Holder, a former PCAOB inspections leader who left the regulator to become a KPMG executive director, pleaded guilty to participating in a scheme to defraud the US Securities and Exchange Commission (SEC) and the PCAOB by obtaining, disseminating, and using confidential lists which detailed the specific KPMG audits the PCAOB was planning to review so that KPMG could improve its performance in inspections.

In 2014 KPMG received approximately twice as many comments as its competitor firms. To improve its performance, KPMG began hiring former PCAOB personnel such as Holder and her co-conspirator, Brian Sweet.

The US attorney’s office for the southern district of New York heard evidence concerning the activities of Holder, Sweet and others, including Jeffrey Wada; David Middendorf, KPMG's then-national managing partner for audit quality and professional practice; Thomas Whittle, KPMG's then-national partner-in-charge for inspections, and another high-level partner at the firm, David Britt, KPMG's former banking and capital markets group co-leader.game the system and improve inspection results. 

It was alleged that between 2015 and 2017 this group worked to illicitly acquire confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to 

For example, after Sweet began employment at KPMG, but while Holder was still employed by the PCAOB, Holder fed Sweet confidential PCAOB information about certain pending inspections, at the same time as she was seeking employment at KPMG.

While applying to KPMG, Holder continued to work on KPMG inspections in violation of PCAOB rules, and once she secured a job at KPMG, Holder stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet, her new boss at KPMG.    

In March 2016, Holder obtained the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion. 

Middendorf, Whittle, Sweet, and others then agreed to launch a stealth programme to ‘re-review’ the audits that had been selected, giving the KPMG engagement partners a false explanation for this process. 

The re-review allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.

In January 2017, Wada, who had again been passed over for promotion at the PCAOB, then stole confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder. At the same time, Wada provided Holder with his CV and sought her assistance in helping him to acquire employment at KPMG. 

Sweet shared the preliminary inspection selections provided by Wada with Whittle and Britt, while noting that the information was only preliminary. Whittle’s response was to ask Sweet to confirm that they would get the final list as well.

In February 2017, Wada texted Holder saying, ‘I have the grocery list… All the things you’ll need for this year.’  He then spoke to Holder and provided her with the full confidential 2017 final inspection selections.

Details were passed on to engagement partners on the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections.  One of these partners reported the matter, as a result of which KPMG’s office of general counsel launched an internal investigation. 

This resulted in Holder and Sweet destroying or fabricating evidence relevant to the investigation.  For example, Holder deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a ‘burner phone’ so her conversations could not be monitored.  Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.

Geoffrey Berman, Manhattan US attorney, said: ‘As a former employee of the PCAOB, Cynthia Holder understood the importance of the organization’s work:  to protect investors and the public by overseeing the audits of public companies.

‘But she undermined the Board’s and the SEC’s regulatory missions when she stole confidential inspection information and provided it to KPMG, her new employer. 

‘KPMG, in turn, used this confidential information to cheat on PCAOB inspections.  Holder’s sentence should be an example to others that stealing confidential information and corrupting regulatory processes are crimes that this office takes very seriously.’

Holder is the first of the group to be sentenced. Sweet pleaded guilty to conspiracy and wire fraud at the beginning of January 2018. Whittle has also admitted wire fraud and a conspiracy charge, and is due to be sentenced on 13 September. Middendorf's and Wada's trial is continuing, while Britt's trial is expected to start later in the autumn.

KPMG US declined to comment.

Pat Sweet | 13 Aug 2019