The U.S. Securities and Exchange Commission has announced charges against 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 misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.
The SEC’s Division of Enforcement and Office of the Chief Accountant allege that the former PCAOB officials made unauthorized disclosures of plans for inspections of KPMG audits, enabling the former KPMG partners to analyze and revise audit workpapers in an effort to avoid negative findings by the PCAOB.
Two of the former PCAOB officials had left the PCAOB to work at KPMG.
The SEC’s Enforcement Division and Office of the Chief Accountant allege the third official leaked PCAOB data at the time he was seeking employment with KPMG. The three former KPMG partners were all in the firm’s national office. 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 were terminated, resigned or placed on leave before separating from KPMG and the PCAOB, respectively.
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.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the six accountants.
The Chairman of the SEC, Jay Clayton, has issued a statement (see full text below) concerning these charges. The SEC stated that it stands ready to work with issuers to ensure that collateral effects, if any, to issuers and, in particular, their shareholders are minimized.
The SEC’s Enforcement Division and Office of the Chief Accountant allege 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 him to join the firm at a time when it had a high rate of audit deficiencies. Indeed, 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’s Enforcement Division and Office of the Chief Accountant allege 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 PCAOB 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 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. The SEC’s Enforcement Division and Office of the Chief Accountant allege 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 minimize 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.
Sweet has agreed to settle to a Commission Order requiring that he cease-and-desist from violating PCAOB ethics rules and barring him from appearing or practicing before the Commission 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.
The statement on the charges against the former KPMG and PCAOB personnel by SEC Chairman Jay Clayton follows:
Today, the U.S. Department of Justice and the SEC initiated enforcement actions against six former KPMG LLP and PCAOB personnel related to an alleged misappropriation of confidential PCAOB inspection information. More information relating to allegations can be found in the Orders Instituting Proceedings (Order 1, Order 2) and the accompanying press release.
The alleged conduct is disturbing, and I support the SEC’s enforcement action. 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. The PCAOB is a critical part of the oversight of our local, national, and international capital markets, in that it helps to promote high-quality audits of the financial statements of issuers and broker-dealers, upon which investors rely.
In matters of this type, I am also concerned about potential adverse collateral effects, including on our Main Street investors. Based on discussions with the SEC staff, I do not believe that today’s 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 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 U.S. capital markets, including the filing of audited financial statements with the Commission.
I have asked the SEC staff to monitor this matter closely and to stand ready to work with issuers to ensure that collateral effects, if any, to issuers and, in particular, their shareholders are minimized.
As to the PCAOB, I understand that when the alleged breaches were first discovered, the Board members and staff at the time took remedial action, including with respect to the PCAOB’s internal information technology and security controls. I have asked Chairman Duhnke to review the prior assessment and to take further action, if necessary.