The US Securities and Exchange Commission (SEC) is bringing charges against six accountants, including former staffers at the Public Company Accounting Oversight Board (PCAOB) and former senior officials at KPMG, who were allegedly involved in a scheme to misappropriate and use confidential information relating to the PCAOB's planned inspections of KPMG
The SEC alleges that the former PCAOB officials made unauthorised disclosures of PCAOB plans for inspections of KPMG audits, enabling the former KPMG partners to analyse and revise audit workpapers in an effort to avoid any negative findings.
Two of the former PCAOB officials, named as Brian Sweet and Cynthia Holder, had left the regulator to work at KPMG. The SEC alleges the third official, Jeffrey Wada, leaked PCAOB data at the time he was seeking employment with KPMG. The three others allegedly involved are former KPMG partners in the firm's national office.
While preparing to leave his supervisory position at the PCAOB for KPMG, Sweet was alleged to have downloaded confidential and sensitive inspection-related materials that he believed might help him at KPMG. KPMG had recruited him to join the firm at a time when it had a high rate of audit deficiencies - nearly half of the KPMG audits that the PCAOB inspected in 2013 were found deficient.
After leaving the PCAOB, Sweet allegedly continued to gain access to confidential PCAOB materials through Holder, a PCAOB inspector. After Holder joined Sweet at KPMG, Wada allegedly leaked confidential information about planned PCAOB inspections of KPMG to Holder. According to the SEC, Wada leaked this information while he was seeking employment at KPMG.
The SEC alleges that when he joined KPMG, Sweet told his supervisors that he had taken confidential materials from the PCAOB and revealed, for example, the KPMG audit clients that the PCAOB intended to inspect that year.
David Middendorf, KPMG's then-national managing partner for audit quality and professional practice and Thomas Whittle, KPMG's then-national partner-in-charge for inspections and another high-level partner at the firm, David Britt, KPMG's banking and capital markets group co-leader, are alleged to have encouraged Sweet to divulge the stolen information to them and others at the firm.
The SEC alleges that Middendorf, Whittle, Sweet, Holder, and Britt worked together to review the audit workpapers for at least seven banks they were told the PCAOB would inspect in an effort to minimise the risk that the PCAOB would find deficiencies in those audits. Middendorf and Whittle allegedly instructed that no one disclose that they had confidential PCAOB information.
According to the SEC's order, the misconduct began in 2015 and persisted until February 2017. Soon after the conduct was discovered, the six respondents had their employment terminated, or resigned or were placed on leave before separating from KPMG and the PCAOB, respectively.
Steven Peikin, co-director of the SEC's enforcement division, said: ‘As alleged, these accountants engaged in shocking misconduct – literally stealing the exam – in an effort to interfere with the PCAOB's ability to detect audit deficiencies at KPMG.
‘The PCAOB inspections program is meant to assess whether firms are cutting corners, compromising their independence, or otherwise falling short in their responsibilities. The SEC cannot tolerate any scheme to subvert that important process.’
In a parallel action, the US attorney's office for the southern district of New York today announced criminal charges against the six accountants.
Sweet has agreed to an SEC order requiring that he cease-and-desist from violating PCAOB ethics rules and barring him from appearing or practicing before the SEC as an accountant based on findings that he, among other things, violated PCAOB ethics rules regarding confidentiality and lacks integrity.
The case will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.
Jay Clayton, SEC chairman, has issued a statement describing the alleged conduct as ‘disturbing’, but said he did not think the actions taken against the six ‘will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.
‘I do not expect that these actions will adversely affect the orderly flow of financial information to investors and the US capital markets, including the filing of audited financial statements with the Commission.’
Report by Pat Sweet