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KPMG’s Banking Audits Aren’t Good Enough, U.K. Watchdog Says

This content was published on July 23, 2021 - 09:11

(Bloomberg) -- KPMG LLP faced renewed criticism for the quality of its banking audits after the U.K.’s industry regulator said it was “unacceptable” that for the third year running the accounting firm’s work wasn’t up to scratch.

Across the U.K.’s seven biggest auditing firms -- including Ernst & Young and Deloitte -- almost 30% of all bookkeeping was below par in the year to the end of March, according to the Financial Reporting Council’s annual report. That’s well above the 10% benchmark the watchdog previously set.

Accountancy firms have faced intense scrutiny by regulators and prosecutors for any role they may have played in a string of company collapses and scandals. The FRC has opened investigations into the audits of Greensill Capital, a fintech that imploded earlier this year, and a bank owned by one of its largest borrowers.

“Given the systemic importance of banks to the U.K. economy,” the FRC said it “will be closely monitoring KPMG’s actions to ensure findings are addressed in a timely manner,” the FRC said Friday.

The firm has agreed to a set of additional improvement activities to be made this year, it said.

KPMG is “already working hard to make the necessary changes the FRC has highlighted,” the firm said in a statement. “Action taken as a result of previous inspections has not yet consistently yielded the high standards rightly expected of us.”

“Whilst we know we have more to do to improve the inspection outcomes, our banking audits are robust and the findings do not call into question our audit opinions,” KPMG said.

Deloitte, EY, Grant Thornton and PwC improved year-on-year, according to the FRC with around 80% or more of audits requiring no more than limited improvements. However, “these improved results still fall short of our expectations.”

Reform

The government published audit reform proposals in March aimed at getting smaller firms into the large company audit market, to break the Big Four’s dominance. However, some of these performed particularly badly in the quality review.

BDO and Mazars were both told to put in place “additional measures” to improve audit quality. Just 44% of BDO’s audits were deemed acceptable by the FRC, and 57% of Mazars’.

BDO now audits the largest number of listed companies in the U.K., and the FRC called the decline in audit quality over the past year “unacceptable.”

BDO’s head of audit Scott Knight said he was “very disappointed” by the results. Among other measures to improve audit quality the firm had increased audit headcount by 250 people, over the past year, he said.

Mazars’ audit head David Herbinet also said the firm was working to improve things.

“We have invested heavily in our team and infrastructure throughout 2020 despite the pandemic including in training, technology and audit methodology,” Herbinet said.

(Updates with government reform measures from the sixth paragraph)

©2021 Bloomberg L.P.

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