The U.S. Department of Justice and the Securities and Exchange Commission are bringing charges that include fraud and conspiracy against six accountants formerly with KPMG and the Public Company Accounting Oversight Board, including KPMG’s former top audit leader, over an information leak that compromised the regulatory inspection process.
The Justice Department unsealed an indictment describing five counts of fraud and conspiracy against David Middendorf, who was KPMG’s national managing partner for audit quality and professional practice until April 2017, Thomas Whittle, KPMG’s former national partner-in-charge for inspections, and David Britt, who led KPMG’s banking group, plus a KPMG executive director who had worked for the PCAOB, and a PCAOB inspection leader. KPMG and the PCAOB indicated in April that they had dismissed several individuals across the two organizations after KPMG discovered the matter internally and reported it to the PCAOB and SEC.
The DOJ indicated it earlier settled two counts of fraud and conspiracy charges against Brian Sweet, a former KPMG partner who left an inspections staff position at the PCAOB to join KPMG in 2015. As the DOJ unsealed its indictment, the SEC issued orders indicating it has settled charges with Sweet that prevent him from practicing before the SEC and scheduled a hearing on similar charges for the other five.
The SEC orders and DOJ indictments describe a series of hirings at KPMG of former PCAOB staff members, who transferred confidential inspection-related information that gave KPMG auditors opportunities to shore up audit files in advance of PCAOB inspections. The action began in April 2015, when Brian Sweet resigned his post at the PCAOB to accept a position at KPMG with some specific responsibility for helping the firm improve its audit inspection results.
As Sweet departed the PCAOB, he took with him inspection-related documents that he believed might help him in his new position at KPMG, the SEC says. Those included not only planning information and inspection guides and manuals, but also the confidential list of KPMG audit engagements that the PCAOB planned to inspect in 2015.
Beginning with lunch on his first day in the new job, the SEC says, Sweet faced questions about the PCAOB’s inspection plans from KPMG’s highest levels of audit leadership, including Middendorf. Within days, Sweet began sharing confidential documents that eventually led to re-examination of audit work papers in preparation for PCAOB inspections, the SEC says.
Through the summer of 2015, Sweet requested and received additional information from Cynthia Holder, a PCAOB inspections leader who then joined KPMG in August 2015 as executive director of the firm’s department of professional practice, the SEC and DOJ say. Jeffrey Wada, another inspections leader at the PCAOB, also began sharing information when he was angry about being passed over for promotion, the SEC and DOJ say.
The SEC and DOJ orders say KPMG audit leadership used the confidential information to alert partners when their engagements had been selected for inspection so they could focus their audit resources and attention accordingly. Both the SEC and DOJ say a KPMG partner eventually became suspicious and alerted the firm’s general counsel, which investigated internally and reported its findings.
Both KPMG and PCAOB said in April when the scheme was uncovered and reported that they had dismissed personnel — six at KPMG and one at the PCAOB. With the recently revealed charges, KPMG issued a statement saying it has cooperated with the government investigation.
“KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm,” the statement said. The firm also says it has taken “remedial actions” to guard against any such conduct in the future.
The PCAOB’s new chairman, William Duhnke, issued a statement to say the PCAOB has cooperated with and appreciates the government's actions to preserve and reinforce the integrity of the PCAOB's regulatory oversight programs. “Immediately upon learning of the alleged misconduct last year, the PCAOB board and staff reviewed and reinforced the PCAOB's safeguards against the improper disclosure of confidential information,” he said. With the installment of all new PCAOB members in 2018, the new board will review the organization’s protocols for information technology, security controls, compliance, and ethics to assess their effectiveness, he said.