Here’s a fun story of what not to do if you’re an ethics director at a Big 4 firm. Damion Henderson, a managing director at KPMG Bermuda, was fined $10,000 by the PCAOB on April 9 for signing off on documents that had been re-created and backdated in advance of a PCAOB inspection and not telling inspectors that the documents had been re-created and backdated.
Henderson also can’t be involved in the design, implementation, or monitoring of any aspect of the firm’s system of quality control for two years, according to the enforcement order.
In addition, KPMG Bermuda was censured and fined $250,000 for “failing to establish and maintain a system of quality control to provide reasonable assurance that firm personnel would comply with applicable professional standards and the firm’s own standards of quality.”
Henderson was head of KPMG Bermuda’s Ethics and Independence Department during 2014 and 2015. At the time, the E&I Department’s quality control policies and procedures required that firm personnel “execute written independence confirmations, or ‘independence affidavits,’ periodically during their employment at the firm.”
The completed, hard-copy documents are then reviewed and signed off by a senior manager, who then would give the independence affidavits to Henderson to initial and approve. The documents would then be placed in a binder. And, of course, the E&I Department didn’t have a backup system in place in case the original documents were lost or destroyed.
Well, guess what? In October 2014, 27 present and former employees’ independence affidavits went missing. And then KPMG found out in December 2014 that PCAOB inspectors would be at the firm in May 2015. Uh-oh.
In response to the discovery of the misplaced affidavits, the E&I Department asked these employees to re-execute the affidavits in the same manner as they had executed the original affidavits, and to backdate the re-executed affidavits to approximate the date that they had signed the originals. Most of these employees complied and returned these documents to the E&I Department.
When one of the former KPMG Bermuda employees was asked to redo and backdate his affidavit, he expressed his concerns, to which he was told by a senior manager in an email:
“I completely understand where you are coming from, as it is unreasonable of us to expect this. The only reason we are asking is that the Firm, including the E&I function, is being inspected by the PCAOB in May 2015 covering the previous 12 months.”
Henderson and the senior manager then backdated their own initials on the re-created affidavits to approximate the date that they had reviewed and dated the original affidavits. This was even happening the day before the inspection was to begin.
On Sunday May 3, 2015, immediately before the Board’s inspection commenced on Monday May 4, 2015, the Administrative Assistant emailed Henderson, stating “I have a few affidavits that need to be signed before putting copies in the binder.” Henderson replied, one minute later: “On way in now.”
The problem was Henderson didn’t let the PCAOB know about the “case of the missing affidavits.”
The Board conducted an inspection of KPMG Bermuda in the spring of 2015. During the inspection, the Firm made a binder of affidavits available to Board inspectors. That binder included certain of the affidavits that had been re-executed and backdated in advance of the inspection. At no time did Henderson or any other Firm personnel disclose to Board inspectors that the original affidavits had been lost, reexecuted, and back-dated.
The PCAOB concluded that Henderson’s conduct “directly and substantially contributed to the failure of the firm’s system of quality control.”
The board also concluded that KPMG Bermuda shit the bed when it came to:
- Independence, integrity, and objectivity;
- Preparing and maintaining appropriate documentation for a sufficient period of time; and
- Training firm personnel concerning the preparation and retention of appropriate documentation, including making appropriate documentation available to PCAOB inspectors.
Oh, and most of the original independence affidavits were eventually found.