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.