The US’s Public Company Accounting Oversight Board (PCAOB) has condemned the quality of audits carried out by KPMG US in an inspection report published last week.
The review was carried out at 25 out of KPMG’s 82 locations across the country, as well as its national office in New York.
The audit oversight body reported major failings in half of the KPMG audits it surveyed. In particular, the PCAOB questioned whether the firm had obtained enough evidence to approve the financial statements as fair for 23 out of the 50 cases considered.
Another audit area the report cast doubt on was the information used by KPMG to confirm the existence of effective internal controls over financial reporting within the audited companies.
"In other words, in these audits, the auditor issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and/or the issuer maintained effective ICFR," explains the report.
The PCAOB pointed out that the findings did not allow for conclusions to be drawn on the quality of the original financial statements issued by the companies themselves, but added that KPMG’s audit deficiencies were cause for concern.
"Whether or not associated with a disclosed financial reporting misstatement, an auditor’s failure to obtain the reasonable assurance that the auditor is required to obtain is a serious matter. It is a failure to accomplish the essential purpose of the audit, and it means that, based on the audit work performed, the audit opinion should not have been issued."
Indeed, many of the cases highlighted several shortcomings, failing to perform effective controls on aspects including mortgage repurchase reserves to loan grading processes.
In the case of the first firm alone, referred to in the report as "Issuer A", the PCAOB found inadequate revenue and accounts controls testing, despite a fraud risk having been highlighted in the area by the audited company itself.
Another area of judgement called into question by the PCAOB was in KPMG’s acceptance as reasonable of significant assumptions made by certain firms.
KPMG chairman and chief executive officer John Veihmeyer and audit vice chair James Liddy released a statement in response, saying: "We remain committed to full cooperation with the PCAOB, appreciate the professionalism and commitment of the PCAOB staff and value the important role the PCAOB plays in improving audit quality."
"We have taken remedial actions with respect to our professionals’ evaluation of contrary evidence," they said, and added: "We will take the further actions necessary to address this quality control criticism and will continue to enhance our system of audit quality control."