Retaining trust depends ultimately on the quality of our work – that is why we see quality as a business imperative.
We have an extensive System of Quality Management (new window) (SoQM), which applies across our business units. This system helps ensure we maintain high quality standards. Our current SoQM was implemented in December 2022 in line with the new International Standard on Quality Management (new window) (ISQM 1).
Why is quality so important?
In 2022/2023, we have made significant progress in several areas, including the implementation of our KPMG Clara (new window) smart audit platform, and decreasing workload on our auditors – an important factor in maintaining quality.
For more details on our SoQM (new window), see Governance, risk management and decision-making.
Performance against quality indicators
Over the past year, we have taken steps to further strengthen quality. We finalized roll-out of KPMG Clara (new window), refreshed our Root Cause Analysis (RCA) process, accelerated IT audit for selected clients, and continued implementation of our Audit Quality Plan. Independence violations due to late or inaccurate registrations decreased by nearly 50%. None of them impaired the independence of the firm. We expect a further decrease next year because of rigorous measures to help our people and by strengthening our guidelines on disciplinary actions.
This work continues the steps taken and investments made in recent years, which have resulted in encouraging results against our KPIs for audit quality. In 2022/2023, we are on target for eight out of the thirteen measured KPIs. The number of engagements with Engagement Quality Control Reviews (EQCR) is 9% point above our target, partner involvement in public interest entity (PIE) engagements increased year-on-year, and we are also involving more specialists – including IT – and providing more technical support to audit engagements.
Even so, five KPIs have come in under target, including our Quality Performance Review (QPR) scores, following internal audit inspections. Overall, the percentage of our files that are rated 'compliant' in internal reviews remained stable at 94%, which means that 6% is non-compliant. The 94% score contains both ‘compliant’ (82%) and ‘compliant - improvement needed’ (12%). This means we did not meet our target of 86% ‘compliant’ quality reviews, which is an unsatisfactory outcome. Inspections show a variety of reasons for this, with no firm-wide issue apparent.
Going into the next year, our goal is to further improve our QPR scores and to strengthen audit quality. We do this through Root Cause Analysis, analyzing recurring findings from our different quality initiatives. Along with this, while our GPS results on quality remain the same as last year, we are refocusing on ethical culture and behavioral elements that affect the quality of our work. We will also focus on targeted and relevant learning in live and virtual classrooms, as well as quality coaching and the sector specific focus of our Audit Quality Professional Practice Department (AQPPD). In addition, we will continuously work on further reducing workload as another means of ensuring our people have the conditions to deliver quality work.
KPIs – Ongoing focus on (audit) quality
|
2022/2023 |
2021/2022 |
On target |
||
|
Results of internal KPMG N.V. audit inspections |
|
82% |
84% |
no |
|
Results of external inspections |
|
n/a |
94% |
n/a |
|
Percentage of engagements involving EQCR |
|
29% |
30% |
yes |
|
EQCR hours spent as percentage of total hours spent on EQCR engagements (scope: all EQCR engagements excl. three largest clients) |
|
1.2% |
1.2% |
yes |
|
Partner hours: |
||||
|
in PIE audit engagements |
|
9% |
8% |
no |
|
in non-PIE audit engagements |
|
6% |
7% |
yes |
|
Average number of hours spent in training per client-facing professional in audit |
|
210 |
210 |
yes |
|
Hours spent by IT and other specialists: |
||||
|
in PIE audit engagements |
|
18% |
16% |
yes |
|
in non-PIE audit engagements |
|
6% |
5% |
yes |
|
Technical resources support (FTEs) as % of total audit FTEs |
|
7% |
6% |
yes |
|
Number of technical consultations as % of total audit engagements |
|
19% |
20% |
yes |
|
Financial statements with restatements as % of audit opinions issued |
|
2% |
2% |
no |
|
Independence violations, both internal and external, as % of total audit headcount |
|
4% |
7% |
no |
|
GPS survey results relating to coaching and audit quality |
|
81% |
81% |
no |
|
||||
- Abbreviations: AQI (audit quality indicator), EQCR (Engagement Quality Control Review), FTE (full-time equivalent) and PIE (public interest entity), n/a (not applicable). Definitions of our Audit Quality Indicators (AQIs) can be found here (new window).
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Notes:
The table above represents only KPIs explicitly linked to the Ongoing focus on (audit) quality material topic. In this instance, all KPIs selected are the same as the AQIs. Details of other AQIs can be found in the Quality management (new window)section of this report. All AQIs are linked specifically to our material topics (new window) and quality drivers under our System of Quality Management (new window). Figures are rounded to the nearest percentage.
In 2020, the Dutch government appointed two quartermasters to oversee reform in the audit sector. As part of their work, these quartermasters are drafting common AQIs, which are applicable across the industry. We are working to bring our AQIs into line with the quartermasters’ recommendations. The quartermasters have released their final report in November 2023. See KPMG N.V.’s website for further details and our response to public consultations on this matter.
Engagements involving EQCRs: the number of engagements during the year does not necessarily equate to the number of reports issued. An engagement may result in multiple reports. Moreover, reports may not be produced for engagement still active at the end of the financial year.
EQCR hours: The three largest clients are excluded from this AQI and are measured separately, because they have a significant higher number of regular audit hours compared to EQCR hours (due to specialist involvement, component audits, etc.). If they are included, the total EQCR hours spent as percentage of total hours spent on EQCR engagements is 1.0% (2021/2022: 1.0%).
GPS and Pulse surveys: figures show positive responses (“strongly agree” and “agree” on a 5-point scale) to GPS questions relating to coaching and quality as % of total responses. Results from culture survey also relate to coaching and quality, but are assessed according to a 'traffic light' system as red, amber or green.
Restatements: In 2022/2023, 52 material errors have been detected in prior financial statements of clients. These errors do not include cases in which the errors have led to a serious deficiency in the view given by the client's financial statements as stated in Section 2:362(6) Dutch Civil Code (new window).
External reviews, inspections and interactions with regulators
The Authority for the Financial Markets (AFM (new window)), our main regulator in the Netherlands, conducted an exploratory theme investigation on Non-Financial Information (NFI) in November 2022. Two engagement files of KPMG were in scope of the review. KPMG discussed the AFM’s preliminary observations in February 2023, which we have taken on board. The AFM also conducted a combined exploratory and regulatory inspection, focused specifically on EQCR, in July-September 2023. As part of its inspection, the AFM reviewed our system of quality control regarding EQCR, with no findings and noted one best practice. The AFM also reviewed four engagements with findings on two reviews. We studied these findings, which gave us relevant insights and learning points, and performed a Root Cause Analysis. As a result, we accelerated the implementation of already scheduled measures and absorbed the learnings in our center of excellence to share knowledge and expertise on the topic. The observations on the specific engagements have been addressed. The AFM released its public report on 21 March 2024. Furthermore, the AFM issued a critical sector-wide report based on its review on the audit of fraud risks. During the year, we also discussed several topics with the AFM, including the AFM’s plans for data-driven oversight. During the year, we reported four formal incidents (2021/2022: four) to the AFM (these are still in progress):
One incident reported was related to events at a PIE audit client of which we gained knowledge as auditor.
Two incidents reported were related to providing non-audit services to PIE audit clients outside the Netherlands.
One incident reported concerned a second whistleblower notification related to the investigation into answer sharing.
The US Public Company Accounting Oversight Board (PCAOB (new window)) conducted its regular three-year inspection in November-December 2021. The inspection reviewed three engagements. Of these, two attracted no comments. Action has been taken to correct the finding relating to the third engagement. In addition, there were two findings on the System of Quality Management that are in the process of being remediated. We have informed the PCAOB of our remediation plan and the progress thereof.
The Royal Netherlands Institute for Chartered Accountants (NBA (new window)) carried out its inspection in September 2022. [1] As part of the inspection, the NBA reviewed 30 engagements. Of these engagements, it rated 29 engagements as satisfactory. One was rated unsatisfactory. Remedial action has been taken to correct this. The NBA stated KPMG’s System of Quality Management complies with the Auditors' Profession Act (new window).
PCAOB Order concerning investigation into answer sharing
The PCAOB Settlement
In April 2024, the US Public Company Accounting Oversight Board (PCAOB) published an Order concerning the investigation into answer sharing and imposed a penalty of $25 million on KPMG in the Netherlands. More than five hundred people were involved in some form of improper conduct, including sending or receiving answers for training tests and providing or receiving assistance in taking such tests. The Settlement with the PCAOB was concluded on a ‘neither admit nor deny’ basis and marked the conclusion of the investigation.
PCAOB findings
In the Order, the PCAOB concluded that 1) from at least October 2017 until December 2022, KPMG Netherlands violated PCAOB rules and quality control standards related to integrity and personnel management; 2) this misconduct revealed an inappropriate tone at the top to effectively promote an ethical culture with respect to improper answer sharing; 3) the leadership failed to respond appropriately to the risk that its people might be engaged in improper answer sharing and; 4) the firm failed to correct inaccurate representations to the PCAOB during its investigation.
Sanctions
Following the investigation, people at all levels of seniority who participated in answer sharing have been sanctioned. Some of them had to leave the firm. After the second whistleblower notification, among others with regard to a member of the Board of Management of KPMG N.V., all members of the Board of Management and Supervisory Board of KPMG N.V. were subject to additional investigation into their involvement in answer sharing. As a consequence, it was decided that Marc Hogeboom, former Head of Assurance and partner, would step down in July 2023 as Head of Assurance and he left our firm as partner on 1 January 2024. The former Chair of the Supervisory Board of KPMG N.V. resigned after admitting that he had received assistance in completing a training test.
Remedial measures
We realize that we need to act with ethics and integrity at all times. Since 2023, we have taken several remedial measures and we are working on further improvements in the areas of policies and procedures relating to the assessment of mandatory training and the internal culture. Based on the PCAOB Order and the enhanced supervision of the AFM, we are performing a thorough Root Cause Analysis (RCA) in order to further understand why this happened and how we can prevent it from happening again, with appropriate measures and meaningful change.
Along with this, we are evaluating the design of online mandatory training to ensure that these trainings are relevant to those taking them. We have also implemented an additional monitoring control in our System of Quality Management to mitigate the future risk of answer sharing. This remediation process is being conducted under the enhanced supervision of the AFM. The Supervisory Board of KPMG N.V. is also monitoring this closely.
Our ethical culture
Our findings so far show that we need to underline the importance of speaking up, address attempts to rationalize wrongdoing and reassert what we expect in terms of tone and ethical practice at all levels in our organization. As a result, we have started an internal dialogue about our ethical culture, discussing ethical dilemmas and choices, experiences and behaviors. In the future, we will build further upon our focus on our quality-oriented culture, by encouraging open communication and psychological safety within our teams, and investing in our learning organization. Focus on ethical culture is here to stay.
- 1 The Royal Netherlands Institute for Chartered Accountants (new window) reviews only those engagements not covered by the AFM (new window) (legal audits) or the PCAOB (new window) (US engagements).