This afternoon, KPMG, a big four accountancy firm, was criticised because of the “unacceptable deterioration” in the quality of the audit work of the company.
KPMG audited Carillion before its collapse last January. The Financial Reporting Council (FRC), the watchdog of the industry, said that the firm will now face heightened scrutiny.
According to the FRC, half of the FTSE 350 audits of KPMG are “in need of more than just limited improvement,” a rise from the 35 percent the year before.
The investigation comes just a few months after MPs questioned KPMG for its failure to flag problems with Carillion, with the accountancy titan expressing no concern over profits four months prior to the collapse of the construction company. The findings could affect KPMG after recent news that the company is set to become the auditor of both Rio Tinto, a mining firm, and BT, the telecom giant.
The FRC also issued a warning that the peers of KPMG – EY, Deloitte, and PwC- also need to improve the quality of their audits.
The chief executive of the FRC, Stephen Haddrill, stated: “At a time when public trust in business and in audit is in the spotlight, the Big Four must improve the quality of their audits and do so quickly.”
Haddrill continued: “They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.”
The head of audit at KPMG, Michelle Hinchliffe, stated: “We are disappointed that our overall audit quality score has decreased by four percent and that the steps taken in previous years have not resulted in the necessary improvements to audit quality. We are taking action to resolve this. We want all of our audits, regardless of size, to meet the highest standards set by the Audit Quality Review [AQR].
She added: “It is important to note that the audit work appraised by the FRC for its 2018 AQR [audit quality review] took place principally in respect of the 2016 year ends, prior to the commencement of this work. We cannot and will not be satisfied with these results and, as a firm, we are already working to put this right.”
The watchdog itself is under the spotlight with the government assigning Sir John Kingman, a former official of the treasury, to look at the future of the regulator.