We adopt a holistic approach to support audit quality and monitor our progress. We have engaged with stakeholders, enhanced our governance and invested in our people, culture, controls and technology.
We are committed to achieving the highest levels of quality in our work. To do that, we not only follow auditing and ethical standards, but monitor our progress and use feedback to continuously improve.
Continuous improvement and Root Cause Analysis
Our Root Cause Analysis (RCA) process is our most impactful way of identifying opportunities for continuous improvement. We use the results of this analysis to consider how to enhance our processes and embed best practices. During the year we commissioned an independent review of our RCA process and have implemented the majority of the enhancement recommendations with substantially all actions to be completed this year.
Over this year, we have continued to broaden the depth and scope of our RCA programme, introduced further innovations to our approach and refreshed our pool of trained and accredited individuals supporting the programme. These steps have enabled us to gain more insight into the key factors that drive quality findings and also those that contribute to high-quality audits.
We take the results from our RCA programme and use them to focus action and target investments.
Regular monitoring of the impact of remedial actions is a key part of our RCA programme so that we can adapt our approach as new issues arise. We apply a mix of remedial actions including those focused on driving a sustainable high challenge, high support culture with supporting behaviours alongside technology and training enhancements. This is now led by a dedicated experienced individual.
The findings from our RCA are reported to internal and external stakeholders, including the FRC and the ICAEW. In the 2021/22 cycle, the most frequent findings indicated:
Key positive messages from RCA
- Strong tone at the top.
- Awareness of requirements.
- Robust responses to complex and changing scenarios including use of internal consultations and support available.
- Good project management and team collaboration.
- Confidence and willingness to challenge management and timetables.
Key areas where improvement is needed
- Consistency of coaching.
- Use of guidance and tools available.
- Critical self-review of work performed.
- Over-reliance on the review process.
- Workload management.
Our RCA in numbers
During the year we spoke to more than 300 individuals. These findings are then analysed and categorised into themes including knowledge, resource allocation and behaviours.
- 29 – RCA performed on external inspections
- 46 – RCA performed on internal inspections
- 4 – RCA performed on other projects
External monitoring and engagement
Engaging with regulators
KPMG has a number of regulators due to the types of services we provide. This includes the Financial Reporting Council (FRC)1, the Institute of Chartered Accountants in England and Wales (ICAEW)2, the Financial Conduct Authority (FCA), the Solicitors Regulation Authority (SRA), audit third country regulators, and other regulatory and oversight bodies (including HM Government). We’re committed to meeting the expectations of our regulators and ensuring our regulatory engagement is based on the principles of openness, transparency, integrity and accountability.
From a regulatory change perspective, the environment remains challenging, and we continue to scan and prepare the firm for incoming regulatory changes. In particular, we continue to engage and work with the FRC to help shape the future for a profession that produces high-quality audits and acts in the public interest. Audit quality is our number one priority, and we value the constructive input and challenge from the FRC through their audit quality inspection and supervision process. We continue to work closely with the FRC to understand their identified areas of good practice, and importantly where we need to continue to focus to ensure that we build trust and confidence in our profession and the markets.
We are subject to external annual reviews, primarily by:
The Financial Reporting Council (FRC) Audit Firm Supervision (AFS), Audit Market Supervision (AMS) and Audit Quality Review (AQR) teams in the FRC’s Supervision Division work closely together to develop an overall view of the key issues for each firm to improve audit quality.
Find out more information below
KPMG in the UK is subject to inspection every three years by the US Public Company Accounting and Oversight Board (PCAOB). In accordance with this cycle, the PCAOB was due to inspect during 2021. However, as a result of the COVID-19 pandemic, the PCAOB deferred its inspection to 2022. The inspection is in the final stages and we look forward to receiving the report in 2023.
Uplift in AQR inspection results
The combined impacts of our investments in quality, governance and technology are starting to become clear. There were notable improvements in our 2022 AQR inspection results – giving us the best results, and the most significant improvement in results, amongst the Big Four professional services firms.
These results are particularly pleasing given that these audits were conducted largely remotely due to the COVID-19 pandemic, when our teams and audited entities had to adapt to significant changes to how our audits were delivered.
We recognise that there is more to do and will remain focused on driving further, continuous enhancements as we pursue our vision of being the most trusted audit firm: by our regulators, the organisations we audit, investors, the public and our people.
FRC Audit Quality Inspection and Supervision Report findings for KPMG LLP, July 2022
In its July 2022 report, the FRC highlighted good practices and areas for improvement, in respect of its review of individual audits and its review of the firm’s quality control procedures. Below we set out a summary of the FRC’s findings (as previously noted, full details are available on the FRC’s website).
Section 2 of FRC’s AQR report - Review of individual audits
Good practices identified in individual audits inspected:
- Risk assessment and planning, including climate risk and fraud.
- Robust and well-evidenced challenge of management.
- Oversight and involvement with component auditors.
- Effective use of data analytics, including a bespoke, robust audit approach to test general IT controls and to recalculate fee income.
- Expected credit losses data testing - data elements.
- Contract accounting – engagement of KPMG infrastructure specialists.
- Engagement Quality Control Review, including strong evidence across all areas with particularly robust evidence and challenge of goodwill impairment.
Areas of improvement from the inspection of individual audits:
- Expected credit losses - model testing and monitoring and assessment and challenge of post-model adjustment relating to covid and other uncertainties.
- Certain areas of Journal testing.
- Procedures performed over settlement and clearing accounts and assessment of conduct-related provisions.
- Impairment assessments for tangible and intangible non-current assets.
- Interim testing of accrued revenue.
Section 3 of FRC’s AQR report - Review of the firm’s quality control procedures
Good practices identified within KPMG in the UK’s firm-wide procedures:
- Use of the KPMG global finance system by the UK firm’s Ethics function to inform assessment of non-audit fee requirements for UK PIEs.
- Requirement for group audit teams discuss with component audit teams how their systems and processes support them in complying with the Revised Ethical Standard requirements.
- Providing detailed guidance for group audit teams, including examples of the conditions that could compromise the independence.
- Design and implementation of a thorough audit accreditation framework.
- Shortening the period for audit teams to assemble the audit file to a maximum of two days after the audit report is signed.
Areas identified for improvement within KPMG in the UK’S firm-wide procedures3:
- Improve guidance on how to more consistently consider the perspective of an Objective Reasonable and Informed Third Party when taking decisions relating to ethics and independence.
- Embed the new Gifts and Entertainment system to ensure pre-approvals are sought before offers/acceptance.
- Issue methodology and improve the quality and extent of IFRS 13 guidance in relation to auditing fair value of financial instruments for banks and similar entities.
- Ensure professional judgements made by internal reviewers are recorded to support the depth of their review and conclusions reached in key areas where no findings have been raised.
- Increase the number of focus areas scoped into each review for large and complex audits with more significant risks or key audit matters.
In response to the FRC’s findings in its AQR report, the firm confirmed that, Audit quality is our number one priority, and we are committed to consistently delivering high quality audits. We value the constructive input and challenge from the FRC throughout this year’s audit quality inspection and supervision process. We continue to work closely with the FRC and thanks to their input, we are clear on areas of good practice, and importantly where we need to continue to focus to ensure that we build trust and confidence in our profession and the markets.