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KPMG singled out for ‘unacceptable’ bank audits

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The accounting regulator’s audit of the auditors revealed “unacceptable” problems by KPMG’s banking bookkeepers and a sluggish performance by a handful of challenger firms, as almost a third of audits fell below standard.

28th Jul 2021
Journalist
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A sector quality check has revealed KPMG’s bank audits required improvements for the third year running, with the situation deemed “unacceptable” by the accounting regulator.

The Financial Reporting Council (FRC) checked 103 audits by KPMG, PwC, Deloitte, EY, Mazars, Grant Thornton and BDO, and said nearly a third required improving, barely bettering the results from its last survey.

“While these results show some improvement on last year’s results, this improvement is marginal and significant change still needs to happen to meaningfully improve audit quality,” said FRC chief executive Sir Jon Thompson. “High quality audit is essential to maintaining trust and confidence in the UK’s financial markets. If the UK is to retain its position as a world leading professional services marketplace, and a global financial centre, outstanding audit quality and rigorous professionalism is at the heart of this.”

The government is under pressure to toughen up oversight of the audit market and corporate governance following a series of high-profile collapses that led to three reviews of the accounting sector.

a screenshot of the total reviews from the report

‘Unacceptable’ hat-trick

No firm came out covered in glory, but the most stinging criticism was reserved for KPMG, which will be “closely monitored” by the FRC for improvements.

“Inspection results at KPMG did not improve and it is unacceptable that, for the third year running, the FRC found improvements were required to KPMG’s audits of banks and similar entities,” the watchdog said. “KPMG has agreed additional improvement activities to be delivered this year over and above its existing audit quality improvement plan,” it added.

According to the report, KPMG “does not currently provide its banking audit teams with sufficiently clear expectations and guidance as to the minimum procedures to be performed” and this is “likely to have contributed to our findings on the individual audits we reviewed,” the regulator said.

It said it had reviewed and found weaknesses in the firm’s documented audit approach and guidance for auditing the requirements of IFRS 9.

“Given the systemic importance of banks to the UK economy,” the FRC said it “will be closely monitoring KPMG’s actions to ensure findings are addressed in a timely manner”.

The FRC did not disclose the companies which had been audited. The regulator recently opened investigations into the audits of Greensill Capital, a failed supply chain finance company, and a bank owned by one of its largest borrowers.

KPMG, which counts Barclays amongst its major banking clients, said it was “working hard” to implement the changes the FRC had noted. The Big Four firm is expecting a significant fine from the FRC for its failed audit of Carillion.

“Whilst we know we have more to do to improve the inspection outcomes, our banking audits are robust and the findings do not call into question our audit opinions,” said Cath Burnet, KPMG UK's head of audit. “We are confident that the steps we have taken to date will result in improvements in future banking audit inspections.”

KPMG has agreed additional improvement activities to be delivered this year over and above its existing audit quality improvement plan, the FRC said.

Challenger weaknesses

Deloitte, EY, Grant Thornton and PwC reported improvements overall. Although about 80% or more of audits required only limited changes, the numbers still fell short of expectations, the FRC said.

EY blamed Covid-19 pandemic issues for the challenges it faced, but said it had been able to maintain standards.

Challenger firms BDO and Mazars were also told to “put in place additional measures to support high quality audit as they continue to grow”.

Five of the nine BDO audits and three of seven at Mazars needed more than limited improvements, the survey found.

Some 44% of BDO’s audits required no more than limited improvements while the equivalent figure was 57% for Mazars and 59% for KPMG, the FRC said.

BDO said it was “very disappointed” by the results. Head of audit Scott Knight said the firm had hired more staff over the past year to improve the quality of work.

Mazars head of audit David Herbinet also said the firm had promised improvements, having

invested in training, technology and audit methodology.

“We are fully supportive of the FRC's efforts in holding our sector to account, and in demanding improvements in the quality of audit work,” Herbinet said.

The FRC said it would increase audit inspections at BDO and Mazars on the back of its findings.

Pointless exercise?

Overall the FRC said the most common issues it found were in relation to revenue, impairment of assets, and group audit oversight.

“The FRC had mixed findings in relation to the effective challenge of management of audited entities, with some examples of good practice but not on a consistent basis,” the regulator said.

The government wants to improve competition in the audit market, reducing the dominance of the Big Four by handing more opportunities to the challenger firms. Some large companies have pushed back on the plans however, arguing the smaller firms do not have the capacity to audit blue-chip corporations.

According to the ICAEW, the FRC audit check “has lost its way”.

“It has become an exercise in compliance checking and the public admonishment of auditors, and it does little to improve audit quality, foster innovation or encourage new entrants into the audit market,” the ICAEW said.

The Department for Business, Energy and Industrial Strategy said the FRC report stressed the need to reform the audit sector. Although a review is underway, no decisions have been made on when a response will be published to its consultation, a spokesperson for the business ministry said.

Replies (8)

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By johnjenkins
29th Jul 2021 10:42

I trained as an audit clerk have have done medium sized audits. I see the problem as not enough good auditors. You have to have a certain mentality, almost criminal, to be able to carry out proper audits. Most of those with that ability will have their own practice where they can earn good money. So you are left with bookkeeping mindset (nothing wrong with that) auditors that do not have the capability of finding something really wrong. This is just a general observation and should not be taken as a targeted criticism, but something is going wrong.

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Replying to johnjenkins:
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By flightdeck
29th Jul 2021 11:34

I think you are right - haven't most of the scandals been to do with deliberate acts by the client therefore a 'criminal detection' mindset sounds absolutely right to me. If the mindset is to take everything at face value then I'm not sure I see the value of such an audit. Audits are not really about awarding marks to clients for the accuracy and honesty of their books but about making sure what they represent is what is actually and really going on. Speed cameras are not there to assure the drivers in a 30 zone who are driving under 30 that they are indeed going under 30 but to deter and catch those who are or would like to exceed that limit.

(I have no audit background and maybe that shines through in my comment).

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By chasmeehan
29th Jul 2021 15:15

I suspect the issue is one of scale , complexity and technical change in the wide range of areas in scope in a bank as well as some natural limits to the granularity which can be applied in risk assessing at the initial stage of thne audit. I think the FRC is saying that if you do the same audit repeatedly then critical reflection on experience should help you identify gaps in your approach more effectively than is being demonstrated. That may be less true where there is ongoing and overlapping digitalisation programmes which keep moving the goalposts. There's no obvious magic bullet (the regulator is doing their job and I have no doubt the firms are also doing their best , but this is a journey which is hampered by underpricing and the regulator might consider researching what their acceptable audit might have cost and use that as a proxy for completeness in future reviews). One thought from the earlier comments - to minimise exposure to criticism the audit firms might experimentally extend the required internal review (which obviously is not forestalling the FRC criticisms ) to what in cybersecurity are known as "red teams" who are rewarded for independently finding gaps and weaknesses in your methodology and execution - the idea being that they give you a harder time than the regulators eventual review and you have a chance to remediate your work before finalisation. Maybe use of AI and automation techniques for this red teaming would allow it to be delpoyed in parallel with the actual audit.

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By mtgill
29th Jul 2021 15:15

It is interesting to see that the ICAEW are blaming the messenger not the perpetrator !!

Will they bother to bring KPMG to task or is it case of they are our mates ?

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By More unearned luck
29th Jul 2021 18:47

What is the word 'bookkeeping' doing in the headline? If you think that bookkeeping is a synonym for auditing, you are in the wrong job.

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By Andrew3018
03rd Aug 2021 22:57

Independence issue is still the major underlying cause of inappropriate audit opinion. It would never change as long as auditors directly get their audit fees from their audit subject. Auditors would, at most, unconsciously avoid biting the hands that feed them. It is sad to admit that HMRC examination approach is the closest example I could think of of realistic audit independence. Statutory auditing needs a bold and drastic revolution to achieve real audit independence and uncompromised audit opinions.

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By Andrew3018
03rd Aug 2021 23:00

Independence issue is still the major underlying cause of inappropriate audit opinion. It would never change as long as auditors directly get their audit fees from their audit subject. Auditors would, at most, unconsciously avoid biting the hands that feed them. It is sad to admit that HMRC examination approach is the closest example I could think of of realistic audit independence. Statutory auditing needs a bold and drastic revolution to achieve real audit independence and uncompromised audit opinions.

Thanks (0)
avatar
By Andrew3018
03rd Aug 2021 23:00

Independence issue is still the major underlying cause of inappropriate audit opinion. It would never change as long as auditors directly get their audit fees from their audit subject. Auditors would, at most, unconsciously avoid biting the hands that feed them. It is sad to admit that HMRC examination approach is the closest example I could think of of realistic audit independence. Statutory auditing needs a bold and drastic revolution to achieve real audit independence and uncompromised audit opinions.

Thanks (0)