Transparency-Report-Audit-Quality-in-Focus-2010
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Transparency ReportAudit Quality in Focuskpmg.com.auAudit Quality in Focus | IntroductionReliable financial information and high quality audits have always been important but never more so than in the current environment of global economic turbulence, complexity, and uncertainty. There is no legal requirement for audit firms to produce a Transparency Report in Australia; but as it is the independence, expertise and professional scepticism of auditors that add value to financial statements we believe that it is important to be transparent about the processes that sit behind the output of an audit, the audit report. This Transparency Report covers KPMG in Australia and our audit division in particular. It describes the systems and controls that ensure, for the benefit of our clients and the capital markets we serve, that every KPMG audit is a quality audit. This report, the first of its kind for a ‘Big 4’ audit firm in Australia, aims to articulate clearly what we mean by a quality audit and the steps we take to deliver it. This is underpinned by our culture and values, our belief and commitment to being open and honest.This report is structured around our unique seven drivers of audit quality. These assist us to articulate what audit quality means to us, and to highlight how every audit partner and staff member is accountable for the delivery of audit quality. Tone at the top is our first driver. To me, it is the tone of an organisation that drives ...
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Transparency Report
Audit Quality in Focus
kpmg.com.au
Audit Quality in Focus | 3
Introduction
Reliable financial information and high quality audits have always been important but never more so than in the current environment of global economic turbulence, complexity, and uncertainty. There is no legal requirement for audit firms to produce a Transparency Report in Australia; but as it is the independence, expertise and professional scepticism of auditors that add value to financial statements we believe that it is important to be transparent about the processes that sit behind the output of an audit, the audit report. This Transparency Report covers KPMG in Australia and our audit division in particular. It describes the systems and controls that ensure, for the benefit of our clients and the capital markets we serve, that every KPMG audit is a quality audit. This report, the first of its kind for a ‘Big 4’ audit firm in Australia, aims to articulate clearly what we mean by a quality audit and the steps we take to deliver it. This is underpinned by our culture and values, our belief and commitment to being open and honest. This report is structured around our unique seven drivers of audit quality. These assist us to articulate what audit quality means to us, and to highlight how every audit partner and staff member is accountable for the delivery of audit quality. Tone at the top is our first driver. To me, it is the tone of an organisation that drives its culture and values. It is this consistent voice both locally and globally that makes it clear that quality is an integral part of everything we do and is therefore not negotiable. I expect this report will be a valuable tool to promote debate about audit quality, inform stakeholders in the capital markets about our audit process, and ultimately enhance quality through increased transparency. I believe a true appreciation of our commitment and performance in relation to audit quality promotes confidence in our client’s financial reporting and contributes to stable capital markets. I trust that you find our report a useful insight into how we strive to enhance audit quality, and a valuable step towards raising the confidence of users and purchasers of audit services.
Peter Nash National Managing Partner, Audit November 2010
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Quality external auditing is integral to the functioning of our capital markets. It is an essential service requiring specialist skills and knowledge. Yet auditor selection is often based more on intuition than informed judgement about what makes a quality audit. But what do we really know about audit quality? In just a few years the concept of audit quality has evolved from being nebulous, loosely discussed and poorly acknowledged, to having substance and understanding. The evolution of audit quality is not finished – in reality it never will be. The pace of development is accelerating, and it is the pace of change that is a challenge for all of us: the audit practitioner, audit firm, professional body, standard setter and regulator. With this challenge comes opportunity to provide strong leadership to influence the development of audit quality for the benefit of all. This Transparency Report by KPMG Australia is an important milestone in audit quality. It is the first to include real metrics or indicators of how audit quality could be measured. This report is important because it clearly shows this firm’s desire to explain publicly its structures, systems, policies and processes, focus and values to deliver audit quality. This report is not a response to a newly introduced regulation but comes from the firm’s commitment to transparency and to making a substantial and meaningful contribution to the evolution of audit quality. This report provides a range of performance measures that show this firm’s size, nature, rate of activity and achievement. These measures tell me of the successes and goals. It shows the significant breadth of operation and contribution that KPMG makes to the Australian business community. These measures also tell where further learning and continuous improvement will occur. Importantly for the evolution of audit quality, commitment to timely remediation and improvement is the clearest sign of a mature and forward looking profession. I congratulate KPMG on taking this step and encourage the broader profession to keep building on our earlier initiatives and successes and ensure that we are all aligned for the common goal.
Lee White General Manager Leadership & Quality Institute of Chartered Accountants in Australia November 2010
4 | Transparency Report
Foreword
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Audit Quality in Focus |
n.
Contents
07 07 09 09 09 10 10 10 10 10 10 10 10 11 11 11 11 12 12 13 13 13 14 14 14 14 14 14 1 1 1 1 1 1 1 17 17 18 18 18 18 19 19 19 19
What is audit quality? The KPMG Audit Quality Equation 1. Tone at the top Our culture, values and Code of Conduct Our Audit Strategy – Audit quality in focus Governance structure Leadership responsibilities for quality within the firm Committee structure Audit Leadership Group (ALG) Audit Quality Committee Department of Professional Practice (DPP) Risk Management and Quality Partners Director Audit Quality 2. Association with the right clients Prospective client and engagement evaluation process Continuance process Safeguards and Higher Risk Register Impact of specific economic conditions Fee dependency 3. Clear standards and robust audit tools Auditing and audit quality KPMG Audit Manual KPMG audit process Technology tools to support the audit process Other tools and templates to support the audit process Ethics and independence Quality & Risk Management Manual Personal independence – investment tracking systems Audit partner rotation Non-audit services – independence systems Conflicts of interest Confidentiality of client information Internal Ethics and Compliance Hotline External complaints Accounting and financial reporting resources 4. Recruitment, development and assignment of appropriately qualified personnel Recruitment Development and retention of talent Reward, recognition and promotion Promoting our senior high performers – partner admissions Partner remuneration Assignment of partners and staff to engagement teams Composition of the engagement team Industry expertise Capacity and resource management
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| Transparency Report 5. Commitment to technical excellence and quality service delivery 21 Training programs 21 Technical training – auditing, financial reporting and independence 21 Developing business understanding and industry knowledge 22 Attendance and assessment of training 22 Continuing professional education of statutory auditors 22 Accreditation and licensing 22 Investment in technical support 23 Access to specialist networks 23 Consultation and differences of opinion 24 6. Performance of effective and efficient audits 25 Planning and risk assessment 2 Timely partner and manager involvement 2 Testing and evidence gathering 2 Critical assessment of audit evidence 2 Professional judgement and professional scepticism 2 Ongoing mentoring and on the job coaching, supervision and review 2 Appropriately supported and documented conclusions 2 Engagement Quality Control Review Partner 27 Completion and reporting 27 Insightful, open and honest two-way communications 27 7. Commitment to continuous improvement 29 Internal monitoring 29 Formal global monitoring programs 29 Quality Performance Review (QPR) Program 29 Other assessments of audit quality 30 Assessments of compliance with independence and ethics requirements 30 External inspections 31 Australian Securities and Investments Commission (ASIC) 31 Institute of Chartered Accountants in Australia (ICAA) 31 Evaluating and appropriately responding to feedback and findings 31 Client feedback 32 Proactive identification of emerging risks and opportunities to improve quality and provide insights 32 Statement on effectiveness of system of quality control 33 Appendices Appendix 1 KPMG Australia legal structure and ownership 34 Appendix 2 Network arrangements 3 Appendix 3 Financial and other information 37 Appendix 4 Governance structure 40 Appendix Public listed clients of the firm 42 Key terms 43 © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”). Liability limited by a scheme approved under Professional Standards Legislation.
KPMG global values We lead by example At all levels we act in a way that exemplifies what we expect of each other and of our clients. We work together We bring out the best in each other and create strong and successful working relationships. We respect the individual We respect people for who they are and for their knowledge, skills and experience as individuals and team members. We seek the facts and provide insight By challenging assumptions and pursuing facts we strengthen our reputation as trusted and objective business advisers. We are open and honest in our communication We share information, insight and advice frequently and constructively and manage tough situations with courage and candour. We are committed to our communities We act as responsible corporate citizens by broadening our skills, experience and perspectives through work in our communities and protecting the environment. Above all, we act with integrity We consistently strive to uphold the highest professional standards, provide sound advice and rigorously maintain our independence.
Audit Quality in Focus | 7
At KPMG we consider audit quality We embed our values in our culture is not just about reaching the right and they define who we are and how opinion, but how we reach that opinion. we act. It is about the processes, thought and integrity behind the final formal auditThe KPMG Audit Quality report. KPMG views the outcome ofEquation a quality audit as the delivery of an KPMG has a culture of personal appropriate and independent opinion accountability and a commitment in compliance with the auditing to quality. We use our Audit Quality standards. This means, above all, being Equation to articulate what audit quality independent, compliant with our legal means to KPMG, to highlight what and professional requirements, and every audit partner and staff member offering insight and impartial advice to is accountable for. Sharing what audit our clients. quality means to us is a critical step in our commitment to transparency and Tfh aerued iits qnuoa liutnyi,v neros eallsyt aabglirseheedd definition allows better understanding of how we o safeguard the quality of the service we meraeseumres to ra bboeuntc hwmhaatr kasc,t uaanldly ndor ives provide. ag en audit quality. It is difficult for clients and We view audit quality as seven key stakeholders to determine whether the drivers combined with the commitment audit is of high quality because what of each individual in KPMG. drives audit quality is a complex set of factors that are often obscured and hard Every KPMG member firm uses this to measure framework to describe, focus on, and . enhance audit quality. Focusing on our The only commentary on audit quality drivers of audit quality benefits our visible to the market relates to financial clients, our people and ultimately our statement restatements or re-issuance, communities. litigation and investigations. However these can take years to manifest and may bear little or no correlation to the original quality of the audit. In this environment, we recognise we must be transparent about what we do so you can have confidence in us. Our commitment to transparency is an important part of our global values that state, “above all, we act with integrity”.
What is audit quality?
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Commitment to Association with icmopnrtoivneuomuesntthe right clients
Our people make the difference... with their professional judgement, scepticism and technical expertise
Issuing an appropriate and independent opinion in compliance with the auditing standards
Performance of Tone at Clear standards and effective and the top robust audit tools efficient audits Recruitment, Commitment to development and technical excellence assignment of and quality service appropriately delivery qualified personnel
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7 Drivers
Audit Quality
Example factors outside the control of auditors affecting audit quality Importance attached to the organisation’s financial reporting process. Number and experience of the organisation’s finance resources. Quality and timeliness of the client’s financial information. Regulatory environment, including reporting deadlines. Background and experience of the Audit Committee members3. Oversight of financial reporting process by those charged with governance4.
Our people
8 | Transparency Report
Our framework is mapped to the only In its recent report2, Treasury recognised Audit Quality Framework, supported these five drivers of audit the UK Financial Reporting Council’s quality as relevant to Australia. Qual Framewor FAruadmit eworikt)y released in kF1 RC( FUKr pehTsilebaro tes oorate wan th ew sy008.ry 2bruae The UK FRC Framework includes the control and assess the performance follo n e drivers: of our audits. We recognise the risks wi g fiv associated with trying to measure 1 The culture within an audit firm something as hard to define as 2 The skills and personal qualities of audit quality, including unintended consequences such as managing to audit partners and staff a particular number or benchmark. 3 The effectiveness of the audit However, some inputs to the audit ocess process are worth tracking to ensure pr we operate our business in a way that 4 The reliability and usefulness of enhances audit quality. audit reporting Factors outside the control of auditors affecting audit quality.
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