The reputation of the U.S. accounting industry and its regulator took a big hit Monday when the government announced criminal and civil charges stemming from an alleged scheme to provide confidential information to help accounting giant KPMG pass regulatory inspections.
The government filed charges against six accountants, including three former partners at KPMG and three former employees of the Public Company Accounting Oversight Board (PCAOB), with conspiring to defraud securities regulators and steal confidential auditing information.
Executives at KPMG recruited employees from the PCAOB, the regulator erected by Congress in 2002 after earlier accounting scandals to clean up the accounting business, to join the accounting firm, according to a criminal indictment unsealed Monday. Those recruits allegedly stole confidential information about the PCAOB’s plans to audit the firm and shared them with the KPMG partners.
The charges highlight the revolving door between auditing firms and potential weaknesses in the U.S. financial system. The allegations paint a picture of the corruption of the accounting industry watchdog by one of the largest firms auditing public companies. In short, the government alleges that an accounting watchdog of corporate America corrupted its own watchdog.
“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 gives 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,” Securities and Exchange Commission chairman Jay Clayton said in a statement.
The scheme allegedly began in 2015 and stretched into 2017, when it was uncovered by the regulators. KPMF fired six employees, including the head of its audit practice, after it learned of the alleged improper conduct.
The SEC said in its complaint that an accountant named Brian Sweet downloaded confidential information about auditor inspections as he prepared to leave the PCAOB for a job at KPMG. At the time, KPMG had been repeatedly dinged by the PCAOB audits. Once at KPMG, Sweet continued to gain access to confidential PCAOB materials through Cynthia Holder, a PCAOB inspector. Once Holder joined KPMG, she received confidential information about inspections of KPMG audits from a third PCAOB employee, Jeffrey Wada, according to the SEC. He was also seeking employment at KPMG.
This chain of auditor corruption was known to senior KPMG executives, according to the SEC. Sweet allegedly told his supervisors he had taken the information. Those supervisors allegedly encouraged him to divulge the information to them and others at the firm. They included KPMG’s then head of inspections, Thomas Whittle, and head of audit quality and professional practice, David Middendorf, according to the SEC complaint. David Britt, the firm’s co-leader for banking and capital markets, was also a part of the scheme, according to the SEC.
The alleged scheme calls into question the very nature of the PCAOB, according to some industry veterans. Congress created the PCAOB through the Sarbanes-Oxley law passed in reaction to the collapse of Enron and related accounting scandals.
“This is an indictment of the PCAOB. It was created to clean up the culture of accounting firms. Instead, it appears to have been corrupted by the culture of accounting firms,” one former PCAOB attorney said. He spoke on the condition of anonymity because his current employer had not authorized him to speak on the matter.
The SEC’s Clayton issued a statement Monday calling the alleged conduct “disturbing.”