Report Exposes Errors Found in KPMG Audits

An annual report released by the Public Company Accounting Oversight Board (PCAOB) highlights errors found in a sampling of KPMG’s nearly 1,900 public audits performed between June and October 2004. Examiners carried out field work at 11 of its 90 practice offices to compile this report.


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The PCAOB is required to review the quality controls of each of the Big Four accounting firms annually by the 2002 Sarbanes-Oxley Act. Reports on PricewaterhouseCoopers LLP, Deloitte & Touche LLP, and Ernst & Young LLP can be expected in the coming weeks.

This report comes a month after KPMG agreed to pay $456 million in penalties and operational oversight by former Securities and Exchange Commission Chairman Richard Breeden. KPMG also dismissed or retired about three dozen partners for their actions leading to their conspiracy charge. The conspiracy charge will be dismissed if the firm can stay out of trouble until the end of 2006.

KPMG Chairman Timothy Flynn said in a prepared statement, “KPMG is committed to the goal of continuous improvement in audit quality. We appreciate the constructive dialogue and consider it an important element in the process of improving our system of quality controls.”

In their exhaustive examination of 76 audits, the PCAOB found many significant errors in 19 audits, one error leading an unnamed client’s board to restate their initially reported earnings according to the report. The report also stated that KPMG auditors set their threshold for corporate accounting mistakes too high on at least two audits. The number of mistakes should have initiated a more detailed examination but did not.

Deficiencies included failure to address companies’ sometimes significant departures from GAAP compliance and perform certain audit procedures properly according to the report. A major criticism in the PCAOB report was KPMG’s failure to obtain and preserve documentation to support the conclusions of the audit.

In some cases, KPMG did respond after being informed of these deficiencies. There were additional efforts by KPMG and their clients that “led to a change in the issuer’s accounting or disclosure practices or led to representations related to the prospective changes,” the PCAOB report said.

KPMG Chairman Timothy Flynn responded in his prepared statement, “KPMG has reviewed the finding identified during the inspection … and has concluded that, with one exception, no new facts came to our attention that caused us to believe that our clients’ previously issued financial statements should be restated or our auditors’ reports withdrawn.”

Eight former KPMG executives were indicted last month on tax-fraud charges by federal authorities in New York. These eight, including a former vice chairman, have pleaded not guilty and are defending themselves against the charges. Other federal indictments are expected in mid-October.

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