Earlier this week the Wall Street Journal and others reported that KPMG had hired former PCAOB staffers to reveal the secret list of KPMG audits that the PCAOB would examine. The article reported that the SEC had indicted 5 former KPMG employees including 3 former partners for fraud. KPMG apparently discovered the scheme in March of 2017 and self-reported. Allegedly almost half the 2013 KPMG audits reviewed by the PCAOB in 2014 had been found deficient and the firm felt pressure to improve its audit quality. The partners charged included those formerly in charge of national audit quality and another responsible for inspections.
A few days later GE announced an SEC probe of its accounting practices along with a restatement of its 2016 and 2017 financial results. At least part of the problem arises from revenue recognition issues in its jet engine and power turbine business. Other problems stem from charges in its long term care insurance business. Together the adjustments may total over 21 Billion dollars. KPMG has served as GE’s auditor since 1909.
These articles highlight the challenges even the largest audit firms face in detecting material misstatements in a client’s financials. We face increasing complexity in public company financials and auditors are struggling to keep up with the standards in a difficult environment.