The Securities and Exchange Commission has charged six certified public accountants – including former staffers at the Public Company Accounting Oversight Board (PCAOB) and former senior officials at KPMG LLP – arising from their participation in a scheme to use confidential information relating to the PCAOB’s planned inspections of KPMG.
The PCAOB is a non-profit corporation established by Congress in the wake of the 2002 WorldCom and Enron financial scandals to oversee the audits of public companies and broker-dealers.
The SEC has charged former PCAOB employees Brian Sweet, Cynthia Holder, and Jeffrey Wada, and KPMG supervisors David Middendorf, Thomas Whittle, and David Britt.
The SEC alleges that the former PCAOB officials made unauthorized disclosures of the board’s plans for inspections of KPMG audits, enabling the former KPMG partners to analyze and revise audit workpapers to avoid negative findings. According to the SEC’s order, the alleged misconduct began in 2015 and persisted until February 2017.
“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,” said Steven Peikin, co-director of the SEC’s enforcement division. “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.”
The SEC alleges that while preparing to leave his supervisory position at the PCAOB for a job at KPMG, Brian Sweet downloaded confidential and sensitive inspection-related materials that he believed might help him at KPMG.
KPMG had recruited Sweet to join the firm at a time when it had a high rate of audit deficiencies. The SEC said that 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 Cynthia Holder, a PCAOB inspector. After Holder joined Sweet at KPMG, a third PCAOB employee, Jeffrey Wada, allegedly leaked confidential information about planned PCAOB inspections of KPMG to Holder. According to the SEC’s order, Wada leaked this information while he was seeking employment at KPMG.
The SEC alleges that upon his arrival at KPMG, Sweet told his supervisors in KPMG’s national office that he had taken confidential materials from the PCAOB and revealed, for example, the KPMG audit clients that the board intended to inspect that year.
Allegedly encouraging Sweet to divulge the stolen information to them and others at the firm were his supervisors – 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 David Britt; KPMG’s banking and capital markets group co-leader.
Middendorf, Whittle, Sweet, Holder, and Britt allegedly worked together to review the audit workpapers for at least seven banks they were told the PCAOB would inspect in an effort to minimize the risk that the board would find deficiencies in those audits. Middendorf and Whittle allegedly instructed that no one disclose that they had the confidential information.
“Audited financial statements are at the heart of the SEC’s disclosure-based regulatory regime: a company’s financial statements provide investors with a wealth of material information, and independent audits give investors confidence that those statements can be trusted,” said SEC Chairman Jay Clayton in a statement on the enforcement actions.
“Based on discussions with the SEC staff, I do not believe that the actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the SEC or for investors to rely upon those required reports,” added Clayton. “I do not expect that these actions will adversely affect the orderly flow of financial information to investors and the U.S. capital markets, including the filing of audited financial statements with the SEC.”
Soon after the conduct was discovered, the six CPAs were terminated, resigned or placed on leave before separating from KPMG and the PCAOB, respectively.
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.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against the six accountants.