Francine McKenna did some expert sleuthing and reports at MarketWatch that Ambac Financial Group was one of the unnamed issuers in the indictment of former KPMG employees and one former PCAOB inspector. There were enough clues to piece together that “Issuer-2” was Ambac, one of the companies that were allegedly subject to a re-review by KPMG partners at the behest of Brian Sweet, the former inspector turned partner who provided an advanced copy of the firm’s issuers to be inspected by the PCAOB.
[T]he Issuer-2 re-review identified a significant error in the way the 2015 audit had been performed. According to the indictment, KPMG had failed to obtain required information from one of Issuer-2’s third-party vendors concerning that vendor’s own internal controls. As a result, the KPMG partner responsible for this audit decided to withdraw KPMG’s previously issued opinion that was included in the company’s 10-K already filed with the SEC, according to the indictment
Just as a refresher, this is what the indictment, says what happened after KPMG pulled their report:
Shortly after the decision to withdraw its opinion with respect to Issuer-2, KPMG was formally notified by the PCAOB that Issuer-2 would be inspected.
[Thomas Whittle] directed Brian Sweet to attempt to convince the PCAOB team leader responsible for the inspection of KPMG (the “Team Leader”) not to inspect Issuer-2. For reasons unrelated to this request, the audit of Issuer-2 was ultimately not inspected.
Ambac filed an amended 10K on May 11, 2016. That amended 10-K includes a revised KPMG opinion that included a material weakness; the firm’s prior report was clean. According to the story, no other KPMG client had a revised report “over failure to obtain information about a third-party vendor’s internal controls” that year.
Neither KPMG nor Ambac commented for the story, which raises the question: Did KPMG tell their clients what was going on? It seems unlikely, but for good measure, Francine is polling Twitter to see where people land on KPMG’s forthrightness:
Did KPMG tell Ambac why they were giving its audit a second look?
— Francine McKenna, yes, that Francine McKenna (@retheauditors) January 29, 2018
This will probably result in a few more awkward conversations for KPMG audit brass. We’ll keep our ears open for more developments.