SEC censures KPMG for 1996 audit

The action overturned a decision made a year ago by an SEC administrative judge in the case of KPMG’s audit of Porta Systems, a Long Island company run by KPMG Baymark. KPMG Baymark specialises in corporate turnarounds and was affiliated with KPMG international, according to the New York Times online.

Commenting on its decision, the SEC was reported on NYTimes.com as saying: ‘We consider independence to be a keystone of our disclosure system.

‘Senior officials at KPMG failed to undertake any reasonable inquiry that necessarily would have led them to discover clear impairments of independence. Under these circumstances we believe the cease-and-desist relief is fully warranted.’

KPMG argued that it had discussed an arrangement with the administrative judge last year and believed it could proceed with its audit. However the SEC disagreed with the judge saying there had been a ‘misunderstanding’.

KPMG spokesman George Ledwith said: ‘We find it extremely unfortunate that the commission chose to disregard the findings of its own administrative judge.’

However the commission’s action, approved on a three to nil vote, with one commissioner not participating, has little practical effect on KPMG. The firm has not been fined, nor have any additional reporting restrictions been placed on it.

Last year a SEC judge concluded that while KPMG had violated securities regulations because KPMG and Baymark where not independent of each other, it had acted in good faith and should not be fined.

Under the agreement between KPMG and Baymark, the CEO of Porta received a $100,000 (£68,300) in an outstanding loan from KPMG, while KPMG’s fees would be paid according to the profits recorded in the books being audited by KPMG. Both agreements are illegal under new auditor independence rules.

Links

Accountants angered by SEC letters

SEC Analysis – SEC wins audit war