On January 23 Bloomberg Tax published a surprising headline: “KPMG Slated to Post Best Audit Inspection Report in 15 Years.” Surprising because we’ve been recycling the “KPMG Still Rocks at Having the Worst PCAOB Inspection Report Among the Big 4” headline for YEARS.
Here’s what BT had to say about the news:
KPMG LLP may have finally cracked the code on delivering better audits to investors: Giving its staff more time to do their work and ensure they increasingly have weekends off during the busy corporate filing season.
…
“It turned out that what our people needed was just a little bit more time,” Christian Peo, the firm’s national managing partner for audit quality and professional practice, said in an interview. “If you’re in hour 63 of a week in February, you might not be at your best.”
KPMG US Audit leader Scott Flynn, who was just named as Global Head of Audit, had this to say on LinkedIn:
The 2024 KPMG US Audit Quality Report highlights our strategy for leading on audit quality. When our 2024 PCAOB Inspection Report covering 2023 audits is released, we expect it will show a Part 1.A deficiency rate of 20%, our lowest deficiency rate since 2009. This is a testament to the progress we have made in transforming our audit approach and system of quality control, investments in our people and our technology to sustainably enhance quality while delivering a better audit experience to our people and our clients.
Audit quality is a continuous journey and fundamental to maintaining trust in the capital markets and protecting investors. Our focus will always be on bringing the power of our full firm to protect investors and support our capital markets.
Look at them, in a position to make digs at the other firms for once:
Last October, US senators Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-RI) got super bent out of shape about deteriorating audit quality and sent a strongly worded letter to the PCAOB that ended up in the hands of FT. In “Elizabeth Warren criticises accounting watchdog over BDO audit failures,” FT writes:
In a letter to the PCAOB seen by the Financial Times, the senators zeroed in on BDO, the sixth-largest accounting firm in the US, where almost all audits examined by inspectors last year were found to have flaws. They asked whether “repeat offenders” are deterred by potential fines that they said are typically “a drop in the bucket” compared with firm revenues.
“The PCAOB must do better,” Warren and Whitehouse wrote. Either the audit standards written by the board were inadequate, they wrote, “or the PCAOB is failing to establish accountability for firms that do not meet them”.
Meanwhile, the PCAOB has been focused on fining firms in other countries for sharing answers on internal training and failing to file timely forms, critically important matters to the reliability of capital markets (does this need an /s or nah?). Note: PwC Canada received a flawless PCAOB inspection during a period in which 93% of its auditors were sharing answers on learning modules, leading us to wonder if this is truly the best use of the PCAOB’s time.
2024 inspection results aren’t out yet but as far as 2023 PCAOB inspection deficiency rates go, here’s how the top seven shook out (listed in descending order by revenue):
- Deloitte: 21%
- PwC: 18%
- EY: 37%
- KPMG: 26%
- RSM: 47%
- BDO: 86%
- Grant Thornton: 54%
You see why KPMG is gloating?
According to the Bloomberg Tax story, part of KPMG’s upcoming audit success is thanks to the firm changing up its deadlines.
Three years ago, the firm began to tackle more audit tasks earlier in the year to ease the crunch during the harried rush of corporate filing season that typically runs from January to March. In what Peo called “a huge cultural change,” now more than half of its audit work is handled by late December, a reversal from past practices that left the bulk of the audit to be squeezed into two months.
“The percentage of staff with weekends off during busy season doubled from 2020 to 2023 to 40%, according to the firm,” said BT.
Said the firm in their audit quality report:
In recent years, we have accelerated audit work earlier in the audit cycle, shifting work out of our traditional busy season, which improves our ability to focus on areas of highest risk with reduced time pressure. This ongoing effort is driven by providing more resources to partners and other professionals to meet audit milestone paired with compensation clawbacks for partners tied to pulling work forward.
Elsewhere in the report they explained:
We continue to accelerate work in the audit across our broader portfolio. As discussed in last year’s Audit Quality Report, we set milestones to complete 40% of all audit documentation by mid-October and 60% of audit documentation before January 1st for calendar year-end public integrated audits. This initiative has been fully deployed among all public audits for multiple years now, delivering a better experience for the companies we audit and our people.
And a snapshot of some key numbers:
It’s going to be an interesting PCAOB inspection season for sure.
“Companies are under pressure from investors to get the best auditor they can,” said Paul Gillis, an accounting professor at Peking University in Beijing. More than 200 Chinese companies are listed on U.S. exchanges, and hundreds more trade on over-the-counter bulletin boards. In the last five months, at least 15 have upgraded to a Big Four auditor — Deloitte, Ernst & Young, PricewaterhouseCoopers or KPMG — from a smaller firm, according to an analysis from Audit Analytics. [
Big deal. For all we know, the PCAOB told ts inspectors find fewer audit problems. Senator Warren wants fewer “audit problems” give her what she wants.
PCAOB inspections are not science. They are not reproducible. They can be massaged any way the PCAOB wants. After all, the inspectors use “risk-based” selection methods to choose audits to inspect. Risk to who or what? Measured how?
Old school rule of thumb…
Possessive plurals are always better recast as a different sentence or sentences.