An “Oops” From the Justice Department on the KPMG Prosecutions

In the so-called “steal the exam” scandal, the federal government prosecuted a former KPMG audit partner as well as an official with PCAOB (the federal government regulator of audit firms that audits publicly traded companies). They were convicted or settled their cases.

KPMG had not been doing so well on its audit quality scores from PCAOB.   So, KPMG got to work and made contacts with PCAOB employees to obtain critical information: Which company audits that KPMG had done would PCAOB review? Some PCAOB employees cooperated with KPMG and later got KPMG jobs.

What KPMG and the PCAOB employees did was just plain wrong.  But, it was not criminal.  The U.S. Supreme Court, and federal district and appellate courts following the high court’s lead, have been curbing the use of federal fraud statutes to prosecute conduct that do not fit the crime’s elements.

Wire fraud charges must involve some type of conduct that deprives someone of property or money. Deception, corruption, and abuse of power are wrong, but do not fall under federal fraud statutes. Several of the parents in the Varsity Blues admissions scandal had their convictions reversed.  Why?  The Fifth Circuit appellate court held that admission to a university is not property. Dave Michaels, “New Definition of Fraud Derails High-Profile Cases,” Wall Street Journal, August 4, 2023, p. B10.

So, the prosecutors in the KPMG case have admitted that they were wrong. The charges have been dropped.  So, when Dave Middendorf, a KPMG audit partner, said at his sentencing hearing that he never imagined that what he was doing was wrong, he was correct.  At least in a criminal law sense.  What Mr. Middendorf  did was unfair, deceitful, and corrupt.  He damaged the audit profession and chipped away at the trust needed in economic systems.  Cheating isn’t always criminal. If it were, by latest stats, 90% of college students would be in jail.

Ethics play a critical role in society. Not every rotten, dirty trick can be criminalized.  Enter ethics. Ethical standards offer some semblance of fair play. Without them society and the economy are the lesser as cheaters run free, happy, and unaccountable in search of another way to game the system without dipping a toe into fraud.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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