KPMG Fined $50 Million for Exam Cheating and Getting Advance PCAOB Info

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.

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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