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KPMG case involving PCAOB highlights need for whistleblower program

KPMG office in Canary Wharf, London. Photo by Paul Wilkinson via Flickr, (CC BY 2.0)

In an alarming and outrageous case involving information misappropriated from the very body that oversees it, accounting giant KPMG admitted earlier this month to using that information to alter clients’ audits in an attempt to cover up its own deficiencies.

KPMG, one of the world’s largest accounting firms, admitted to the shocking allegations as part of a settlement with the Securities and Exchange Commission on June 17 and agreed to pay a $50 million fine. That is the largest fine that the SEC has imposed on an accounting firm.

The wrongdoing calls into question KPMG’s trustworthiness as an auditor of large companies and highlights the need for a new whistleblower program, which Congress is considering. KPMG’s clients, which include such massive corporations as Citigroup, General Electric, Deutsche Bank and Wells Fargo, collectively have a market capitalization of over $100 billion dollars.

Investors and others depend on audits by KPMG and other accounting firms to provide honest information about companies.

But KPMG found a way to alter audits without being detected and to mislead the Public Company Accounting Oversight Board (PCAOB), a private nonprofit created in 2002 by the Sarbanes-Oxley Act to oversee public accounting firms such as KPMG and protect investors. Before the PCAOB, the auditing industry was self-regulated.

According to the SEC order, senior executives at KPMG, motivated by KPMG’s history of mounting audit deficiencies in prior years, went to great lengths to illicitly obtain and use confidential information from the PCAOB to anticipate audits and to surreptitiously revise the firm’s previously published audit work. They wanted to avoid deficiencies being discovered by the PCAOB. An earlier PCAOB report had found a 46 percent rate of deficiencies in KPMG’s audits.

KPMG also obtained a list of PCAOB audit targets, the criteria the PCAOB used to select its targets and the topics on which the PCAOB audits would concentrate.

The scheme began when a KPMG employee, who previously worked for the PCAOB, turned over confidential information he had obtained while working for the regulator to a small group of KPMG executives.

The employee then solicited another PCAOB employee to provide additional confidential information, which the KPMG executives also used. KPMG then hired that PCAOB employee.

The firm also accepted and used confidential PCAOB information provided by a third PCAOB employee.

The KPMG executives used the illicitly obtained information to revise the work papers of previously published audits, which led to improved PCAOB inspection results in 2016. In 2017, the same executives attempted to repeat the misdeed. However, another partner discovered what they were doing and reported it to senior management, which in turn informed the SEC.

Shortly afterwards, the five KPMG executives involved in the scheme and one PCAOB employee were terminated, resigned or placed on leave before separating from their respective employers. All but one of the five former KPMG executives charged with illicitly obtaining and using the confidential PCAOB information have either pled guilty or have been convicted of conspiracy and wire fraud. The fifth executive is scheduled to be tried this fall.

In addition to misappropriating and using the confidential PCAOB information, KPMG also admitted to internally manipulating the results of internal tests meant to make sure employees sufficiently understood accounting principles. This included feeding answers to test-takers and lowering the scores needed to pass, such that some audit professionals passed exams while answering less than 25 percent of the questions correctly.

As part of the settlement, KPMG agreed to carry out a review of its quality controls, ethics and training, culminating in a report to the SEC on its findings. To accomplish that, KPMG has formed a special committee, and hired an outside law firm, to oversee an internal investigation of its past training examinations.

The SEC order also requires KPMG to retain an independent consultant to review the special committee’s findings and the company’s policies, and make recommendations to implement compliance and quality controls.

This case shows the need for rigorous enforcement and stiff penalties for violations of the public’s trust. It also could give more weight to draft legislation the US House of Representatives is considering that would create a whistleblower program to encourage individuals to report wrongdoing by accounting firms to the PCAOB.

If you are aware of securities law violations involving accounting firms and would like to discuss the matter with experienced whistleblower attorneys, please contact us for a free, confidential review to better understand your options.

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