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Solved: The Mystery of KPMG’s Redacted PCAOB Inspection Report (Kinda)

illuminated question marks in a pile of black question marks

This past February, the PCAOB released KPMG’s 2022 inspection report but inexplicably redacted the firm’s deficiency rate. To say this was very strange would be minimizing the situation, something we aren’t generally known to do. VERY strange. CAPS exclamation points Confused Nick Young meme strange. This isn’t something we’d ever seen, certainly not in a Big 4 inspection.

screenshot of KPMG's redacted 2022 PCAOB inspection report
Why Did the PCAOB Redact KPMG’s Audit Failure Rate?

Jeffrey Johanns, associate professor at The University of Texas at Austin McCombs School of Business and regular audit industry commentator, wrote a really good LinkedIn Pulse post about the situation when the redaction first appeared. This, uh, unique choice by the PCAOB obviously led to more questions than answers. Such as:

· The other 13 reports issued along with KPMG’s included each firm’s Deficiency Rate, including the other three Big 4 firms. Why was KPMG handled differently?

· In KPMG’s listing of “Audits with Unsupported Opinions”, containing issuers labeled as “A” through “P”, issuer “N” is omitted from the list? Who is the mysterious Issuer N? Are there other missing issuers?

· After more than two years of inspection, discussion, and negotiation with KPMG, why can’t the PCAOB decide whether any particular audit is deficient? It is the regulator. The Board has the final say. It is their responsibility to draw a conclusion and move on, whether the firm agrees or not. The purpose of the response letter included in the report is for the inspected firm to indicate if they have any disagreements with the determinations in the report. If KPMG doesn’t agree with the Board’s decisions about individual audits, they should say it in their response letter.

· Why didn’t KPMG (apparently) not agree with some of the Board’s conclusions, or object in the normal inspection process? This question raises a lot of speculation, not particularly helpful to KPMG. Are there one or more audits they are being advised not to agree to as deficient? For what reasons?

We still don’t have answers to those questions but we do now have a number: 30 percent.

So a 30 percent Part I.A. deficiency rate, up from 26 percent in 2021 and 2020. Why does this feel so anticlimactic?

The number of audits selected for review was on par with previous years:

What was the secrecy all about then?? Why is this all so weird? Bloomberg Tax has an explanation:

The US accounting oversight board issued a complete version of KPMG LLP’s 2022 inspections review on Friday that detailed an extra audit with a single deficiency tied to income tax accounting.

KPMG had appealed portions of the Public Company Accounting Oversight Board’s inspection findings resulting in the release of a partially redacted report in February. In total, inspectors found fault with 30% of the firm’s inspected audits, work that generally covered 2021 financial statements, according to the amended report.

Quick update: The PCAOB tweeted about the inspection report and didn’t even mention KPMG by name. HMM.

Full report embedded below for your reading pleasure.

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