Two Big 4 firms are updating audit practices, adding technology and taking other steps to boost their reputations in light of major scandals last year.
KPMG and PwC have taken similar steps to address ethics lapses that resulted in millions of dollars in SEC fines, Bloomberg reported.
The changes are seen by some as improved assurance that financial reports are reliable, but critics believe a fundamental conflict still exists – the need to keep valuable audit clients while consolidation reduces the number of those clients.
KPMG, reeling from a so-called “steal the exam” scandal in which senior staff conspired with the PCAOB, made changes detailed in its most recent audit quality report. The scandal resulted in prison time for former staffers and a record $50 million settlement for extensive misconduct, as determined by the SEC. KPMG worked to find out which of its clients would be reviewed by PCAOB.
The reforms include:
- Overhauling the audit leadership team
- Moving internal inspections out of the audit practice
- Revising performance evaluations and compensation
- Updating audit methods
- Introducing a cloud-based audit system that can examine a far larger amount of data
- Increasing partner supervision and support
- Improving methods of assessing risk, internal controls and estimates
KPMG is also exploring partner tenure, staffing levels and even the order in which the work is handled, Bloomberg reported.
“We know there’s really no silver bullet here,” says Jackie Daylor, KPMG’s national MP for audit quality and professional practice. She says she hopes the firm can be more proactive in providing extra resources or oversight.
At the same time, competitor PwC is addressing problems with following its conflict of interest rules. The firm agreed to a $7.9 million SEC settlement last year after providing services to audit clients that were not allowed, and for failing to inform the clients’ audit committees about the work.
The reforms include:
- Requiring independence training for staff and partners
- Adding reviews of contracts or proposals
- Improving communications with audit committees and adding independence coaching before or during an audit
- Adding an independent director to the firm’s governance board
- Forming an advisory group on culture, risk management and other areas that impact audit quality.
KMPG followed suit on some of the changes, Bloomberg reported, adding independent directors to its board, hiring a chief culture officer and re-evaluating its corporate values.
Barbara Roper, director of investor protection for the Consumer Federation of America, says auditors must stand up to management of the companies they are auditing. The risk is losing that client, but it’s a risk firms must take.
Roper said they should be transparent about how they measure audit quality – from inspection deficiencies to independence to skepticism – and use those metrics when promoting and compensating senior leaders.
“It’s got to be more than lip service.”