From the Wall Street Journal:
The U.K. watchdog for accounting and audit on Tuesday launched an independent review into the governance, controls and culture at KPMG LLP’s U.K. audit unit.
The Financial Reporting Council will examine KPMG’s risk management, its controls and the behavior of partners and other employees in the audit practice. This first-of-its-kind review will be conducted by A&O Consulting, the consulting arm of Allen & Overy LLP, on behalf of the FRC, a spokesman for the regulator said.
Let’s stop right there for a moment. The CEO of A&O Consulting, who will be working closely with the FRC during its review of KPMG, is Sally Dewar. According to her bio, Dewar spent seven years working at JPMorgan and 10 years working at the Financial Reporting Authority in the U.K. before joining A&O. And guess where Dewar worked right out of university? KPMG!
Her LinkedIn page shows that Dewar hasn’t worked at KPMG in the U.K. for more than 20 years, but many people are going to say or write that Dewar being a KPMG alum means the review won’t really be independent. Will it? Some of you who practice professional skepticism for a living will probably say “nope.” But the thing is, now that the FRC will be replaced as the U.K.’s audit regulator by the Audit, Reporting and Governance Authority next year, I honestly don’t think the FRC gives a shit whether there’s a conflict of interest or not.
OK, back to the WSJ article:
The FRC will also assess whether KPMG is capable of delivering high-quality audits in the U.K. A 2018 quality assessment the FRC conducted found that around 50% of audits done by KPMG were below standard, the FRC said.
It wasn’t just “below standard.” The FRC actually called KPMG’s decline in audit quality over the past five years “unacceptable” last June and said KPMG’s auditors don’t challenge management enough, aren’t sufficiently skeptical, and are inconsistent in their execution of audits.
In January, the FRC launched a second investigation into how KPMG audited the books of U.K. construction company Carillion, which collapsed in early 2018. And last July, KPMG U.K. Chairman Bill Michael got hammered on social media for praising the “hard work and commitment of the Carillion audit team” despite the firm playing a role in the company being run into the ground.
The FRC’s review of KPMG will be concluded during the course of this year and could result in recommendations for changes at the firm, according to the WSJ.
But why didn’t the FRC conduct this review of KPMG right after Carillion kicked the bucket, or after it revealed that half of the audits done by KPMG that it reviewed sucked? The FRC has known that KPMG has been bad at auditing for quite a while now. Where was the review three years ago?
Now that the FRC is going to be abolished in less than a year, it seems this review of KPMG is too little, too late.