The Financial Reporting Council, Britain’s audit regulator, admonished KPMG once again for conducting poor audits. The FRC says the Big Four firm’s banking audits are not up to acceptable standards for the third year in a row. And KPMG isn’t alone as a target of the regulator’s criticism: Out of the U.K.’s seven biggest audit firms, 30 percent of all audits included inadequacies, according to the report.
“Overall inspection results at KPMG did not improve and it is unacceptable that, for the third year running, we found that improvements were required to KPMG’s audits of banks and similar entities. In addition, our firm-wide work on KPMG’s IFRS 9 procedures and guidance identified that further improvements are required to provide a stronger basis for KPMG’s banking audit teams to deliver high quality audits in this area,” the FRC said in a statement.
KPMG has repeatedly said it is working to implement the necessary changes to bring audits up to acceptable quality standards. “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,” said Cath Burnet, KPMG U.K.’s head of audit.
The FRC noted in its report that KPMG has already invested significantly in its banking practice and believes that it will be able to demonstrate improvements in its 2020 year-end audits. The U.K.’s audit watchdog believes that for KPMG to bolster its performance, the firm needs to further examine:
- The content and direction of the Audit Quality Transformation Plan (the Plan), particularly in relation to the audit of banks and similar entities.
- Whether its Root Cause Analysis (RCA) process produces sufficiently targeted actions, particularly in relation to cultural and behavioral factors.
- How it monitors, on a timely basis, the impact of actions and how effectively they are embedded.
KPMG has agreed to a set of additional improvement activities to be made this year. Deloitte, EY, Grant Thornton, and PwC have all consistently improved over the past few years, says the FRC, with KPMG being the only firm still falling short of its standards.
The development is significate for internal auditors, since the scrutiny is likely to flow down the chain and result in closer examination and emphasis on cultural and behavioral factors by external auditors. Internal audit leaders, particularly those with banking operations in Britain, might want to ensure their financial reporting and accounting controls and other financial reporting practices are on the audit plan. 
Michael McGee is assistant editor at Internal Audit 360°