LAW & COMPLIANCE

Ex-KPMG staff and audit watchdog employees charged by SEC with audit misconduct

The Securities and Exchange Commission in the U.S. announced today charges against six certified public accountants, accusing them of misappropriating and using confidential information to help KPMG pass an audit inspection.

The six accountants include former staffers at PCAOB (Public Company Accounting Oversight Board)  and former senior officials at KPMG, according to an SEC statement.

The agency alleges that the former PCAOB officials made unauthorized disclosures of PCAOB plans for inspections of KPMG audits, enabling the former KPMG partners to analyze and revise audit workpapers in an effort to avoid negative findings by the PCAOB.

According to the SEC's order, the misconduct began in 2015 and persisted until February 2017. Soon after the conduct was discovered, the six respondents were terminated, resigned or placed on leave before separating from KPMG and the PCAOB, respectively.

"As alleged, these accountants engaged in shocking misconduct – literally stealing the exam – in an effort to interfere with the PCAOB's ability to detect audit deficiencies at KPMG," said Steven Peikin, Co-Director of the SEC's Enforcement Division.

PCAOB official downloaded confidential documents before joining KPMB

While preparing to leave his supervisory position at the PCAOB for a job at KPMG, Brian Sweet downloaded confidential and sensitive inspection-related materials that he believed might help him at KPMG, said SEC.

KPMG had recruited him to join the firm at a time when it had a high rate of audit deficiencies, SEC noted.

“Indeed, nearly half of the KPMG audits that the PCAOB inspected in 2013 were found deficient,” SEC said in a statement.

After leaving the PCAOB, Sweet allegedly continued to gain access to confidential PCAOB materials through PCAOB inspector Cynthia Holder, SEC revealed.

After Holder joined Sweet at KPMG, a third PCAOB employee, Jeffrey Wada, allegedly leaked confidential information about planned PCAOB inspections of KPMG to Holder, SEC said.

According to the SEC's order, Wada leaked this information while he was seeking employment at KPMG.

Upon his arrival at KPMG, Sweet told his supervisors in KPMG's national office that he had taken confidential materials from the PCAOB and revealed, for example, the KPMG audit clients that the PCAOB intended to inspect that year, according to the SEC.

Allegedly encouraging Sweet to divulge the stolen information to them and others at the firm were his supervisors – David Middendorf, KPMG's then-national managing partner for audit quality and professional practice and Thomas Whittle, KPMG's then-national partner-in-charge for inspections and another high-level partner at the firm, David Britt, KPMG's banking and capital markets group co-leader.  

Middendorf, Whittle, Sweet, Holder, and Britt worked together to review the audit workpapers for at least seven banks they were told the PCAOB would inspect in an effort to minimize the risk that the PCAOB would find deficiencies in those audits.

According to the agency, Sweet has agreed to settle to a Commission Order requiring that he cease-and-desist from violating PCAOB ethics rules and barring him from appearing or practicing before the Commission as an accountant.

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