KPMG criticised by regulator for 'unacceptable' audit deterioration

The accountancy regulator has criticised KPMG for an "unacceptable deterioration" in the quality of audits that the firm carries out for large UK companies.

The Financial Reporting Council said half of KPMG’s audits of FTSE 350 companies required "more than limited improvements" in 2017-18 – a deterioration from 35% the year before. As a result the FRC, which is under pressure over its own effectiveness, will place KPMG under greater scrutiny.

The FRC will inspect 25% more of KPMG’s audits in the current year and monitor its audit quality plan closely.

KPMG was the worst performer in a worsening overall audit market. In 2017-18, 73% of FTSE 350 audits required no more than limited improvements compared with 81% the year before. The FRC blamed failure by auditors to challenge company management and raise doubts and worse results for bank audits.

Stephen Haddrill, the FRC’s chief executive, said: "At a time when public trust in business and in audit is in the spotlight, the Big four must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits.

"We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders."

The FRC unveiled its findings as big accountancy firms – and KPMG in particular – face criticism over the quality of their audits, which are an essential check on the claims of company management. The big firms often make far more money from selling consulting services than their audit work, leading politicians and campaigners to accuse them of conflicts of interest.

KPMG has come in for criticism for its auditing of Carillion, the outsourcing company that collapsed in January. KPMG audited Carillion for 19 years and signed off its accounts before it descended into bankruptcy.

The firm's audit practice is under new management. The FRC is investigating KPMG's auditing of Carillion.

The FRC has said the big four – KPMG, Deloitte, PwC and EY – should be subject to a competition inquiry. The regulator is also under pressure over claims it has failed to hold firms to account. John Kingman, a former Treasury official, is carrying out a review of the FRC for the government.