What's Happening?
KPMG has reported its lowest Public Company Accounting Oversight Board (PCAOB) inspection deficiency rate since 2010, marking a significant improvement in its audit quality. The firm, which had the highest deficiency rates among the Big Four from 2014 to 2021, has been steadily improving since 2018, now reporting a deficiency rate of 28.6%. This development comes as other Big Four firms, such as Deloitte and PwC, have experienced rising deficiency rates since 2020, currently at 22.2% and 24.5%, respectively. Meanwhile, EY's deficiency rate increased significantly from 16.9% in 2020 to 42.9% in 2022, before declining to 37.8% in 2023. The PCAOB's inspections, which aim to protect investors by ensuring audit quality, have shown that Global Network
Firms, including KPMG, generally have better international office audit deficiency rates compared to non-Global Network Firms.
Why It's Important?
The improvement in KPMG's deficiency rate is significant for the auditing industry, as it highlights the firm's efforts to enhance audit quality and reduce deficiencies. This trend is crucial for maintaining investor confidence and ensuring the integrity of financial reporting. The PCAOB's role in auditing oversight is under scrutiny, with discussions about its independence and effectiveness. The board's ability to demonstrate improvements in audit quality is vital for its continued existence and independence from the SEC. The broader implications for the Big Four firms include the need to address rising deficiency rates and improve audit practices to meet regulatory expectations and maintain their market positions.
What's Next?
The PCAOB is expected to continue its focus on improving audit quality, particularly among smaller firms and international offices. The board's future actions may include increasing the number of engagements selected for review and implementing additional procedures to enhance inspection robustness. For KPMG and other Big Four firms, ongoing efforts to improve audit practices and reduce deficiencies will be critical. The PCAOB's ability to maintain its budget and independence may depend on its success in demonstrating tangible improvements in audit quality.
Beyond the Headlines
The PCAOB's inspection results highlight the challenges faced by the auditing industry in maintaining high standards of audit quality. The board's focus on smaller firms and international offices reflects the need to address unique challenges in these areas. The potential elimination of the PCAOB and its integration into the SEC could have significant implications for the regulatory landscape and the auditing profession. The ongoing scrutiny of the PCAOB's effectiveness underscores the importance of transparent and accountable auditing practices in protecting investors and ensuring financial market stability.
