A former audit inspector and executive director at KPMG was sentenced to eight months in prison after entering a guilty plea related to a scheme to steal inspection plans.
Cynthia Holder, who was an inspections leader at the Public Company Accounting Oversight Board before she joined KPMG, was sentenced to eight months in federal prison after pleading guilty in October 2018 to two separate counts of conspiracy to commit fraud. Her sentence includes two years of supervised release. A restitution amount will be set at a later date, according to the U.S. Department of Justice.
Holder and five others were accused of executing a plan to get confidential inspection planning information from the PCAOB about which of KPMG’s audits would be inspected, providing an opportunity to double-check work ahead of the inspection. Three others also entered guilty pleas to similar charges, including Brian Sweet, a former PCAOB staffer who left the PCAOB to join KPMG, taking the first batch of ill-gotten information with him in the job change.
David Middendorf, former national managing partner for audit quality at KPMG, and Jeffrey Wada, former inspections staffer at the PCAOB, were convicted at trial. Middendorf’s attorney has said the case will continue in appeals.
While the individuals also face civil charges from the Securities and Exchange Commission, the SEC extracted a $50 million settlement out of KPMG over allegations of cheating that went even deeper. The SEC had evidence of not only the inspection scheme but also widespread cheating and manipulation related to individual professional exams associated with internal training. The SEC said while it was investigating the inspection scandal, the firm revealed it has learned that auditors at all seniority levels in the firm were involved in gaming internal training testing that was intended to gauge understanding of a wide variety of accounting principles.
The scheme related to inspection began in 2015, authorities said, as KPMG struggled to shake off unfavorable results in audit inspections by the PCAOB. The firm was turning out among the worst findings across the largest firms that are inspected annually.
The criminal indictment indicates Sweet faced pressure from the very beginning of his employment with KPMG to share what he knew about the PCAOB’s plans. Holder was still employed at the PCAOB when Sweet began working at KPMG but became Sweet’s source for newer information as the scheme continued, according to the allegations.
Holder later joined KPMG, and the scheme continued into 2017, with Wada becoming the new source for stolen information after he was passed over for a promotion, authorities said. The transfer of information enabled audit leaders to conduct “stealth re-reviews” of audit files, the DOJ said, in an effort to improve documentation before inspections would begin. A KPMG partner who eventually became aware of the plot blew the whistle on it.
Sweet was the first to plead guilty to charges and cooperate with the investigation.
The PCAOB withheld KPMG’s 2016 inspection report for months determining how to proceed. The board eventually republished the firm’s 2014 and 2015 inspection reports to reflect harsh quality control criticisms along with the 2016 report showing 43 percent of audits were deficient.
The PCAOB remedied the subverted inspection process by throwing out inspections of 11 audits for financial services entities where the firm had advance notice, replacing them with inspections of 10 new files. The board also released the firm’s 2017 inspection results showing 50 percent of inspected audits contained deficiencies.
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