuers in the communications, consumer staples, materials, real estate, and utilities sectors.
You can read more about the 2021 audit inspection season at KPMG below.