PCAOB Finds Hefty KPMG Audit Errors

The federal regulator came down hard on the Big Four firm after inspecting a selection of its work.
Stephen TaubSeptember 30, 2005

The Public Company Accounting Oversight Board said it found shortcomings of such significance at 19 KPMG audits it chose to inspect last year that the PCAOB deduced that the firm hadn’t come up with enough evidence to support its opinion on those companies’ financial statements.

Inspectors did field work at the Big Four firm’s national office and at 11 of the its 90 practice offices from June 2004 to October 2004. According to a 29-page report by the PCAOB, the federal overseer of public accounting firms, inspectors uncovered deficiencies including failures by KPMG to identify or adequately address errors in its clients’ applications of generally accepted accounting principles. The GAAP compliance mistakes included, in some cases, errors that seemed likely to be material to the issuer’s financial statements.

The deficiencies also included failures by KPMG to perform, or to perform sufficiently, a number of needed audit procedures. When audit deficiencies are identified after the date of the audit report, PCAOB standards require a firm to take appropriate actions to assess the importance of the shortcomings to the company’s ability to support its previously expressed opinions, according to the report. Failure to take those actions could set the stage for board disciplinary sanctions.

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The inclusion of shortcomings in an inspection report, however, doesn’t mean that the firm didn’t address them after it was informed of them by the PCAOB’s inspection, the board stated. “In response to the inspection team’s identification of deficiencies, the firm, in some cases, performed additional procedures or supplemented its work papers,” according to the report. In some cases, when inspectors identified GAAP departures, a follow-up effort by KPMG and its client “led to a change in the issuer’s accounting or disclosure practices or led to representations related to prospective changes,” it added.

Some of the errors, however, were so important that it seemed to PCAOB inspectors that KPMG hadn’t “obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements” at the time the firm issued its audit report, the PCAOB asserted. “In some of those audits, that conclusion followed from the omission, or insufficient performance, of a single procedure, while other audits included more than one such failure,” it said.

In describing the shortcomings that reached that level of significance, the report identifies the client by letter rather than by name. Concerning the audit of what it dubs “Issuer A,” for instance, the regulator asserted that KPMG “failed to identify various departures from GAAP that it should have identified and addressed before issuing its audit report.”

Although the board details the firm’s deficiencies concerning issuers listed alphabetically through “Issuer S,” KPMG only responded specifically to the report on Issuer A. The firm stated: “We accept the PCAOB’s findings in the report. We agree that one engagement, identified as Issuer A, had deficiencies that represent departures from both PCAOB standards and KPMG’s quality control procedures.” The firm added that it undertook a “complete review of this engagement” and talked about all the GAAP “departures” that were discovered with the client and its audit committee. The client then agreed to restate its results.

Issuer A accounted for a sale-leaseback deal using normal sale-leaseback accounting, “despite the presence of conditions that made such accounting inappropriate” under SFAS 98, Accounting for Leases, according to the PCAOB. “As a result, the assets and the debt attributable to the sale-leaseback properties were not reflected in the issuer’s balance sheet, as they should have been, and the issuer recorded a deferred gain that it should not have recorded,” it said.

The PCAOB said that KPMG’s documented analysis of this transaction outlined general accounting considerations under SFAS 98, but did not refer to the contractual terms that had the effect of precluding normal sale-leaseback accounting. “These terms — guarantees, letters of credit and indemnification arrangements — also were not disclosed in the footnotes to the issuer’s financial statements,” the report added.

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