July 23, 2018

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

KPMG partners criminal charges pcaob sec

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.]

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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’.

Madoff Feeders Getting Some Unwanted Attention

The SEC, feeling confident these days, has filed a complaint against Cohmad Securities Corporation and its Chairman, Chief Operating Officer, and one of the brokers, saying they “actively marketed Madoff investments while ‘knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud.'”
Call us Captain Obv but that sounds like they were either dumb or in on the scam. Either way, they can’t be too psyched about it.
An additional complaint has been filed by the SEC against Stanley Chais, an investment adviser who put all of the assets he oversaw into casa de Madoff.
Irving Picard, who might have the most thankless job in America, also sued both Cohmad and Chais, because, you know, a few people want their money back. The trustee’s complaint against Cohmad spells it out:

The trustee’s lawsuit asserted that fees paid to Cohmad by Mr. Madoff were based on records showing the actual cash status of customer accounts — the amounts invested and withdrawn — without including the fictional profits shown in the statements provided to customers. When a customer’s withdrawals exceeded the cash invested, Cohmad’s employees no longer earned fees from that account — even though the customer’s statements still showed a substantial balance, according to the lawsuit.

This arrangement indicated that Cohmad and its representatives knew about the Ponzi scheme and knew that the profits investors were allegedly earning were bogus, according to the trustee’s complaint.

Good luck explaining that.

Brokerage Firm and 4 Others Sued in Madoff Case
[New York Times]