KPMG slapped with $50m fine over past audit work
KPMG has agreed to pay a $50m penalty after the American Securities and Exchange Commission (SEC) charged the firm with altering past audit work after receiving stolen information about upcoming inspections. The SEC also found that numerous KPMG audit professionals cheated on internal training exams by sharing answers and manipulating test results.
Alongside the $50m penalty, KPMG agreed to adhere to a set of measures, including retaining an independent consultant to review and assess the firm’s ethics and integrity controls. The SEC said that KPMG have also admitted the facts in the order.
The SEC were scathing in their assessments of KPMG’s conduct.
“The breadth and seriousness of the misconduct at issue here is, frankly, astonishing,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “This settlement reflects the need to severely punish this sort of wrongdoing while putting in place measures designed to prevent its recurrence.”
“KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton. “The resolution the Enforcement Division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors,” he added.
In January last year, five former KPMG officials were charged with scheming to interfere with the Public Company Accounting Oversight Board’s (PCAOB) ability to detect audit deficiencies at the Big Four firm. The SEC now says that these senior staff sought and obtained confidential PCAOB lists of inspection targets because the firm had experienced a high rate of audit deficiency findings in prior inspections and improvement had become a priority. Armed with the PCAOB data, the now-former KPMG personnel oversaw a program to review and revise certain audit work papers after the audit reports had been issued to reduce the likelihood of deficiencies being found during inspections.
“This conduct was particularly troubling because of the unique position of trust that audit professionals hold,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division. “Investors and other market professionals rely on these gatekeepers to fulfil a critical role in our capital markets.”
The SEC’s order also finds that KPMG audit professionals who had passed training exams sent their answers to colleagues to help them also attain passing scores. The exams related to continuing professional education and training mandated by a prior SEC order finding audit failures. They sent images of their answers by email or printed answers and gave them to colleagues. This included lead audit engagement partners who not only sent exam answers to other partners, but also solicited answers from and sent answers to their subordinates.
Furthermore, the SEC’s order finds that certain KPMG audit professionals manipulated an internal server hosting training exams to lower the score required for passing. By changing a number embedded in a hyperlink, they manually selected the minimum passing scores required for exams. At times, audit professionals achieved passing scores while answering less than 25 percent of the questions correctly.
Melissa Hodgman, associate director of the SEC’s enforcement division, said she was hopeful that the sanctions will prevent future scandals from taking place. “The sanctions will protect our markets by promoting an ethical culture at KPMG. To that end, KPMG will take additional remedial steps to address the misconduct and further strengthen its quality controls, all of which will be reviewed and assessed by an independent consultant.”
In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order. The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation.
The SEC’s investigation continues.