KPMG fails twice as often as rivals in US audit inspections abroad
U.S. regulators were twice as likely to find flaws in audits conducted by KPMG’s foreign subsidiaries than those of any other Big Four accounting firm, according to an analysis of inspection data.
The findings raise further questions about KPMG’s ability to enforce common standards across its global network after a series of run-ins with regulators and internal controversies.
They also come as the US audit regulator, the Public Company Accounting Oversight Board, steps up enforcement action and pledges to require non-US subsidiaries of global companies to meet US standards. Last Wednesday, the PCAOB fined the Italian, Dutch and Canadian branches of KPMG for concealing the outsourcing of certain audit work to unregulated firms.
The PCAOB has the authority to inspect the audit of any company listed in the United States, regardless of where its auditor is based. Between 2018 and 2020, it reviewed 80 audits involving non-US KPMG subsidiaries and found flaws in their work in 55% of cases.
According to an analysis of PCAOB inspection reports by the Financial Times and data provider Audit Analytics, this compares to 20-28% of audits inspected at non-US subsidiaries of other large companies.
Large global accounting firms are structured as a network of local partnerships operating under a single brand.
KPMG pointed out that PCAOB data is released with a delay and that the agency does not distinguish between serious and minor shortcomings. The company said it was rolling out a new system to standardize its audit process across geographies, which included measures to ensure compliance with US standards.
“The most recent inspection results reflect audits performed before the implementation of major advances in technology, learning and development, and monitoring that lead to quality audits today,” said said a spokesperson.
The PCAOB said on Wednesday that three of KPMG’s foreign subsidiaries had used entities not registered in Poland or Romania to carry out part of their audits while informing the regulator that they had used another registered entity. KPMG Canada paid $150,000 for Celestica manufacturer audit breach; KPMG Italy paid $75,000 for work for luxury furniture maker Natuzzi; and KPMG Netherlands paid $50,000 for its audit of ING, the bank.
KPMG neither admitted nor denied the findings.
KPMG was called out by the UK’s Financial Reporting Council in 2021 for weaknesses in its audit processes after receiving the worst score among the Big Four in that regulator’s inspections. However, the FRC’s latest annual report showed the company’s scores improving significantly, which the agency called “promising, but. . . not yet a trend.
Recent FT reporting has revealed unrest at KPMG subsidiaries in the Middle East, where staff have spoken out about the governance of its Lower Gulf subsidiary and working conditions in Saudi Arabia.
Last month, PCAOB board member Christina Ho drew attention to higher deficiency rates among non-U.S. affiliates of global accounting firms, saying they had failed to keep up with improvements to United States.
Lynn Turner, a former chief accountant at the U.S. Securities and Exchange Commission, said the explanations include more lax enforcement by regulators in other countries and a greater risk of investor lawsuits in the United States. “American companies are looking over their shoulder more than their international subsidiaries,” he said.
PCAOB chair Erica Williams said in an interview with the FT this month that the agency “will hold accountable all businesses, including affiliates, that break our rules, and we have recently improved our rules of “other listeners” to make this even clearer.
FT/Audit Analytics analysis of PCAOB inspection data showed Deloitte had the second-worst deficiency rate across its non-U.S. Big Four subsidiaries from 2018 to 2020. It also had the largest gap in deficiency rates of its United States and no. -US businesses, largely reflecting a strong improvement in the US. Deloitte US’ deficit rate fell from 12% in 2018 to 4% in 2020.
“We are confident that when inspection reports become available for the current performance cycle – 2021 – they will reflect the positive results of the comprehensive quality investments we have made, including a narrowing of the results gap outside of United States,” Deloitte said.