Accounting firm KPMG LLP has made sweeping changes to its audit practice in the aftermath of a cheating scandal that tarnished its reputation and laid bare its struggles to comply with U.S. audit standards.
The shake-up started soon after the firm confessed to U.S. regulators in early 2017 that it knew in advance which audits would be reviewed as part of its 2016 annual inspection.
In recent public statements and documents, KPMG paints a picture of a new and improved audit firm. And the firm pledged that the steps it has taken will result in an improved 2018 inspection report card after years of audit lapses.
KPMG responded swiftly and has made meaningful changes to plug holes in quality control backstops at the firm, said Amal Shehata, an audit and accounting professor at New York University Stern School of Business.
How the firm responded, including accepting responsibility for its actions, matters. And KPMG’s competitors are watching. They are taking notes and making changes to avoid similar gaps in their own quality controls, Shehata told Bloomberg Tax.
The firm detailed nearly two years of restructuring in a letter included in a recent batch of inspection reports released by the Public Company Accounting Oversight Board, plus its annual audit quality report, released the same day.
Among the changes, KPMG has:
- Replaced four leaders at the top of the audit practice;
- Added two independent directors to the firm’s governing board;
- Begun rolling out technology improvements and new audit methods that align with PCAOB standards;
- Been using quality review teams to double-check the work of audit teams sooner in the process;
- Moved internal inspection teams that evaluate the work of auditors outside of the audit practice;
- Revised performance evaluations for partners and other senior leaders; and
- Spelled out responsibilities for audit quality for partners up to and including CEO Lynne Doughtie.
“Earning the public’s trust requires that every day we live up to the high standards we set for ourselves. It also requires us to be transparent about any shortcomings and make the important decisions to fix them—even when those decisions may be difficult,” the firm said in a letter to stakeholders included in the quality report released Jan. 25.
KPMG declined to elaborate further.
KPMG’s confession triggered a series of investigations at the PCAOB, at KPMG, and ultimately federal criminal charges were filed against six former KPMG and PCAOB staff members. Three of those cases are headed to trial in 2019 while three others await sentencing.
Driving the firm’s candor is pressure from its own clients—the audit committees who hire them want to know how their audits were handled. Potential new clients also will want to know what happened and how the firm responded, said Bob Pozen, a former investment management executive and now a senior lecturer at MIT Sloan School of Management.
Audit committees are asking KPMG to explain what happened and what the firm did in response. “And KPMG has to say something,” Pozen told Bloomberg Tax.
Any steps the firm takes to improve its audit work should be applauded, but it will take time to see if KPMG’s actions result in better auditing, said Tony Sondhi, a financial advisory consultant who serves on the PCAOB’s Investor Advisory Group.
Investors, too, depend on auditors to ensure reliable numbers are reported in corporate financial statements. “The better the audit quality, the better off all of us are,” Sondhi told Bloomberg Tax.
“Any of these frauds or scandals end up damaging the trust in the audit role whether it’s KPMG or their competitors,” Shehata said. “There ends up being this lingering blemish on the integrity of the audit, the feasibility of the audit—does it really work, is it possible to conduct an independent audit?”
But such scandals also give the firms the opportunity to make changes and improve the audit, Shehata said.