• Big 4

    Former KPMG Employees Learn That Using Confidential PCAOB Inspection Info Has Its Drawbacks

    By | January 22, 2018

    Six former employees of KPMG have been arrested and charged “with conspiring to defraud securities regulators and misuse of confidential auditing information.” These charges stem from the leak of confidential PCAOB inspection information that we learned about last year. The Securities and Exchange Commission also filed civil charges in a parallel action. The 54-page indictment lists the following defendants:

    • David Middendorf, 53, of Marietta, Georgia, was KPMG’s National Managing Partner for Audit Quality and Professional Practice until April 2017.
    • Thomas Whittle, 54, of Gladstone, New Jersey, was KPMG’s National Partner-In-Charge for Inspections until April 2017.
    • David Britt, 54, of New Canaan, Connecticut, was KPMG’s Banking and Capital Markets Group Co-Leader until February 2017.
    • Cynthia Holder, 51, of Houston, Texas was an Executive Director in KPMG’s Department of Professional Practice group from August 2015 until April 2017. She was an Inspections Leader at the PCAOB from December 2011 to August 2015.
    • Jeffrey Wada, 42, of Tustin, California was a PCAOB Inspections Leader from February 2012 to February 2017.

    The other key player in this saga is Brian Sweet, 40, of Fresno, California. He was a Partner in KPMG’s Department of Professional Practice, but more importantly, he was an Associate Director at the PCAOB from March 2014 to April 2015. It was Sweet and Holder, the indictment alleges, who joined KPMG to help them improve their dismal PCAOB inspection results in 2015. Sweet took confidential materials from the PCOAB to KPMG and Wada allegedly leaked the the confidential info to Holder.

    This paragraph from Accounting Today explains the scheme nicely:

    [A]fter Sweet started working at KPMG, he told his supervisors in KPMG’s national office he had taken confidential materials from the PCAOB, including, for example, the KPMG audit clients the PCAOB planned to inspect that year. Among those allegedly encouraging Sweet to provide the stolen information to them and others at the firm were his supervisors—David Middendorf, who was then KPMG’s national managing partner for audit quality and professional practice, and Thomas Whittle, who was then national partner-in-charge for inspections, along with another high-level partner at the firm, David Britt, KPMG’s banking and capital markets group co-leader. The SEC’s Enforcement Division and Office of the Chief Accountant allege that Middendorf, Whittle, Sweet, Holder, and Britt worked together to review the audit workpapers for at least seven banks they were told the PCAOB would inspect in an effort to minimize the risk that the PCAOB would find deficiencies in those audits. Middendorf and Whittle allegedly instructed that no one disclose that they had confidential PCAOB information.

    KPMG had no immediate comment when contacted by Going Concern. The AT article does include this statement from firms spokesman Manuel Goncalves:

    When KPMG first discovered the issue in early 2017, we promptly notified the authorities and have been fully cooperating with the government in its investigation. KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm. Since then KPMG has taken remedial actions to assure that such conduct cannot happen again. Integrity and quality are paramount for KPMG, including operating with the utmost regard for the critical importance of the regulatory process to our profession.

    We’re wading through the indictment and SEC orders, but for now, feel free to discuss this news and call out anything interesting. We’ll have some follow-up coverage.

    [WSJ, AT, SDNY, SEC, Sweet, Holder et al.]

    • I_LIHTC_ur_Mom

      To the Pit of Misery!
      Dilly Dilly!

    • willie phuister

      tough start for KPMG – they also “audit” GE, and we know GE is cooking the books and KPMG has lost what ever backbone they had left.

    • Big4Veteran

      Nice article, Colin. This reminds me of the good ‘ole days when GC was all over the biggest accounting tabloid stories like Scott London (another KPMG scandal!) and Veruca James (the accountant turned porn star).

      When GC first reported on this story, I didn’t see what the big deal was. But after reading this, its some pretty sordid shit. String ’em up, I say.

    • Ron Burgundy

      Well thank god our wonderful GOP is doing away with SOX. Less auditing, more work life balance

      • Gregory Jackson

        The problem with SOX and the PCAOB is that there are not enough auditors who want to work 80 hours a week during busy season to produce the level of workpapers to satisfy the PCAOB audit requirements. Sure, you can find enough to staff the Fortune 500 type clients that are clearly going to be reviewed by the PCAOB, but how do you make sure that the rest of your SEC clients have the same level of workpapers? You just can’t, which is why the deficiency rates are in the 30% and 40% range. I’m not making excuses for KPMG’s cheating, because that is exactly what they were doing, but I am saying that the PCAOB has become the tail wagging the dog. My solution quite frankly was to exit public accounting because I knew that I’d never have the time, budget, training, oversight or staff to audit middle market clients in a manner that wouldn’t result in me being humiliated by PCAOB findings. I knew then that it was the right decision, and I continue to feel that way.

      • Deplorable S E Delenda

        SOX is the cause of this. We’ve now had more than a decade and a half of SOX,has it really improved anything or just been a wonderful make-work scheme for the securities Bar?

        • Gregory Jackson

          The people who gave us SOX weren’t looking out for accountants, but they certainly created a lot of work for us. SOX and PCAOB were simply knee-jerk reactions to the Enron / Andersen fiasco.

          • Deplorable S E Delenda

            I would describe it our dear leaders reaching for the first available tool they could get their grubby little mitts on, because they had to appear to be decisive when they didn’t have a freaking clue. Of course this was the crisis COSO and its groupies were looking for, but making the requirement to be on the PCAOB to be not a CPA for the majority was interesting. Remember the Treadway Commission was originally convened in the late 80’s or early 90’s.

            Keeping in mind lawyers were an integral part of Enron, one wonders why we don’t have a Public Company Law Oversight Board (complete with a board where the major requirement for the majority) read like this:

            two members, and only 2 members, of the Board shall be or have been licensed attorneys pursuant to the laws of 1 or more States, provided that, if 1 of those 2 members is the chairperson, he or she may not have been a practicing attorney for at least 5 years prior to his or her appointment to the Board.

    • Gregory Jackson

      I am not going to hide behind a screen name. My name is Greg Jackson, and I am the Director of Finance at Prime Natural Resources in Houston. You can look me up. I worked with Cindy Holder at both PwC and later at UHY (which is now part of BDO). Cindy is the kind of auditor who bounced around from job to job. She also worked at Deloitte and in a couple of industry jobs before joining the PCAOB. Does that sound like the resume of a Big 4 partner? No. She wore out her welcome after about five years everywhere she worked. She had a lot of people who liked her because she had a big ego, but she ALWAYS struck me as shady, and I could tell that she lied about her life experiences (one amazing story after another). She let that ego get in the way of her common sense, and she found a way to the Director level at KPMG by cheating. I have to admit that I’m surprised that she was that blatant and reckless, but she clearly could not handle that she was not Big 4 partner material, so she cheated to get there. It took over 20 years, but my suspicions about her proved right.

      • Debit_Big4_Experience

        looks like someone got rejected back in the 90s and is still bitter about it

        • Gregory Jackson

          Not at all. I left when I had had enough if it. Never imagined that i’d do it for more than a few years. Your cynicism is showing. How has that worked out for you?

    • SouthWestFL

      Time for the FDIC to step in and bar KPMG from performing audits of insured banks for 10 years. Put some bite into the enforcement actions!