KPMG is obviously known as one of the ‘Big Four’, the leading conductors of audits of other major companies. When I was researching becoming a consultant, I was interested in the question – who actually audits KPMG themselves?
Although it changes from year to year, KPMG is always audited by another large accountancy firm, such as another of the ‘Big 4’ (Deloitte, EY, or PwC). KPMG are also inspected by the Public Company Accounting Oversight Board (PCAOB).
The PCAOB is an independent organization that oversees the audits of public companies in the United States.
KPMG is also subject to alternate audits in the different countries in which they operate.
In this post, I’ll take a look at:
- Who audits KPMG
- More information about the organizations that audit and inspect them
- How their audits and inspections are conducted
- Who are KPMG
Table of Contents
Who Audits KPMG?
As a huge global company, KPMG is subject to rigorous auditing.
It is important to ensure that they are following good-quality auditing standards and procedures.
The specific firm that audits them may vary from year to year, but would usually be another large accounting firm.
KPMG’s audit committee will select the auditor, and this is approved by the firm’s governing body.
KPMG is also audited in the different countries that it operates in around the world.
For example, it is subject in the UK to inspections by the regulatory body – the Institue of Chartered Accountants in England and Wales. (ICAEW)
In India, they are audited by the Institue of Chartered Accountants of Inda (ICAI).
Inspection By The PCAOB
An inspection of KPMG is also undertaken by the Public Company Accounting Oversight Board (PCAOB). (Source) This is an entirely independent organization.
Their role is to conduct inspections of registered accounting firms. They are particularly checking that firms such as KPMG are following the rules set out by the SEC – Securities and Exchange Commission.
They are also auditing that KPMG is following the regulations set out by the Sarbanes-Oxley Act of 2002.
Who Are The Public Company Accounting Oversight Board?
The PCAOB is an organization that is entirely independent. They regulate audits of public companies in the United States.
They were largely created as a result of several high-profile financial scandals around the turn of the millennium.
Enron was probably the largest and most well-known of these.
The PCAOB was created following the Sarbanes-Oxley Act of 2002 (a little more about this act is found below).
Who are the PCAOB there to protect?
Mainly it is investors. The PCAOB, in a nutshell, is there to check that the financial statements of public companies are correct.
The PCAOB audits all of the ‘Big Four’ accounting firms. They are looking to ensure they are following standards and rules.
The PCAOB is able to take disciplinary action when it finds a company is not following standards and rules.
The PCAOB is promoting:
- Accuracy of financial statements
- The following of rules and regulations
- Integrity in public companies
I found the following Youtube video that explains really well exactly what the PCAOB is and what they do:
How Do The PCAOB Inspect Companies?
PCAOB inspections are conducted on a regular basis. They may also occasionally conduct an impromptu inspection following complaints or concerns raised to the.
Normally the inspection process will look at:
- The PCAOB will review a sample of the firm’s audit work, including its work paper and documentation.
- They will review the firm’s quality control procedures and policies
- They will interview employees
- They assess the firm’s compliance with professional standards
The PCAOB is extremely powerful.
If they find serious breaches of rules and regulations they are able to take significant action. This includes:
- Impose fine
- Revoke a firm’s registration
- Bring enforcement actions against individuals who violated professional conduct regulations
So very serious stuff!
What Is The Sarbanes-Oxley Act Of 2002 (That KPMG Are Inspected Against)?
The Sarbanes-Oxley Act of 2002 was passed as a response to several scandals around the time of the millennium.
The most covered of these were Enron and WorldCom. (Source)
The Act was designed to protect future investors by improving the accuracy of financial statements for public companies.
It made companies and their top executives more accountable for their financial reporting.
The Act involved the following:
- Establishing the PCAOB
- Corporate governance – this improves the accountability of Directors and Corporate Officers
- Disclosure requirements – companies are required to to disclose more information about their risks and financial performance
- Whistleblower protection – Those that report fraud and other illegality is now protected
Here is a Youtube video that explains exactly what the Sarbanes-Oxley Act of 2002 is:
Who Are The Institue Of Chartered Accountants In England And Wales?
KPMG are audited by different institutions in different countries.
To look at just one other outside the United States, in the UK they are audited by the Institute of Chartered Accountants in England and Wales. (ICAEW).
Who are the ICAEW?
They are a professional membership organization that represents accountants in England and Wales.
They have numerous functions, including:
- Providing training to their members
- Setting professional standards for their members
- Conducting research and advocacy on important issues related to accounting
- Development opportunities.
- Regulating ethical and technical standards
- Investigating and discipline those that violate standards
The ICAEW has many powers similar to the PCAOB. However, they are not able to close firms down.
They can, however, revoke the membership of anyone they find violating professional standards. The firm would then not be able to continue practicing as a chartered accountant.
Do DPMG Audit Themselves?
On top of external audits, KPMG also inspects its own financial statements and processes (though this is not an official audit). It makes sense that they have a detailed overview, with them being one of the four largest auditors in the world.
They will monitor:
- Their own internal control systems
- Their risk management processes
- Compliance with laws and regulations
Who Are KPMG?
KPMG is a huge professional services firm. They provide:
- Advisory services
- Assurance services
- Independently verifying and reporting on the financial information of a company
- Providing advice on tax compliance
- Consulting on issues such as risk management and compliance
Having been founded in 1987, they comprise a merger of four existing accounting firms:
- Klynveld Main Goerdeler (KMG)
- Peat Marwick Mitchell & Co.
- William Barclay Peat & Co.
- James Marwick & Co.
The name KPMG is somehow derived from the four founding firms.
They actually have their headquarters in the Netherlands, but are active in more than 147 countries, including more than 100 offices in the United States, and at least one office in every of the fifty states. (Source)