The last time the SEC fined an audit firm $50 million was when Deloitte Touche settled with the agency for its audit work for Adelphia. Deloitte neither admitted or denied that its audit work, which meant that the world was unaware that the Rigas family had perpetrated a $2.3 billion fraud on investors by hiding off-the-book liabilities as well as conducting a classic piggy-bank raid of company assets. Arthur Andersen missed the off-the-debt problem at Enron, yet another multi-billion-dollar-fraud. Arthur Andersen is no more. Deloitte and KPMG were both auditors on the HP acquisition of Autonomy, which turned out to be an $8.8 billion fraud. PwC was the auditor for AIG, Tyco, Yukos, and Satyam ($1.5 billion fraud). PwC also messed up the best picture award in 2017 (LaLa Land was announced incorrectly as the winner because the PwC partners gave the presenters the wrong envelope). KPMG was fined for the $1.5 billion earnings fraud at Xerox over a four-year period and had a partner plead guilty to charges of insider trading by feeding a friend client information. The so-called Big Four have one heck of a track record when it comes to following the money, or the fake money.
The record for these audit firms, which audit 98% of publicly traded companies, is not stellar. So, in this round, KMPG executives decided to recruit Public Company Accounting Oversight Board (a quasi-government entity established post-SOX to audit the auditors of publicly traded companies, AKA, PCAOB) employees to let KPMG folks know which of the KPMG client audits would be subject to PCAOB reviews so that, one guesses, the firm could do a crackerjack job on those audits. They got the information from PCAOB employees for two years.
Then, to add to the evolving ethical culture at KPMG, certain employees who had passed the PCAOB training exams (required by PCAOB for all audit firms under its jurisdiction) shared their answers to fellow KPMG employees so that they could be assured of passing the PCAOB exams. The subject of the training? Integrity and other professional topics.
KPMG is admitting the misconduct in the settlement, expected to be approved by the SEC this week, and has also agreed to have an independent consultant for one year to assess “remedial measures” and “compliance with ethics and integrity requirements.” The Barometer’s advice? Do a little root-cause analyses on all the ethical lapses over the years to see what happened and why things keep happening. Then have the independent consultant interview employees (front-line types) to find out what the KPMG culture is really like. Until KPMG gets at its culture, there are no remedial measures that will work.