KPMG has been singled out for heavy criticism from the accounting watchdog in its annual review of the major auditing firms.
The Financial Reporting Council said there had been “an unacceptable decline” in the quality of KPMG’s auditing practices over the past year.
In its assessment of the firm, the FRC said there were problems with KPMG’s auditors challenging the companies they were interrogating and the consistency of their approach.
“Our key concern is the extent of challenge of management and exercise of professional scepticism by audit teams, both being critical attributes of an effective audit, and more generally the inconsistent execution of audits within the firm,” the report said.
Across the 16 audits of FTSE 350 companies by KPMG that the FRC reviewed, it said half needed to be improved.
KPMG now faces tougher scrutiny over the next 12 months from the watchdog, which plans to check 25 per cent more of its audits.
The FRC is currently probing the financial audits of Carillion that KPMG carried out between 2014 and 2017 in a separate investigation.
Responding to today’s annual report, KPMG head of audit Michelle Hinchcliffe said the firm was working to improve its auditing through “increased central monitoring” of audit teams.
She added that there would also be a requirement for all senior staff to work in the audit division before they became partners.
Ms Hinchcliffe said: “It is important to note that the audit work appraised by the FRC for its 2018 AQR took place principally in respect of 2016 year-ends, prior to commencement of this work.”
The watchdog’s annual review also found a general deterioration in the quality of auditing by the ‘Big Four’ accountancy firms – Deloitte, EY, KPMG and PwC.
The number of audits that required improvement increased from 19 per cent to 27 per cent.
FRC chief executive Stephen Haddrill 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.”
The Big Four firms were heavily criticised by the Carillion Joint Inquiry last month.
The inquiry, carried out by the business and the work and pensions select committees, said: “KPMG’s long and complacent tenure of cursory audits at Carillion was not an isolated failure; it was symptomatic of a market which works for the members of the oligopoly but fails the wider economy.”
One of the inquiry’s key recommendations was that the auditing functions of the Big Four should be spun off into separate businesses to avoid conflicts of interest with their consulting and administration operations.
KPMG stepped down as an adviser in the Grenfell Tower Inquiry earlier this year due to potential conflicts of interests over its role as an auditor for Rydon and cladding supplier Celotex.
Who audits the 10 biggest UK contractors
- Balfour Beatty – KPMG
- Kier – PwC
- Interserve – Grant Thornton
- Morgan Sindall – Deloitte
- Galliford Try – PwC
- Laing O’Rourke – PwC
- Amey – Deloitte
- Mace – Moore Stephens
- Bouygues UK – EY
- Costain – PwC
Top 10 based on CN100 2017 ranking by turnover