KPMG served as the auditor for Singing River Health System for 34 years. This Mississippi based hospital had continued to renew the audit engagement with the accounting firm for many years and also used them on the audit of the defined benefit pension plan the hospital carried. Recently, it was discovered that the work product may not have been accurate and the audits may be in need of restatement.
A change of the auditing firm in 2013 occurred in order to save money. According to this new firm’s research at the time of the transition, the hospital’s pension plan was underfunded by $150M and the hospital was in violation of certain debt covenants on their bonds due to the newly revealed financial condition of the hospital.
Singing River is calling the audits flagrantly erroneous and asking for a jury trial so the true damages would be taken into consideration. The lawsuit is asking for the audits to be restated and damages to be paid.
While the accuracy of the audits is still in question, there are many take-aways for accounting firms to learn. Building a solid risk management program for a firm should include as much real-life lesson as possible. Here are a few from this scenario:
- Repeat business is great, but it requires extra diligence to assure that the work does not get rolled-over each year or looked at with a lower degree of scrutiny. Second partner reviews become key during engagements such as these. Audits are especially important to maintain independence from the client.
- As the duration and relationship lengthens, maintaining proper independence requires more effort.
- Audits continue to be high risk because of large amounts like this. Our firm has seen many claims revolve around auditing work that did not take into account the full situation or were not reviewed adequately by the partners.
- Pension audits have historically been troublesome as well. The assets in the plans were reduced during the Great Recession, leading to a slew of claims against auditors, investors, fiduciaries and the firm that sponsor the plans. These engagements need special expertise and monitoring.
- An accounting firm cannot get away from long-time clients or taking on higher risk work at times. It can, however, employ proper risk management techniques and be sure to purchase accountant’s malpractice insurance.
As a corollary to this case, the International Forum of Independent Audit Regulators (IFIAR) released a report outlining a number of deficiencies of audit firms in 2014. The IAFAR assessed 29 firm’s audit work and came out with findings that line up with similar studies of the PCAOB and other entities. The IFIAR findings show room for improvement in three key areas. Internal control testing (24%), Fair value measurement (20%) and Revenue recognition (14%). These are key areas of an audit firm’s practice and a good list of items to assess in 2015 at your own firm.
Contact us to discuss ways to best protect your firm in today’s litigious times.