Redacted US big 4 audit quality report still more comprehensive than Australia’s
Concerns have been raised around KPMG’s deficiency rate being redacted in a US big four audit quality report with no explanation from the authors.
The deficiency rate of audits conducted by the US arms of Deloitte, EY, and PwC nearly doubled in the most recent annual inspection report from the Public Company Accounting Oversight Board (PCAOB).
The report comes amidst ongoing scrutiny levelled against the big four’s auditing and governance proficiency both abroad and in Australia.
For instance, Australian engineering and integrated services firm, Downer EDI on Monday announced it would bring a claim against KPMG for its alleged failure to detect accounting irregularities which, once revealed, decreased the firm’s valuation by $500 million.
Aggrieved shareholders launched a class action against Downer for overstating its earnings after it announced it would not achieve its FY23 profit forecasts. On Monday, the firm told its investors that it was bringing a defensive third-party claim against KPMG.
In the US PCAOB report, KPMG’s audit deficiency rate was redacted. It is unclear why.
Associate professor at the University of Texis at Austin Jeffrey Johanns wrote that the move to redact the information without providing context or an explanation was “highly unusual,” adding the PCAOB appears to regard deficiency rates as a leading transparency measure.
On average, 24 per cent of the audits conducted by the three firms were deficient, meaning their conclusions were based on insufficient evidence.
Only a year prior, their overall deficiency rate was 13 per cent. The data is analysed on a lag, so the 24 per cent figure relates to a sample of audits conducted in 2021.
EY’s deficiency rate of 46 per cent was greater than those of Deloitte and PwC combined, at 17 per cent and nine per cent, respectively.
The questions relating to the unexplained redaction are natural, yet even a partly-redacted audit quality report would be a step forward in Australia given ASIC’s cessation of firm-level reporting.
A senate inquiry recommended that ASIC begin firm-level reporting for the big four, along with BDO and Grant Thornton – which it did, twice.
In its most recent firm-level scorecard, released in October 2022, Deloitte was singled out for failing on half the reviewed key audit areas, followed closely by KMPG.
Following a review in 2022, ASIC said it would focus on opportunities for “a stronger and more effective approach.”
Instead of publishing audit quality data of individual firms, ASIC now only names and shames in exceptional circumstances, citing resourcing constraints as part of a restructuring which also saw the shrinking of its audit team and letting go of its chief accountant, Doug Niven.
ASIC said the reviews were too time and resource-intensive, explaining it will instead opt for a more risk-based, targeted approach, reported the Australian Financial Review.
Under questioning at the Senate inquiry into consulting, ASIC’s executive director of markets Greg Yanco suggested the inspection reports were abandoned in part due to the nature of the media coverage of the data exposed in those reports.
“If you look at the media on it, all the focus is on the numbers. It doesn’t go back and talk about the work we do that’s not audit file related, that is about conflicts of interest, governance, root cause analysis,” he said.
“A whole lot of other work goes on that is not just looking at audit files.”
Senator Deborah O’Neill took issue with the move, arguing that naming and shaming is an important as aspect of transparency.
“It’s hard to believe that this relatively new program, which was actually shedding some light on what was going on inside the big four, has been lost in the reshape of ASIC,” O’Neill told 7.30.
“I have grave concerns if nobody is watching. That’s the perfect conditions in which further degrading of the quality of audit is likely to occur.”
