In the latest 2014 inspection report on KPMG’s US operations PCAOB found deficiencies in half of the audits it reviewed, mainly relating to testing the internal controls over financial reporting, with the firm revising its original view on one audit  following the regulator’s assessment.

This is the last of the Big Four firms’ reports to be released, which found that overall the Big Four had a deficiency rate of 35% for the latest year’s inspections, an improvement over a 39% deficiency rate in 2013.

The PCAOB reviewed portions of 51 audits performed by the firm, along with a review of KPMG’s audit work on one other issuer audit engagement in which the firm played a role but was not the principal auditor.

Of the total, 28 audits were found to be deficient and in 27 cases these related to the testing of internal controls over financial reporting. In addition, the PCAOB report notes that in one of the audits, after the primary inspection procedures, KPMG revised its opinion on the effectiveness of the issuer's internal controls over financial reporting to give an adverse opinion.

In 19 audits, the PCAOB identified deficiencies related to the substantive testing performed for purposes of the opinion on the financial statements. Five of these audits included deficiencies in substantive testing that the inspection team determined were caused by a reliance on controls that was too high in light of deficiencies in the testing of controls.

The PCAOB report says that certain of the deficiencies identified were of such significance that it appeared that the firm, at the time it issued its audit report, had not obtained sufficient audit evidence to support its opinion that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

However, the PCAOB inspectors stated that this did not necessarily mean that the ‘financial statements are misstated or that there are undisclosed material weaknesses in internal controls of financial reporting’.

It added that the failure to obtain the reasonable assurance that the auditor is required to obtain was a serious matter, and that as a result KPMG failed to accomplish the essential purpose of the audit, and therefore, based on the audit work performed, the audit opinion should not have been issued.

The problems with the 2014 inspection come a year after the PCAOB released previously non-public portions of its reports on its 2010 and 2011 inspections after KPMG failed to address some of the PCAOB’s quality control criticisms during the period given to remediate them. In its 2013 report, the PCAOB found deficiencies with 23 of the 50 audits it reviewed.

In a statement, KPMG said: ‘KPMG continues to be fully committed to performing consistently high-quality audits. We are always mindful of our responsibility to the capital markets, and the PCAOB’s inspection process continues to play an important role in assisting us and the profession as we identify areas where performance can be enhanced and audit quality control systems can be improved.

‘In recent years, we’ve taken robust steps to further our commitment to audit quality. These include significant investments in new resources and technology, extensive root cause analyses of issues identified by the PCAOB and our own monitoring processes and increased training and communications for all of our people. These efforts, as well as additional initiatives undertaken since the 2014 inspections were completed over a year ago, have led to significant improvements which will be reflected in future inspection reports.’

The PCAOB report is here

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