Late yesterday the PCAOB released the first Big 4 firm inspection report with none other than KPMG (in full on page 2). Compliance Week reported that the House of Klynveld more or less stayed consistent with last year's findings, which basically amounts to everyone shrugging with indifference:
In its first published report from the 2011 inspection cycle, the Public Company Accounting Oversight Board found fault with a dozen KPMG audits, the same number it criticized the year before. The board inspected 52 audits performed by KPMG, plus an additional audit where the firm contributed to the audit effort but was not the principal auditor. From November 2010 through October 2011, the PCAOB inspectors visited 31 U.S. field offices and KPMG's national offices to study audits where it believed it was most likely to find problems. In the prior year, when audit failures jumped for all the major firms, KPMG's numbers were almost identical. Inspectors studied 52 audits and an additional two audits where the firm was not the principal auditor, and it picked apart and criticized 12 audits, for a failure rate of 22 percent. In 2009, the board found fault with only eight of the 60 audits it studied.
The failures cited by the PCAOB were practically identical, too; they included "loan losses, business combinations, fair value measurements, accounts receivable, revenue recognition, yields and cash flows associated with troubled loans." The only real difference between last year's report and this year's was the firm's response. Last year it was attributed to the firm as a whole, while this year Vice Chair of Audit James Liddy affixed his name to the "we're taking the necessary steps, yada yada yada":
James Liddy, KPMG vice chair for the firm's audit practice, attached a response to the KPMG report. “We conducted a thorough evaluation of the matters identified in the draft report and addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures,” he wrote.
Anyway, we had to start somewhere and KPMG has set the benchmark failure rate at 22%. Since PCOAB Chairman Jim Doty has suggested that the inspection reports will look very similar to last year, I guess we should expect to this be one of the better performances among the larger firms, which obviously isn't saying much.
But with KPMG out of the gate, this does give us a good excuse to start handicapping the rest of the field. So of the remaining major firms (i.e. let's include Grant Thornton, BDO, McGladrey, and Crowe Horwath just for fun), where will they land and what will their failure rates be? Will E&Y give KPMG another run for its money? Will Deloitte, McGladrey and Crowe bring up the rear by a wide margin again? Will one firm simply knock it out of the park and come home with a <5% failure rate (hell, we'd settle for <20%). Let the wildly unfounded speculating begin.
