• KPMG Settles With SEC Over a Giant Failure of an Audit

    By | August 15, 2017

    KPMG has settled SEC charges for $6.2 million due to a shoddy audit of an oil and gas company. The partner in charge of the job, John Riordan, also settled to charges, agreeing to a $25,000 fine and a suspension to practice before the SEC. He can re-apply in two years. KPMG did not admit or deny any wrongdoing.

    The SEC press release states that KPMG’s audit of Miller Energy Resources “grossly overstated values for key oil and gas assets” and Mr. Riordan “failed to properly assess the risks associated with accepting Miller Energy as a client and did not properly staff the audit, which overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year.” The statement in the press release is sober, but that doesn’t stop it from being hilarious:

    “Auditing firms must fully comprehend the industries of their clients. KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars,” said Walter E. Jospin, Director of the SEC’s Atlanta Regional Office.

    Yep! Miller bought a bunch of land in Alaska for next to nothing but then turned around and said it was worth $480 million. Despite knowing all this and more, including the fact that the company was a penny-stock and lacked qualified executives or accounting staff, the SEC says KPMG assessed Miller Energy as a low-risk client.

    Also somewhat troubling is that John Riordan — a partner who had been with KPMG for over 20 years when this all went down — had no oil and gas experience:

    sec order 081517

    The order states the obvious: “In light of the high degree of risk associated with the Miller Energy engagement and the unusual bargain purchase transaction in the prior year, KPMG should not have assigned a partner-in-charge who had no experience auditing companies in the oil and gas industry.”

    There’s plenty to enjoy in the order, especially if you work on energy clients, but one of its last details gives you a great sense of how FUBAR the situation was. In late July 2011, a blog called StreetSweeper had just written a scathing article on Miller Energy, questioning its valuations, citing numerous bankruptcy documents from the land’s previous owner. Then, oops:

    sec order 081517-2

    Yeah, so this thing is pretty embarrassing all the way around. KPMG told The Wall Street Journal that “the settlement was related to audit work from six years ago and that it has ‘fully cooperated with our regulators to reach a resolution,'” as if it was some bad relationship and therapy has worked.

    As for Mr. Rioran, he is still with the firm, according to the SEC order. He’s been the managing partner of the firm’s Knoxville office since 2013.

    [Press Release, Order]

    Image: Ardfern/Wikimedia Commons