KPMG must pay $50 million after the Securities and Exchange Commission charged the accounting giant with cheating on training exams and using purloined information concerning audit inspections to be conducted by the Public Company Accounting Oversight Board (PCAOB). KPMG agreed to the $50 million penalty and also accepted a public censure as part of the settlement.
The findings in the SEC’s cease-and-desist order—which KPMG has admitted—are that now-former members of KPMG’s Audit Quality and Professional Practice Group improperly obtained lists of particular audit engagements that the PCAOB planned to inspect. KPMG obtained the confidential information from multiple individuals who had worked in the PCAOB’s inspections group, some of whom joined KPMG after leaving the PCAOB. KPMG personnel then used the information to revise audit work papers to minimize the chances that the PCAOB’s inspections would turn up deficiencies. These misdeeds resulted in a substantial improvement to KPMG’s 2016 inspection results. The SEC charged six accountants individually, including these former KPMG personnel, in January 2018 for this conduct.
The SEC’s order also details how KPMG audit professionals engaged in a cheating scheme with respect to internally-administered training exams. Lead audit partners who had passed the exams distributed exam answers to other personnel. KPMG personnel also cheated on exams by manipulating a hyperlink. Embedded in the hyperlink was an instruction to the server that specified the score necessary to pass. For example, “MasteryScore=70” meant participants were required to answer at least 70% of the questions correctly. By altering the hyperlink, KPMG personnel were able to lower the percentage of correct answers necessary to pass, at times dropping it to below 25%.
Based on this conduct, the SEC found that KPMG willfully violated PCAOB Rule 3500T, which requires the firm to comply with the ethical standards described in the American Institute of Certified Public Accountant’s Code of Professional Conduct when performing professional services in connection with an audit. These violations provide a basis for the SEC to impose censure pursuant to Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. In addition to the $50 million penalty, KPMG must evaluate the sufficiency and adequacy of its ethics and integrity internal controls and must retain an independent consultant to review them. KPMG audit professionals are also required to complete ethics and integrity training.
It is difficult to say what KPMG could have done to prevent this conduct—which the SEC’s Co-Director of the Enforcement Division referred to as “astonishing” —from occurring. KPMG reported the misconduct to SEC staff when it was discovered and appointed a Special Committee of its Board of Directors to oversee an internal investigation. As stated in the order, KPMG received credit for these and other cooperation and remedial efforts.
The Administrative Proceeding is In the Matter of KPMG LLP, File No. 3-19203. In its press release, the SEC stated that its investigation is continuing. Stay tuned to Winstead’s Securities Litigation and Regulatory Enforcement blog for further developments.