Former staff members at the PCAOB and former partners at KPMG face decades in prison, if convicted.
The SEC and the U.S. Attorney’s Office for the Southern District of New York report consequential charges against six certified public accountants — including former staff members at the Public Company Accounting Oversight Board (PCAOB) and former partners at KPMG LLP.
Those charges are based on their alleged “participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG,” the SEC says.
Two of the former PCAOB officials had left the PCAOB to work at KPMG, the commission points out, and a third official “leaked PCAOB data at the time he was seeking employment with KPMG.” All three of the former KPMG partners were in the firm’s national office.
Three of the six face up to a maximum of 85 years in prison for federal charges that include conspiracy to defraud the United States and conspiracy to commit wire fraud, according to the U.S. Attorney’s office, which is an extension of the U.S. Department of Justice. Two more are facing 65 years for the same charges.
The U.S. Attorney’s securities and commodities fraud task force is managing the criminal case. As the U.S. Attorney’s office points out, the CPAs charged in New York City are innocent until proven guilty. And the sixth CPA, formerly a KPMG partner and a PCAOB associate director, who already has pled guilty, has agreed to cooperate with prosecutors.
(The PCAOB, overseen by the SEC, describes itself as a nonprofit corporation established by Congress in the Sarbanes-Oxley Act of 2002 to “oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.” Prior to its creation, the auditing profession was self-regulated, the nonprofit notes.)
The SEC’s division of enforcement and its office of the chief accountant, specifically, allege that the unauthorized disclosures of PCAOB plans for inspections of KPMG audits enabled the “former KPMG partners to analyze and revise audit work papers in an effort to avoid negative findings by the PCAOB.”
Those disclosures were especially valuable, says the SEC, because KPMG had “experienced a high rate of audit deficiency findings and had made a priority of improving its PCAOB inspection results.”
Specific information improperly disclosed “related to the PCAOB’s inspections of KPMG audits, including the audit engagements the PCAOB planned to inspect, the criteria the PCAOB used to select engagements for inspection, and the focus areas of the inspections,” the SEC alleges.
According to the SEC, the misconduct — which Steven Peikin, co-director of the SEC’s enforcement division, called “shocking” — allegedly began in 2015 and persisted until February 2017. The six CPAs have been accused of “literally stealing the exam — in an effort to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG,” Peikin said.
“In 2017, a KPMG partner who received early notice that his/her engagement was on the confidential 2017 inspection list reported the matter, as a result of which KPMG’s Office of General Counsel launched an internal investigation,” the DoJ reports, adding that following the partner’s report to KPMG, two of the defendants took actions to “destroy or fabricate evidence relevant to the investigation. For example, [one of the defendants] deleted a number of relevant text messages, emails, and documents.”
One defendant, the DoJ says, planned to purchase a “burner phone” to avoid monitoring; another defendant “burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel,” according to the DoJ.
“Disturbing” was how SEC Chairman Jack Clayton recently characterized the allegations against the six, adding that he supports the SEC’s enforcement action. “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 observed. “The PCAOB is a critical part of the oversight of our local, national, and international capital markets, in that it helps to promote high-quality audits of the financial statements of issuers and broker-dealers, upon which investors rely.”
And Manhattan U.S. Attorney Geoffrey S. Berman said in a statement that the defendants were “each meant to be the watchmen of our financial system. The defendants who formerly worked for KPMG were vested with the responsibility to audit publicly filed financial statements and issue audit opinions relied upon by the investing public. The defendants who formerly worked for the PCAOB were supposed to help ensure the quality of the work behind those audits. But, as alleged, these defendants chose to cheat the system and to undermine the safeguards put in place to protect investors.”
When their actions were discovered, all “six respondents were terminated, resigned or placed on leave before separating from KPMG and the PCAOB, respectively,” the SEC points out.
FTF News contacted a KPMG media representative for comment, asking: “Does KPMG regards its relevant oversight procedures as strong enough to avoid a repetition of this type of scheme? Has KPMG strengthened its oversight since all this came to light?”
“When KPMG first discovered the issue in early 2017, we promptly notified the authorities and have been fully cooperating with the Government in its investigation,” the KPMG spokesperson replied. “KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm. Since then KPMG has taken remedial actions to assure that such conduct cannot happen again. Integrity and quality are paramount for KPMG, including operating with the utmost regard for the critical importance of the regulatory process to our profession.”
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