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Why Did the PCAOB Redact KPMG’s Audit Failure Rate?

top secret wax seal on envelope, confidential

What the fuck is this??

2022 PCAOB Inspection of KPMG LLP [PDF]

WSJ doesn’t know why it was redacted either. NO ONE DOES.

We’ve got some more inspection reports to dig into shortly, lots of them. EY, PwC, Deloitte, GT, BDO, RSM, Moss Adams…does anyone want to know all that? We were warned last year that this batch of PCAOB inspection reports would be “completely unacceptable” but no one said they would be completely unknowable. Thankfully they gave us deficiency rates for the other firms.

9 thoughts on “Why Did the PCAOB Redact KPMG’s Audit Failure Rate?

  1. Probably litigation involving an issuer reviewed and/or lingering issues that aren’t resolved (contested finding)

  2. None of the deficiencies coming out of the Big 10 surprises to anyone in the profession. The Big 10 are the Big 10 because they are the top money producers. They are not on top because of their quality audits. One of the largest reasons that audit quality has gone down is due to the risk based standards and doing away with rule based standards instead of principle based standards. I submit that human nature will bend towards financial goals rather than to quality when given the option to have rules verses principles. For a system to work with principles, honesty and integrity have to be paramount, and those are not paramount when given the chance to have human judgement verses professional judgement. This argument was brought up when GAAP was beginning to be merged with IFRS and the powers to be in the profession just could not help themselves fail any more than to accept this line of thinking. Academia, being what they are, are a hopeless group in a capitalist profession. We told the profession as students that principle based standards should never have bee entertained. Too much room for error and human nature.

    1. TLDR version: Agree with you, however most of these findings have nothing to do with the accuracy of the financial statements or application of GAAP.

      The full story: Generally, the PCAOB finds issues in the auditing of management’s controls. For example, when an SAP report is used in a control, the control reviewer (let’s call him Bob) is required to validate that the report is complete and accurate. The auditor is responsible for proving that Bob made sure the report was complete and accurate. The fact that the auditor proved that the report was complete and accurate does not matter one bit for the ICFR opinion. Basically they need to see evidence that Bob audited the report. If there are 10 theoretical ways the report could be wrong, they need to see evidence of how Bob proved those 10 things didn’t go wrong. The degree of evidence required to prove that Bob audited the report is a matter of judgement and the PCAOB will fail an entire audit for insufficient evidence obtained for one report, in one control (out of hundreds audited “correctly”). How did Bob know that the report extracted from SAP correctly and that no data was lost in the export? He agreed it to the general ledger. Unfortunately Bob didn’t film himself do that, so hopefully he printed off a screenshot of the G/L and put some tickmarks on it. The control requires Bob to review all items over $1,000 to ensure they were properly authorized. Hopefully Bob kept notes and support proving he did that for every single item, and hopefully he found some errors to prove he was actually reviewing stuff. IMO if investors knew what the auditors were actually spending their time doing, they would lose their mind. More time spent on ICFR that the numbers.

  3. Sounds like you have some personal experience there. I haven’t had that exact experience, but my experience is close enough to know a personal experience when I hear it.

  4. Its pure and simple – its all a big racket. Monitoring / regulatory agencies at the end of the day are in cahoots with entities they’re tasked to monitor. This is primarily because their funding source is the accounting industry itself and most senior level regulators are from these Big CPA firms. Its been this way and nothing is going to change. Its all a show, no substance or depth behind the covers.

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