In June 2019, KPMG agreed to pay a $50 million civil penalty to settle SEC charges
alleging that KPMG employees participated in a scheme to obtain and misuse
confidential information about upcoming PCAOB inspections. The SEC’s order
states that, in an effort to avoid potential audit deficiency findings, KPMG altered
its documentation of past audit engagements after obtaining information leaked by
PCAOB staffers who sought jobs at KPMG. The order further states that KPMG
employees cheated on training exams mandated by a prior SEC order by improperly
sharing answers and manipulating test results. In connection with the settlement,
KPMG agreed to extensive undertakings, which include, among other things,
retaining an independent consultant to review and assess the firm’s quality controls
and its response to investigative findings, enhanced ethics and integrity training
requirements for all of the firm’s audit professionals, and an annual certification
related to KPMG’s assessment of its policies and procedures related to ethics and
integrity.
- Misuse of PCAOB Data – According to the SEC order, in September 2014, the
PCAOB found that 46% of the KPMG audits it inspected were deficient. In
response, three partners from KPMG’s National Office engaged in a concerted
effort to improve these results, which included recruiting employees from the
PCAOB to help the firm improperly obtain and misuse confidential PCAOB
information, including lists of specific audits the PCAOB planned to inspect,
the criteria used to select the audits for inspection, and the focus areas of the
inspections. According to the SEC, the former KPMG partners sought this
information to enable KPMG to review and revise its audit engagement work
papers in an effort to avoid negative inspection findings by the PCAOB.
- Cheating on Training Exams – In August 2017, the SEC ordered KPMG’s audit
professionals to complete a minimum of 12 hours of continuing education
training, including fraud training, as part of the firm’s settlement of charges
that it failed to properly audit the financial statements of an oil and gas client.
According to the SEC’s June 2019 order, a number of KPMG audit professionals,
including certain lead audit engagement partners, sent and solicited answers to
help the firm’s audit professionals pass these training exams. The order also
states that certain KPMG employees manually lowered the required score for
passing the training exams by altering numbers that were embedded in the
firm’s hyperlinks to the exams.
- Individual Liability – KPMG’s settlement came approximately six months after
the SEC and DOJ filed parallel charges against six former KPMG and PCAOB
employees in connection with the matter. Three of those individuals have been
sentenced to prison, while the remaining three await sentencing. In August
2019, Cynthia Holder, a former PCAOB inspections leader and KPMG executive
director, was sentenced to eight months in federal prison after pleading guilty in
October 2018. David Middendorf, KPMG’s former national managing partner
for audit quality and professional practice, was sentenced to one year and one
day in prison in September 2019 after he and former PCAOB inspections leader
Jeffrey Wada were convicted by a Manhattan jury of wire fraud and conspiracy
to commit wire fraud in March 2019. Wada was sentenced to nine months in
prison on October 11. The other individual defendants – Brian Sweet, a former
PCAOB employee and KPMG partner; Thomas Whittle, KPMG’s former
national partner in charge of inspections; and David Britt, KPMG’s former
banking and capital markets group co-leader, have all pleaded guilty and are
awaiting sentencing.
The SEC’s settlement order with KPMG can be found here.
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