UK regulator to review KPMG’s audit practice

KPMG is facing further scrutiny by the Financial Reporting Council (FRC), which is to carry out an assessment of the governance, controls and culture within KPMG’s audit practice, in the wake of its ongoing investigation of the firm’s auditing of collapsed auditor Carillion and the ‘unacceptable’ deterioration in quality highlighted in its annual quality review

An FRC spokesperson told Accountancy Daily: ’In November 2018, the FRC opened an investigation relating to the provision of materials to the FRC by KPMG UK in connection with the FRC’s audit quality review into aspects of the audit of Carillion for the year end 2016.

‘The decision to open this investigation followed matters self reported by KPMG. That investigation remains ongoing.

‘Following that referral and discussions with KPMG, the FRC, supported by A&O Consulting, has commenced an assessment of the governance, controls and culture within KPMG’s audit practice to ensure we have confidence that it is making demonstrable progress with its programme of quality improvements.

‘As one of the UK’s major audit firms it is vital that investors and others have confidence in its ability to perform its core work to the highest standards.’

A KPMG spokesperson said: ‘We are co-operating fully with the various inquiries currently under way, engaging actively with the reviews of the audit sector, and, where we can, we are moving ahead and taking action ourselves.

‘We are now 18 months into our audit quality transformation programme, and we are confident that we are making good progress.

‘But it is absolutely essential that the FRC, and our wider stakeholders, have confidence that our programme to upgrade the consistency of our quality is delivering the right outcomes.  With this in mind, we welcome that the FRC has commenced an assessment of our audit practice. 

‘We see this as a valuable opportunity for the FRC to test our progress and to confirm next steps for our audit transformation. We also believe this kind of rigour and challenge will become increasingly common in our sector and this is a change for the better.

‘The review will support the FRC’s supervision of the sector as part of its new Audit Firm Monitoring Approach and Supervision (AFMAS), consistent with enhancements recommended by Sir John Kingman.’

Law firm Allen & Overy has confirmed that Sally Dewar, CEO of A&O Consulting, its regulatory consulting business, and her team are supporting the FRC in its overall assessment of KPMG’s audit practice. 

Sally Dewar, CEO of A&O Consulting said: ‘We’re seeing increased demand for advisers with in depth legal and technical insight, together with the ability to deliver tailored business outcomes. The scope and scale of our offering enables us to do this and is proving to be a successful combination. ‘Working with financial regulators and organisations such as the Financial Reporting Council and KPMG to improve the quality of their services not only helps individual companies deliver an improved offering to their clients, but it sets a higher standard for entire industries and sectors.’

The FRC’s investigation of KPMG’s auditing of Carillion was announced at the end of January 2018, not long after the company went into liquidation, putting thousands of jobs and major government infrastructure projects at risk. In an update this January, the regulator said its work is set to continue for much of this year but will be completed ‘promptly and thoroughly’.

A key area of focus for the FRC has been the financial performance of Carillion’s major contracts in both the construction and services divisions, and whether Carillion management and its auditors ensured that this was appropriately reported in its financial statements. The investigations are also considering conduct relating to pension liabilities, goodwill, cash disclosures and going concern.

Report by Pat Sweet

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