The Securities and Exchange Commission has canceled sanctions imposed by audit regulators on a now-retired KPMG auditor connected with a mortgage lender failure at the height of the financial crisis.

The Public Company Accounting Oversight Board sanctioned Cynthia Reinhart, who was the engagement partner for Thornburg Mortgage Inc. when it collapsed in 2009 after filing its 2007 financial statements with what would later be revealed as fraudulently overstated income. The SEC brought accounting fraud charges against the company’s CEO, CFO, and chief accounting officer over a scheme to overstate fourth-quarter 2007 profit by $400 million to hide a loss.

The PCAOB said Reinhart violated professional standard during the audit of the company’s year-end financials with “repeated instances of neglect” in two audit areas, one focused on whether there was substantial doubt that the company could continue as a going concern and the other involving whether the company had the intent and the ability to retain investments long enough to permit recovery of market value.

Reinhart appealed the PCAOB finding, which was never made public under Sarbanes-Oxley rules that give privacy to PCAOB disciplinary proceedings until fully resolved, to the SEC. The SEC examined the evidence and determined the PCAOB did not adequately make its case, so it dismissed the PCAOB’s finding.

The SEC says the PCAOB’s sanction was based on two critical findings. First, the PCAOB says Reinhart’s alleged misconduct represented repeated instances of negligent conduct. The SEC says the PCAOB “has not established on the record here that the fact that two audit areas were affected” necessarily constitutes repeated instances.

Second, the PCAOB found that Reinhart’s decisions regarding certain audit steps independently constituted repeated instances of negligent conduct, but the SEC said the record does not support that finding.

The PCAOB took exception with Reinhart’s audit response during the weeks following the company’s Dec. 31, 2007, reporting date and the publishing of its Form 10-K in February 2008, according to the SEC’s opinion. KPMG gave the company a clean audit opinion, and then the company started getting margin calls almost immediately after filing its 10-K. The firm withdrew its audit opinion a few days later and pressed the board to restate its financial statements.

The PCAOB alleged Reinhart violated the board’s rules by failing to exercise professional skepticism, failing to obtain sufficient evidence, and inappropriately relying on management representations. A PCAOB hearing officer only partially supported the allegations, which prompted both the board and Reinhart to appeal. Ultimately, the PCAOB issued a final decision adhering to its original allegations, barring Reinhart from practice. Reinhart took that appeal to the SEC.

The SEC does not often overturn PCAOB disciplinary actions, says Nancy Reimer, a partner at law firm Freeman Mathis & Gary. “It is expensive and time consuming to challenge a PCAOB finding,” she says, which leads many cases to settlements. “This case demonstrates it could be worth the time and expense to challenge PCAOB findings.”