The Securities and Exchange Commission (SEC) and prosecutors
pursued civil and criminal charges against six accountants,
including former KPMG employees and one former regulator. The
SEC expects to vote on the settlement this month.
The penalty looks set to be one of the biggest fines ever
imposed on an auditor in an SEC case. As part of the
settlement, KPMG has to admit all the facts in the SEC order
and hire an independent compliance consultant to review its
ethics and integrity controls.
"The key to preventing such schemes in the future is to
shake up people’s confidence that they can get
away with it," said Jeff Hauser, director at the Centre for
Economic and Policy Research (CEPR). "I suspect there are many
"We cannot guarantee that any institution is impervious to
manipulation," he said, "but we can make it much less
The case dates back to January 2018 when the US Department
of Justice charged six former KPMG executives and PCAOB
employees with sharing confidential information about audits.
The SEC claimed PCAOB employee Cynthia Holder began leaking
information to Brian Sweet in 2015 when Sweet left the board to
join the firm.
Later, Holder also joined KPMG. The SEC claimed that
regulator Jeffrey Wada began leaking "grocery lists" of
upcoming inspections to Holder and that KPMG partners David
Middendorf, Thomas Whittle and David Britt oversaw audits of
several banks before the PCAOB came knocking.
The PCAOB discovered there was a leak in February 2017 and
KPMG fired the employees one month later. The Big 4 firm
concluded that the employees either had "improper advance
warning" of inspections or they "failed to report" what was
"We need a greater cooling off period between working for
the PCAOB and working for the firms one oversaw while at the
board," Hauser said. "It would benefit the system as a whole if
regulators saw their job as a calling and didn’t
revolve back and forth with industry."
The US government established the PCAOB, sometimes jokingly
referred to as 'Peekaboo’, after the Enron scandal
brought down Arthur Andersen and exacted heavy losses on
investors. The Big 5 became the Big 4, and the SEC had to
sharpen its tools.
This case threatens the reputation of the watchdog and the
industry it watches over, so the US authorities have been keen
to make an example and safeguard the credibility of the board
given its important role. Likewise, KPMG has set out to contain
the damage of this case.
"KPMG has taken remedial actions to assure that such conduct
cannot happen again," the firm explained when the case began.
"Integrity and quality are paramount for KPMG, including
operating with the utmost regard for the critical importance of
the regulatory process to our profession."
KPMG "fared poorly in its PCAOB inspections in or about 2013
and 2014", the court documents claim. This included
approximately 28 comments in connection with 51 audits
inspected by the board – around twice the average
number received by the Big 4 firm’s rivals. The
documents claim that the firm began hiring PCAOB employees to
"assist in predicting which of KPMG’s engagements
would be inspected".
This alone does not prove any wrongdoing on the
firm’s part. It’s also claimed that
KPMG put in place incentives for teams who did not receive any
comments on audits and used data analytics as part of its
"efforts to improve its performance".
The SEC has stressed that the allegations do not mean
investors cannot rely on KPMG’s audits. In fact,
the commission itself often relies on the firm’s
work. Nonetheless, the case has raised questions about the
level of oversight the US has over the accounting industry.
The case so far
In March, a federal jury convicted David Middendorf and
Jeffrey Wada of wire fraud and conspiracy to commit wire fraud.
The jury acquitted Middendorf and Wada on the charge of
conspiracy to defraud the US.
Middendorf has launched an appeal against the charge of wire
fraud. "We appreciate the one not guilty verdict," said Nelson
Boxer, who represents Middendorf. "But overall
we’re very disappointed with the result."
"What occurred here was not a wire fraud, and we intend to
continue to vigorously press that argument on appeal," the
At the time, PCAOB Chairman William Duhnke told the press:
"The misconduct that led to the trial directly contradicts the
public’s expectations of the auditing profession,
as well as the mission, vision, and values of the PCAOB."
Brian Sweet and Thomas Whittle accepted plea deals and
testified against Middendorf in the case. Fellow defendant
Cynthia Holder pled guilty, but did not agree to testify. The
courts are due to hand down sentences in July and August.
David Britt is expected to face trial in October 2019. "The
allegations in the indictment against David involve conduct
that is simply not a crime and we look forward to proving his
innocence in court," said Melinda Haag, who represents
The case continues.