KPMG In Doghouse With $50M SEC Fine for Stolen Regulator Info

Published on June 18, 2019

Washington, D.C.—On Monday, the U.S. Securities and Exchange Commission (SEC) fined Big Four accounting giant, KMPG LLP, $50 million for former top executive’s use of confidential information which was stolen from its regulator, Public Company Accounting Oversight Board (PCAOB), to improve results on audits, as well as audit professionals’ efforts to cheat on internal training exams.

KPMG, one of the big four accounting firms that Wall Street and the public rely on to audit public companies, isn’t so good when it comes to auditing itself.

The PCAOB is an agency overseen by the SEC, which is the U.S.’s main regulator of auditors. KMPG admitted wrongdoing as part of its legal settlement with the SEC and agreed to hire an independent consultant to review its internal controls, according to Monday’s statement.

What’s the Legal?

This fine comes after last year’s criminal and civil charges filed against three former staffers of audit watchdog, PCAOB, and two ex-KPMG officials case by the SEC which was filed by the SEC and the U.S. Department of Justice (DOJ).

The incidents occurred between 2015 and 2017, according to the U.S. Government. The government has charged that the PCAOB and KPMG employees conspired to share information about which audits the watchdog would be reviewing, giving KPMG an opportunity to shore up those before facing scrutiny.

The KPMG officials included:

  1. David Middendorf, national managing partner for audit quality and professional practice;
  2. Thomas Whittle, national partner-in charge for inspections;
  3. David Britt, the firm’s banking and capital markets group co-leader;
  4. Cynthia Holder, of the firm’s department of professional practice group, and
  5. Brian Sweet, of the firm’s department of professional practice group.

Back in March, a jury convicted Middendorg and Wada. As of today, only Whittle, Sweet, and Holder have pled guilty.

Britt, who “intends to defend himself,” has demanded a separate trial, scheduled to begin this fall.

The criminal case against the other defendants is:

USA v. Middendorf et al
Case No: 1:18-cr-00036
U.S. District Court for the Southern District of New York

The Facts (Allegedly)

According to court documents, when KPMG hired Sweet from PCAOB in 2015 in an effort to improve its inspection results, Sweet allegedly took with him, confidential information that he passed along to his superiors, prior to leaving the board.  When Wada and Holder joined KPMG from the PCAOB, they too, according to the SEC, passed along confidential information.

What Was Stolen?

The information in question included the PCAOB’s planned inspections for the year, according to SEC findings. Once the now-former employees had the list of planned inspections, their plans of using the information was targeted at “review[ing] and revis[ing] certain audit workpapers after the audit reports had been issued to reduce the likelihood that the PCAOB would find deficiencies in those audits,” according to the SEC order.

Separate from the leaks, the integrity of these individuals was also diminished, according to the SEC, when they shared (correct) answers to internal training exams and lowered the scores required to pass the exams.

“KPMG’s ethical failures are simply unacceptable,” said SEC Chairman, Jay Clayton, in his statement. “The resolution the Enforcement Division has reached holds KMPG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.”

A KPMG representative issued the following statement in response to the pending SEC investigation—

We have learned important lessons through this experience and we are a stronger firm as a result of the actions we are taking to strengthen our culture, our governance, and our compliance program. As we move forward, we are committed to delivering the highest quality and fulfilling our important role in the capital markets.

Mr. Clayton previously called the accusations “disturbing.”

“Audited financial statements are at the heart of the SEC’s disclosure-based regulatory regime: a company’s financial statements provide investors with a wealth of material information, and independent audits give investors confidence that those statements can be trusted,” Clayton said in a statement.

This is yet another instance of ethical failure, as KMPG was reported last week to Britain’s accounting watchdog by a former employee who has urged the regulator to investigate how the Big Four firm responded to complains about a top partner accused of bullying.

Want to Follow This Proceeding?

Administrative Proceeding No.: 3-19203, In the Matter of KPMG, LLC, before the SEC

KMPG Counsel: Kevin Burke, Sidley Austin LLP

SEC Investigators: Ian Rupell and Paul Gunson

Andrew "Drew" Rossow is a former contract editor at Grit Daily.

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