Accounting News Roundup: When Good KPMG Auditors Go Bad and Brazen Tax Scams | 04.17.17

By | 2 months ago

It’s hard to watch when auditors make bad decisions.

When good auditors go bad

The Wall Street Journal published a profile of Scott Marcello over the weekend, the now former Vice Chair of Audit for KPMG who was fired for his role in a ring of employees who received a leak of confidential information from a PCAOB employee. As these things tend to go, everyone who knows Marcello was shocked that he was a part of this, the article notes his charity work, etc., etc.

In a way, everyone’s surprise is to be expected. It’s not like Marcello would’ve been running afoul of ethics rules his entire career, failing upward to reach this point. He needed a sterling reputation to get into this job in the first place. It’s kinda like PwC flubbing the Oscars; years and years of doing things right do not remove the possibility that something terrible could go wrong.

As for motive, the pressure to improve the firm’s performance on its PCAOB inspections probably had something to do with it:

Some auditors have long felt stressed by the board’s inspections, feeling their careers could be set back if the regulator finds problems with too many of their audits. “They are all feeling the pain and the frustration,” said Bob Conway, a former KPMG partner who later ran the accounting board’s Southern California office.

Mr. Marcello took over as KPMG’s vice chair of audit after several years in which the firm’s inspection results had steadily worsened. The rate of deficient audits found by the PCAOB had risen from 22% for 2010 to 54% for 2014.

The article also quotes Marcello’s underling David Middendorf, who also was fired, from a transcript of PCAOB advisory panel meeting, when he called the inspections “an area for stress” and “a reason some people leave our profession.”

I’m sure Marcello, Middendorf and the rest of this ring all thought that inspections would cause them to leave their jobs at some point. But probably not quite like this.

Accountants behaving badly

Accountants run scams in all shapes in sizes. One of my personal favorites is the get-rich-fast-by-stealing-as-much-possible-in-the-shortest-time-possible scheme. In this version, you get the sense that perpetrator isn’t even trying to hide their crimes because they’re stealing so much so fast with almost no regard for how obvious the scam is. The case of Rodrigo Pablo “Paul” Lozano falls into this category:

Lozano, who was also known as “El Profe” because of his prior profession as a teacher, filed more than 13,000 false income tax returns and collected more than $23 million in refunds during 18 months in 2011 and 2012, federal officials said. U.S. District Judge Pilip S. Gutierrez ordered Lozano to pay back that money to the IRS.

According to evidence provided at the trial in July, Lozano’s co-conspirators provided him with fabricated identification documents that he used to obtain individual tax identification numbers. The numbers were used with fake W-2 forms and fictional dependents to maximize the amount of the additional child tax credit. The tax refunds ranged from $3,000 to $4,000 per filing, federal officials said.

For those crunching the numbers at home, 13,000 returns and $23 million in 18 months works out to approximately 167 returns and $294,000 a week. Lozano’s own employees “said the identity and W-2 documents looked suspicious, and the IRS sent hundreds of notices stating that the tax returns and W-2s were invalid” but he kept the scheme up. That’s…impressive? Audacious? Whatever it is, Lozano now has a 10-year prison sentence to think about it.

Previously, on Going Concern…

Megan Lewczyk wrote about lavish capex spending in a race to own the cloud.

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