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  • Writer's pictureDaniel Goelzer

PCAOB Discloses Non-Public Portions of 2018 and 2019 KPMG Inspection Reports

Updated: May 1

The Public Company Accounting Oversight Board has made public several previously nonpublic portions of KPMG’s 2018 and 2019 inspection reports.  This action indicates that, in the Board’s view, the firm did not satisfactorily address the quality control issue discussed in those portions of the 2018 and 2019 inspection reports within 12 months of the report dates.  Criticisms of a firm’s quality control system are discussed in Part II of the firm’s inspection report.  Under the Sarbanes-Oxley Act, Part II is nonpublic when the report is issued.  If the firm does not satisfactorily address a quality control criticism within 12 months, the Board makes the criticism public.

 

The now-public quality control criticisms in the 2018 KPMG PCAOB inspection report relate to three topics:

 

  • Testing Controls.  The 2018 report states that KPMG’s system of quality control does not provide reasonable assurance that the work performed by the firm’s personnel with respect to testing controls will meet the requirements of the Board’s auditing standards.  This finding is based on deficiencies inspectors identified in the areas of (1) identifying and testing controls that address risks of material misstatement, (2) testing controls that include a review element, and (3) identifying and testing controls over the accuracy and completeness of data or reports. For example, with respect to testing controls that include a review element, the Board found that the firm “did not sufficiently evaluate whether controls that it selected for testing that included a review element operated at a level of precision that would prevent or detect material misstatements because the firm did not evaluate the review procedures the control owners performed, including instances in which the firm did not evaluate (1) the criteria used to identify items for follow up and (2) the resolution of such items.”

 

  • Supervision of the Audit.  The 2018 inspection report states that KPMG’s system of quality control does not provide reasonable assurance that supervisory activities, including engagement partner reviews of audit work, will meet the requirements of the Board’s auditing standards.  This finding is based on the PCAOB inspection team’s identification of deficiencies that the engagement partner should have identified but did not.

 

  • Policies for Financial Holdings Disclosures. The 2018 inspection report also finds that KPMG’s system of quality control does not provide reasonable assurance that KPMG personnel will comply with the firm’s policies and procedures concerning independence-related regulatory requirements.  KPMG, like other large firms, conducts periodic sampling reviews to determine whether firm personnel are complying with internal requirements that they report certain financial relationships to the firm. In the reviews KPMG conducted during 2018, it found that 25 percent of the managers included in its sample had not reported financial relationships that were required to be reported under firm policies.  The inspection report states: “This high rate of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provides cause for concern, especially considering that these individuals are required to certify on an annual basis that they have complied with the firm’s independence policies and procedures.”

 

The quality control criticisms in KPMG’s 2019 PCAOB inspection report are largely the same as those in the 2018 report.  The main difference between the portions of the 2019 and 2018 reports that have been made public is that, unlike the 2018 report, the Testing Controls section of the 2019 report does not include criticism of KPMG’s testing of controls over the accuracy and completeness of data or reports.   

 

The 2018 KPMG inspection report is dated April 28, 2020.  Therefore, the release of these portions of the 2018 report indicates that KPMG failed to persuade the PCAOB that, as of April 28, 2021, it had satisfactorily remediated the quality control deficiencies. The 2019 KPMG inspection report is dated December 17, 2020.  Therefore, the release of the previously nonpublic criticisms in that report indicates that KPMG failed to persuade the PCAOB that, as of December 20, 2021, it had satisfactorily remediated the quality control deficiencies in that report.

 

Comment:  Disclosure of a portion of Part II of a major firm’s inspection report is unusual, but not unprecedented.  The Board has taken such action concerning each of the Big Four firms and many other firms as well.  In 2022 and 2023, the PCAOB made public portions of EY’s and Deloitte’s 2018 inspection reports that are similar to the “Policies for Financial Holdings Disclosures” portion of KPMG’s 2018 and 2019 reports.  See PCAOB Gives EY a Partial Fail on 2018 Remediation, September-October 2022 Update and PCAOB Makes Public a 2018 Criticism of D&T’s Quality Control, February-March 2023 Update.

 

However, the portions of the 2018 and 2019 KPMG inspection reports that have been released raise somewhat different issues than the EY and Deloitte reports.  In particular, the criticisms of control testing and audit supervision address matters that could potentially directly affect many audits.  Audit committees of KPMG clients may want to discuss with their engagement partner how the firm is addressing these matters, what changes have been made since the PCAOB’s determination that the deficiencies had not been remediated, and how the company’s audit might be affected.

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