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UK govt slams BoU former auditors KPMG, PwC over poor work

LONDON – Global auditing firms KPMG, PwC, Ernst &Young and Deloitte have come under fire from UK regulator Financial Reporting Council (FRC) over declining auditing standards as British lawmakers urged governments and companies to consider breaking the monopoly of the largest accountancy firms.

The FRC, which sets codes of conduct and standards for accounting, auditing and actuarial work, called for a “swift reversal” of the firms’ methods if they are to achieve this year’s performance targets for audit quality.

Stephen Haddrill, chief executive of the Financial Reporting Council

“At a time when public trust in business and in audit is in the spotlight, the Big 4 must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and skepticism by auditors, in particular in their bank audits,” said Stephen Haddrill, CEO FRC in a statement released this month.

A British parliamentary report last month criticised KPMG, Deloitte, EY and PwC, along with banks and other advisers, for poor oversight of Carillion, a collapsed British firm that constructed and managed government projects.

A review of 16 audits carried out on firms in the FTSE 350 index by the FRC found that half required some or significant improvement.

Overall results of 8 inspected firms showed that 72% of audits done by the firms in 2017/18 required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year.

“Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders,” added Haddrill.

FRC faulted the 4 firms for “failure to challenge management and show appropriate skepticism across their audits and poorer results for audits of banks.”

This month, the FRC fined PwC £6.5m and severely reprimanded the firm for misconduct related to two 2014 audits. KPMG was fined £3.15m over a 2013 audit.

FRC said auditors at KPMG did not challenge management enough, were not sufficiently sceptical and were inconsistent in their execution of audits. The decline in quality over the past five years “is unacceptable and reflects badly” on efforts by previous leadership to improve the work, the watchdog said.

“This is further evidence that problems at KPMG are profoundly systemic,” said Atul Shah, professor of accounting and finance at the University of Suffolk. “They are a profit-maximising business rather than a professional firm with standards of independence, character and integrity. To reform the Big Four we must address these cultural problems and conflicts of interest.”

The development raises concerns about the professional conduct of PwC which has for many years conducted high level audits of government institutions and commercial banks.

The defunct Crane Bank that was taken over by DFCU following the financial discrepancies (FILE PHOTO)

Both KPMG and PwC have since been declared ineligible to investigate the controversial sale of Crane Bank to dfcu Bank.

The two were pinpointed as having conflict of interest, having been clients of the defunct Crane Bank, which is a subject of the investigation. Both KPMG and PwC have also been BoU auditors and have previously worked as auditors for Crane Bank.

BoU had earlier contracted PwC to carryout forensic audit on Crane Bank. BoU used the report as a basis to file a case against city property mogul Sudhir Ruparelia. The case is pending hearing in the High Court.

The disputed forensic audit report which Sudhir’s lawyers, Kampala Associated Advocates (KAA), have since called a draft document, was made by PwC on November 13, 2014.

Crane Bank was also audited by KPMG from 2004-2007 and 2013-2015; PwC in 2008-2010; Deloitte and Touche 2011-2012, leaving the Auditor General shortlist with only two firms without issues.

Some analysts have advised that an independent foreign company be outsourced to audit BoU.

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