AAA Spark Meeting of the Regions

The Audit Quality and Economic Implications of KPMG’s Persistent Organization-Level Quality Control System Deficiencies

• In Event: DSFI/SE - Session 5 (Archival)

Abstract

KPMG’s 2014 and 2015 PCAOB Part II inspection reports, made public by the PCAOB on January
25, 2019, revealed the firm’s persistent failure to address organization-level quality control (QC)
system deficiencies. According to the PCAOB, a strong firm-wide QC system is paramount to
setting the tone and culture at the firm, as it cascades to the conduct of the audit at the engagementlevel.
Predicated on this notion, we examine the audit and economic implications of KPMG’s
persistent organization-level QC system deficiencies. First, our evidence does not suggest that
KPMG’s engagement-level audit quality differs significantly from the quality of other Big 4 audit
firms over the PCAOB’s inspection period pertaining to identified organization-level QC
deficiencies at KPMG. Second, despite our empirical results suggesting KPMG might have
responded to the adverse Part II findings, the risk of client loss to another audit firm is greater,
while continuing clients face subsequently higher audit costs likely due to KPMG investing in
remedial action. These findings are robust to an array of additional analyses. Third, we find
evidence linking unaddressed Part II QC deficiencies to client and investor dissatisfaction, which
reflects they assess the issues raised by the PCAOB. Taken together, our results suggest significant
economic and audit quality consequences of failure to rectify persistent organization-level QC
deficiencies for large auditors.

Authors

• Suzanne Mullinnix, AAMVA

• Jian Cao, Florida Atlantic University - Boca

• Yun Cheng, The University of West Georgia

• Divesh Sharma, Kennesaw State University

• Joseph Zhang, University of Memphis