KPMG audit partners settle test cheating allegations

The settlements are part of a larger SEC investigation into KPMG that involved the firm improperly receiving inspection information from the Public Company Accounting Oversight Board (PCAOB)—a scandal that has so far resulted in a $50 million fine and jail time for several executives involved. The SEC uncovered a concerted effort by KPMG to subvert regulatory inspections by the PCAOB. During that investigation, KPMG disclosed that employees at all levels had been sharing internal test exam questions and answers.

In the most recent settlements, announced Monday, the three former audit partners did not admit wrongdoing but did admit to deleting photographs of test questions from their phones. They had texted the questions to other members of the firm who had not yet taken the test, the SEC said.

As a result of the most recent settlements, the three KPMG audit partners—Timothy Daly, Michael Bellach, and John Donovan—“agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies,” the SEC said in a press release. Daly can apply for reinstatement to practice before the SEC after three years, Bellach after two years, and Donovan after one. All three separated from KPMG in March 2019, according to the company and SEC documents.

“The actions against individuals who were separated from our firm more than a year ago was an expected development following the firm’s settlement with the SEC last June,” KPMG said through a spokesman. “We are a stronger firm as a result of the actions we are taking to strengthen our culture, governance and compliance program. We are committed to delivering the highest quality professional services and fulfilling our important role in the capital markets.”

In June 2019, the SEC and KPMG agreed to a $50 million settlement covering allegations that KPMG improperly obtained information about which of its audits the PCAOB would review. KPMG improperly accessed the information through a PCAOB staff member, who was hired by the firm and brought the information with him. The information transfer continued, the SEC said, with other PCAOB staff members seeking employment at KPMG.

During the investigation, KPMG disclosed to the SEC that auditors at all seniority levels in the firm—before, during, and after the inspections scandal became public—gamed internal training testing that was intended to gauge their understanding of a variety of accounting principles, the SEC said.

A former KPMG national managing partner for audit quality and professional practice, David Middendorf, was sentenced to a year in prison while Jeffrey Wada, a former inspections leader at the PCAOB, was sentenced to nine months in prison. Several other KPMG and PCAOB employees were also disciplined.

The $50 million settlement that covered both the stolen inspection information and the cheating scandal included remedial actions like the placement of an independent consultant to review the firm’s compliance with ethics and integrity codes. The settlement includes an admission by KPMG to the allegations, the SEC said.