Solved: The Mystery of KPMG’s Redacted PCAOB Inspection Report (Kinda)

Posted on by Going Concern News Desk
illuminated question marks in a pile of black question marks

This past February, the PCAOB released KPMG’s 2022 inspection report but inexplicably redacted the firm’s deficiency rate. To say this was very strange would be minimizing the situation, something we aren’t generally known to do. VERY strange. CAPS exclamation points Confused Nick Young meme strange. This isn’t something we’d ever seen, certainly not in a Big 4 inspection.

screenshot of KPMG's redacted 2022 PCAOB inspection report
Why Did the PCAOB Redact KPMG’s Audit Failure Rate?

Jeffrey Johanns, associate professor at The University of Texas at Austin McCombs School of Business and regular audit industry commentator, wrote a really good LinkedIn Pulse post about the situation when the redaction first appeared. This, uh, unique choice by the PCAOB obviously led to more questions than answers. Such as:

· The other 13 reports issued along with KPMG’s included each firm’s Deficiency Rate, including the other three Big 4 firms. Why was KPMG handled differently?

· In KPMG’s listing of “Audits with Unsupported Opinions”, containing issuers labeled as “A” through “P”, issuer “N” is omitted from the list? Who is the mysterious Issuer N? Are there other missing issuers?

· After more than two years of inspection, discussion, and negotiation with KPMG, why can’t the PCAOB decide whether any particular audit is deficient? It is the regulator. The Board has the final say. It is their responsibility to draw a conclusion and move on, whether the firm agrees or not. The purpose of the response letter included in the report is for the inspected firm to indicate if they have any disagreements with the determinations in the report. If KPMG doesn’t agree with the Board’s decisions about individual audits, they should say it in their response letter.

· Why didn’t KPMG (apparently) not agree with some of the Board’s conclusions, or object in the normal inspection process? This question raises a lot of speculation, not particularly helpful to KPMG. Are there one or more audits they are being advised not to agree to as deficient? For what reasons?

We still don’t have answers to those questions but we do now have a number: 30 percent.

So a 30 percent Part I.A. deficiency rate, up from 26 percent in 2021 and 2020. Why does this feel so anticlimactic?

The number of audits selected for review was on par with previous years:

What was the secrecy all about then?? Why is this all so weird? Bloomberg Tax has an explanation:

The US accounting oversight board issued a complete version of KPMG LLP’s 2022 inspections review on Friday that detailed an extra audit with a single deficiency tied to income tax accounting.

KPMG had appealed portions of the Public Company Accounting Oversight Board’s inspection findings resulting in the release of a partially redacted report in February. In total, inspectors found fault with 30% of the firm’s inspected audits, work that generally covered 2021 financial statements, according to the amended report.

Quick update: The PCAOB tweeted about the inspection report and didn’t even mention KPMG by name. HMM.

Full report embedded below for your reading pleasure.

KPMG-2022-PCAOB-inspection-reportDownload

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Who’s Doing an Inventory Today?

Thumbnail image for inventory.jpgIt’s a big day of counting items of all sorts: screwdrivers, unsold Pontiacs, Shiri Zinn Minx vibrators. And unless you’re Count von Count, we’re guessing that you’re not too psyched about it.
We’ve touched on inventories a couple of times in 2009 and now that the mother of all count days is here, we’ll open a thread for those of you poor souls that will be spending all day tagging [insert item].
Whatever your responsibilities are, we hope they won’t get in the way of your NYE plans but unfortch, one reader has already told us about the less than thrilling news they got yesterday:

I just found out I have one on new year’s eve that is three hours away from where I live for another of the firm’s offices and I likely won’t be leaving there until 8:00 pm. And this company’s inventories have historically been “messy”. F My Life.

Nothing like last minute. To top it all off they’ll probably end up counting pig carcasses outside a slaughter house.
So let this story be your jumping off point for our inventory thread. Share your nightmare inventory count stories from auditor tales of yore or what the hell you’re up to today. And don’t leave out the details like condom goodie bags. Have a great count and don’t be ashamed to use your fingers.

PCAOB Chairman James Doty Is Concerned That Some Auditors Either Don’t Care or Are Completely Ignorant About the Notion of Independence

As you may have heard, PCAOB Chairman Jim Doty gave a speech at the University of Southern California yesterday where he discussed among other things, the possibility of mandatory auditor rotation and changing the standard auditor’s report. The prospect of these two changes aren’t exactly something auditors are stoked about but some people are of the opinion that a) auditors like to get a little too chummy with their clients which leads to b) not taking the “independence” thing too seriously and c) the auditor’s report, in its current form, its pretty much worthless.

You can read Doty’s entire speech over at the PCAOB website where touches on all of these but here’s one example around independence that probably qualifies for, in Doty’s words, “[an] approach [to] the audit with an inappropriate mindset”

[An] audit partner’s self-assessment claimed that he “overcame long-standing barriers against non-audit services at [two audit clients] with a series of well-planned meetings and supporting presentations with the Audit Committee Chair, the full Audit Committee, the CEO and the CFO at both companies.”

In response, his reviewing partner noted that he was –

highly alert to cross service line opportunities and has successfully penetrated both of his accounts where few services had been
provided in the past. The results of these efforts were a number of proposals and wins but the efforts will likely impact FY 11 in [a] more significant way.

Anyway, there are other stories of bad auditor behavior, so check the whole speech if you feel so inclined. And while Chairman Doty admitted that “We don’t see these problems in all the files we look at,” it causes he and others to wonder if “these audit partners are unaware of, or simply unconcerned about, the independence rule that should make such considerations irrelevant to their compensation, and why a firm would allow such unawareness or unconcern to continue unabated.”

So flagrantly bending the rules to the point where they might as well be breaking or stupidity? Neither is too flattering.