KPMG has been taking it on the chin lately – and apparently for good reason.  KPMG is enmeshed in an unfolding corruption scandal in South Africa.  Add to that the indictment last week of five individuals (four KPMG employees and a Public Company Accounting Oversight Board (“PCAOB”)) and the unsealing of a guilty plea by another individual from KPMG and a former PCAOB employee.  (See Indictment  and Information Here and Here).  To add injury to insult, on the same day, the SEC announced enforcement actions against the same individuals.  (See SEC Enforcement Filings Here and Here).

The PCAOB is a nonprofit corporation reporting to the SEC that inspects audit work performed by registered accounting firms, such as KPMG.  Annually, the PCAOB inspects the largest accounting firms.  As part of its regular inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for closer review.  The PCAOB maintains a list of audits to be inspected and does not notify the accounting firm of the audits to be inspected, the issues to be examined and other aspects of the inspection until shortly before the inspection is announced.  Following the inspection, the PCAOB issues and Inspection Report containing any negative findings or comments with respect to the specific audits reviewed.  The PCAOB sends these Inspection Reports to the SEC.

As outlined in the indictment and charging documents, the government alleges that KPMG audit professionals and PCAOB employees shared confidential audit inspection information with KPMG in order for KPMG to game PCAOB’s inspection system.  The details, as outlined, read like a Netflix crime drama, and paint an unfortunate picture of KPMG.

KPMG has a poor record of audit inspections conducted by the PCAOB.  KPMG led the list of deficient audit practices and related comments noting deficiencies in specific audit practices.

To address this problem, KPMG sought to hire former PCAOB employees.  Unfortunately, this hiring initiative quickly turned into a means to obtain confidential PCAOB audit inspection plans so that KPMG could review specific audits prior to notification of an upcoming PCAOB audit.

Two PCAOB employees, Brian Sweet and Cynthia Holder, were hired by KPMG.  A third PCAOB employee, Jeffrey Wada, sought a job with KPMG but the scheme was uncovered before he could get hired.

Brian Sweet plead guilty and agreed to cooperate with the government’s investigation.

The KPMG partners at the center of the fraud and conspiracy included:

• David Middendorf, the head of KPMG’s Department of Professional Practice and National Managing Partner for Audit Quality and Professional Practice Group;
• Thomas Whittle, a KPMG audit partner and National Partner-in-Charge for Quality Measurement; and
• David Britt, a KPMG Audit Partner.

Beginning in 2015, when Sweet was about to leave the PCAOB and take a job at KPMG, Sweet copied confidential PCAOB documents, including PCAOB manuals and guidance, comments issued in connection with audit inspections on which Sweet had worked, and a list of KPMG engagements to be inspected by the PCAOB in 2015.

In his first week at KPMG, Middendorf asked Sweet which KPMG engagements would be audited.  Later that same week, Middendorf reminded Sweet to remember where Sweet’s paycheck came from and to be loyal to KPMG.

Whittle asked Sweet for the list of engagements to be inspected by the PCAOB in 2015.  Whittle reminded Sweet that Sweet was most valuable to KPMG at that moment and would soon be less valuable.  The next day, Whittle requested the list and Sweet sent it to him.  Whittle sent it to Middendorf.

After joining KPMG, Sweet sought to have KPMG hire Cynthia Holder who was then working at the PCAOB.    Holder provided Sweet with a confidential comment requested by Sweet.  In one other instance, Sweet talked Holder out of writing a comment on a KPMG inspection.  Holder also gave Sweet advance notice that the PCAOB would be canceling one of its inspections and not replacing it.

Holder was hired by KPMG in July 2015.  Before leaving the PCAOB, Holder copied confidential documents onto a thumb drive and copied it to her home computer.

Jeffrey Wada, a PCAOB employee was disgruntled because he failed to receive a promotion.  Wada shared with Holder 12 issuers audited by KPMG that would be inspected.  Middendorf, Britt, Whittle and Sweet used this list of 12 to initiate additional reviews of these 12 audits to protect KPMG’s monitoring program.  Britt told a KPMG partner that his engagement would be inspected and not to tell any other members of the audit team.

The re-reviews of the 12 audits detected problems with some of the audits and KPMG took actions to improve the audits prior to the inspection.

In January 2017, Wada read to Holder a preliminary list of audits that would be inspected.  Holder shared the information with Sweet, who in turn told Whittle and Britt.  Whittle and Britt notified KPMG partners who were handling the audits to be inspected in the future.

The next month, February 2017, Wada read Holder a list of approximately 50 stock ticker symbols, which was the full list of KPMG audits to be inspected by the PCAOB in 2017.  Holder again shared it with Sweet, who in turn shared it with Middendorf, Whittle and Britt.  These three KPMG partners then shared this information with certain engagement partners.

The ongoing conspiracy started to unravel in February 2017 when a KPMG partner was informed by Sweet that the partner’s engagement would be audited by the PCAOB, and the information was reported to KPMG’s general counsel.

KPMG attorneys then reached out to Sweet and Holder, who both began to delete emails, documents and destroying original documents.  Holder also deleted texts between her and Wada.  Holder and Sweet sought to communicate through their spouses’ cellular telephones and use codes to communicate.