November 20, 2018

Ex-KPMG Executive Director Admits Guilt in PCAOB Inspection Leak Scandal

A former Public Company Accounting Oversight Board inspector-turned-KPMG executive director, who was accused of obtaining confidential information on which KPMG clients’ audits the PCAOB would be reviewing so the Big 4 firm could improve its dismal inspection results, pleaded guilty in Manhattan federal court on Oct. 16 for her involvement in the scandal.

Cynthia Holder, 52, pleaded guilty to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud. She is expected to be sentenced on April 5, 2019, and could face up to 20 years in prison.

According to a Reuters report, Holder said in court that she regretted her actions and “I accept full responsibility.”

Reuters noted that Holder did not sign a plea agreement, and prosecutors believe sentencing guidelines call for a prison sentence of 41 to 51 months.

Holder, who was a PCAOB inspections leader before joining KPMG in 2015, was one of five people indicted by federal authorities in January for their roles in the alleged scheme to game the PCAOB inspections process.

The others were:

  • Jeffrey Wada, a former PCAOB employee who is accused of leaking confidential inspection information to Holder in the hopes of landing a job at KPMG;
  • David Middendorf, national managing partner for audit quality and professional practice at KPMG;
  • Thomas Whittle, national partner-in-charge for inspections at KPMG; and
  • David Britt, co-leader of KPMG’s Banking and Capital Markets Group.

At the time, KPMG had a high rate of audit deficiencies, and the firm’s executives allegedly wanted the information to help the firm improve its inspection results. The cheating scandal went down from about May 2015 until February 2017 when KPMG finally caught wind that this was going on.

While she was inspecting KPMG as an employee of the PCAOB, Holder used her position to share confidential information about certain pending inspections with Brian Sweet, a partner at KPMG and a former associate director at the PCAOB. She did this while simultaneously seeking employment with the accounting firm, which, obviously, is a no-no.

According to the U.S. Attorney’s Office for the Southern District of New York:

Once she secured a job at KPMG, Holder stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet, her new boss at KPMG.

Holder received confidential PCAOB information on audit selections for KPMG from Wada in both 2016 and 2017. In both instances, she shared this information with Sweet, who passed it along to Middendorf, Whittle, and Britt so extra attention would be placed on these audits before they were inspected by the PCAOB.

The PCAOB has yet to release KPMG’s 2016 inspection report. Huh, I wonder why?

Sweet pleaded guilty to conspiracy and wire fraud charges in early January.

After Holder’s court appearance yesterday, Manhattan U.S. Attorney Geoffrey Berman released the following statement:

“In the wake of the accounting fraud scandals of the early 2000s, Congress passed important laws to ensure the quality and accuracy of auditing work performed on publicly traded companies so that investors could have confidence in the reported financial results of those companies. The SEC was vested with the responsibility and authority of executing these laws and the PCAOB was created to play a key role: To audit the auditors. Holder undermined the work of the SEC and the PCAOB by stealing confidential inspection information from her former employer, the PCAOB, and helping insiders at her new employer, KPMG, to cheat the regulatory system put in place to protect the investing public. This was a revolving door tainted by fraud and today we hold the defendant accountable for her conduct.”

Wada faces similar charges as Holder, while Middendorf, Whittle, and Britt also face conspiracy charges, as well as three counts of wire fraud. Their trial is scheduled to begin on Feb. 11, 2019.

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SHOCKER: Doesn’t Appear that Stanford Auditors were Doing Any Auditing

allen-stanford_1018295c.jpgLast week’s indictment of Allen Stanford has brought up the always popular question when fraud, occurs: “Who are the auditors that were asleep at the wheel of this disaster?”
Well, in this case, the auditors were a local UK two-person shop, CAS Hewlett, which must be Queen’s English for Friehling & Horowitz.
It doesn’t appear that CAS Hewlett has a website, but they’ve been doing the Stanford “audits” for at least 10 years, so obv they’re legit. PwC and KPMG both have offices on Antigua but Stanford preferred to stay with its “trusted firm”. Totally understandable.
And the best part? The founder of the firm, Charlesworth “Shelly” Hewlett died in January, approximately a month before the story broke on the Ponz de Stanford.
This all adds up to who-the-fuck-knows if audits were even occurring and for us to speculate if Shelly needed to get got because Stan knew that the poo and fan were coming together. Just sayin’.

PCAOB: The Rodney Dangerfield of Bureaucracies

pcaob.gif It’s tough being part of a bureaucracy, especially if you’re doing something as glamarous as babysitting auditors. The CIA, FBI, NSA have got it easy. You get to catch bad guys, use guns, and Hollywood makes movies about you. Aside from the warrantless wiretaps and otherwise general big brotherishness, it’s cool.
The PCAOB doesn’t get that luxury. They get to poke around auditors’ work and then tell them how much they suck at it. Not so fun for anybody. They also get to write auditing standards. Take the watchdog aspect, multiply it times infinity, and that’s about the amount fun we’re talking about for writing rules on auditing.
But now people are saying they’re too slow in writing these I-already-want-to-kill-myself boring rules? Yep:

“Given how little they’ve accomplished in the standards-setting area, they don’t get a passing grade,” says Lynn Turner, a former chief accountant for the SEC.
Turner says he and a group of investor advocates wrote to the PCAOB in 2004, asking it to improve fraud standards. But the work remains undone, he says.
Bill Gradison, the board member whose term expires in October, calls the criticism fair. “We’ve been much slower than other standards writers,” he says.
By comparison, the International Auditing and Assurance Standards Board, which sets international auditing standards, among other duties, finished revising its own standards in March. The process, which included 37 standards, took about five years

Man, now comparisons to the Europeans. They’re looking for some new blood at the PCAOB though, since Mark Olson is retiring as Chairman and another board member’s term is expiring.
But don’t you go calling them lazy! “the PCAOB is taken seriously by the auditing community and deserves credit for trying. ‘Anyone who says it isn’t is off the wall,'”
What a ringing endorsement.

COMPLIANCE WATCH: Oversight Board Sets Sluggish Pace
[WSJ]