Accounting regulators criticized KPMG LLP yesterday for failing to identify significant errors uncovered in an intense, months-long inspection of the accounting firm's work.
A report by the Public Company Accounting Oversight Board, created by Congress to provide independent oversight of the accounting industry, cited numerous faults in 18 audits performed by KPMG for publicly held companies. In one case, mistakes exposed by the board led an unnamed client company to restate previously reported earnings. Board inspectors selected for review a small slice -- 76 audits -- of KPMG's nearly 1,900 publicly traded clients between June and October 2004.
The report comes a month after KPMG, the nation's fourth-largest accounting firm, agreed to pay $456 million and overhaul its business practices to settle Justice Department charges that it engaged in a conspiracy to help wealthy clients evade taxes. The firm has opened its operations to monitoring by former Securities and Exchange Commission chairman Richard C. Breeden and fired or pressured to retire nearly three dozen partners. If KPMG stays out of trouble until Dec. 31, 2006, the U.S. attorney in the Southern District of New York will dismiss the conspiracy charge.
Yesterday's report is the first in a series the board will release in the coming weeks chronicling the performance of the four largest accounting firms -- KPMG, PricewaterhouseCoopers LLP, Deloitte & Touche LLP and Ernst & Young LLP. The board is required to review quality controls at members of the industry's Big Four each year.
Leaders at the oversight board declined to comment yesterday. But last month, at the time of KPMG's settlement with prosecutors, board officials said they remained "confident" that KPMG could perform "high-quality audits of public companies."
"KPMG is committed to the goal of continuous improvement in audit quality," KPMG Chairman Timothy P. Flynn said yesterday in a prepared statement. "We appreciate the constructive dialogue and consider it an important element in the process of improving our system of quality controls."
Congress created the accounting board as a centerpiece of the 2002 Sarbanes-Oxley Act, passed after audit blowups at Enron Corp. and WorldCom Inc. The law wrested control of auditor discipline from the hands of the industry for the first time in nearly 70 years. Under the terms of the law, however, the board is barred from making public certain criticisms of accounting firms unless the firms fail to correct the problems within a year. As a result, several sections of the KPMG report remain undisclosed.
Among the most pervasive criticisms cited by the oversight board was what it called KPMG's failure to obtain and preserve documents to back up its conclusions. On at least two occasions, the board said, KPMG auditors set the threshold for their review of corporate accounting mistakes too high -- meaning that mistakes that should have triggered more thorough investigation did not.
The board report is far from the last word on KPMG's past work. A federal grand jury in New York last month indicted eight former KPMG officials, including a onetime vice chairman, on tax-fraud charges. Each of the defendants has pleaded not guilty and is fighting the charges. Prosecutors have signaled in court that they will bring more charges by mid-October against others who once worked at the firm.
William J. McDonough, the board's chief and a former president of the Federal Reserve Bank of New York, said last week that he would resign by Nov. 30 to pursue other opportunities. SEC Chairman Christopher Cox has yet to name a successor.