The former vice chair of audit at KPMG during the Big Four firm’s infamous cheating scandal was fined a record $100,000 by the Public Company Accounting Oversight Board (PCAOB) on Tuesday for his supervision failures.
Scott Marcello was censured in addition to receiving the agency’s largest money penalty ever imposed on an individual in a settled case. The matter is the first in which the PCAOB has imposed sanctions for a failure reasonably to supervise, as authorized under Sarbanes-Oxley.
Marcello neither admitted nor denied the PCAOB’s findings.
The details: Marcello served as vice chair of audit for KPMG from July 2015 until he was fired in April 2017. Among his direct reports was David Middendorf, the firm’s former national managing partner for audit quality and professional practice and the individual found to be “at the top of a chain of corruption” regarding the KPMG cheating scandal.
Between 2015 and 2017, Middendorf and others allegedly worked to acquire confidential PCAOB information concerning which KPMG audits would be inspected in an effort to improve inspection results. The scheme took place both before and after Marcello became vice chair of audit, the PCAOB noted in its disciplinary order, and prominently involved four other KPMG employees and PCAOB inspector Jeffrey Wada.
Marcello was aware of the illegal scheme as it was taking place, according to the PCAOB. He learned from Middendorf in March 2016 that KPMG had obtained advance information about certain PCAOB inspection selections of its audits and “further understood that KPMG personnel intended to review the work papers for those audits and could enhance the documentation in an effort to improve inspection results,” the regulator stated. Marcello was once again allegedly informed of the receipt of confidential PCAOB inspection information in 2017 and did not respond appropriately.
“Marcello did not report or escalate the matter or instruct Middendorf and other subordinates to refrain from using the PCAOB’s confidential information,” the regulator stated. “In failing to take action in response to learning about the receipt and intended use of confidential information in 2016, Marcello missed an opportunity to change the tone at the top of the firm, which could have helped prevent further violations.”
Marcello would eventually report the receipt of the PCAOB information to KPMG’s in-house counsel in 2017, but only after others in the firm had reacted negatively upon discovering the scheme, according to the PCAOB.
“This ‘first of its kind’ disciplinary action demonstrates that the PCAOB is committed to sanctioning top-level personnel at the largest firms when they fail to take sufficient supervisory steps aimed at preventing violations by their subordinates,” said PCAOB Chair Erica Williams in a press release.
KPMG response: “We are a stronger firm as a result of the actions taken since 2017 to strengthen our culture, our governance, and our compliance program,” said firm spokesman Russ Grote in an emailed statement. “Integrity and quality are paramount for KPMG, including operating with the utmost regard for the critical importance of the regulatory process to our profession.”
In September 2019, Middendorf was sentenced to one year and one day in federal prison and three years of supervised release for his role in the scandal. Two other individuals, including Wada, received prison time for their involvement in the scheme, while the other three were granted more lenient sentences.
KPMG in June 2019 agreed to pay $50 million to settle charges from the Securities and Exchange Commission related to the misconduct, which also included allegations of cheating on internal exams that were covered in the settlement.
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