The SEC made official today the news that Dave Michaels of the Wall Street Journal broke late last week, announcing that KPMG will pay $50 million to settle allegations that former partners “stole the test” by using confidential information that was being fed to them by a PCAOB insider to improve the firm’s performance on public company audit inspections.
Yes, Cole Sprouse, there’s more! The SEC charged KPMG with two separate instances of misconduct that “resulted in violations of the fundamental requirement that auditors act with integrity,” according to the cease-and-desist order. The first being stealing confidential PCAOB inspection information. But there was some other cheating happening within the walls of House of Klynveld offices that the SEC shared on Monday morning:
[B]efore, during, and after the senior National Office professionals used confidential PCAOB information, KPMG audit professionals – at all levels of seniority – engaged in misconduct in connection with examinations on internally-administered training courses that were intended to test whether they understood a variety of accounting principles and other topics of importance.
This misconduct took a variety of forms. KPMG audit professionals shared exam answers with one another. A number of audit partners gave exam answers to other partners, and a number also sent answers to and solicited answers from their subordinates. In addition, for a period of time up to November 2015, certain audit professionals made unauthorized changes to KPMG’s server instructions that allowed them to manually select the scores necessary to pass the tests, which they often lowered to the point of passing exams with less than 25 percent of the questions answered correctly. The exams related to a variety of subjects that were relevant to the test-takers’ audit practices, and included additional training required by a 2017 Commission Order after the Commission found that KPMG engaged in improper professional conduct and had caused a client’s reporting violations.
During a conference call with us media folks this morning, Steven Peikin, SEC co-director of enforcement, said the SEC views this as “an extraordinary situation that warrants an extraordinary response. KPMG has admitted the conduct detailed in today’s commission’s order. It will pay a $50 million penalty and it’s being ordered to take significant remedial actions to improve its ethics and integrity.”
As part of the “significant remedial actions” the firm is being forced to undertake, KPMG must:
- Identify auditors who violated ethics and integrity requirements in connection with the training exam cheating over the past three years. “The firm will evaluate the sufficiency of its training programs, whether it’s culture is supportive of ethical and compliant conduct and whether it deploys sufficient resources and oversight for compliance with ethics and integrity requirements,” Peikin said.
- Comply with a cease-and-desist order.
- Retain an independent consultant, not a monitor, to review and assess the firm’s ethics and integrity controls and its investigation.
“With respect to the test cheating, KPMG has retained an outside law firm to investigate those issues and has been taking appropriate employment actions,” Peikin said. “The firm’s investigation is being overseen by an independent member of KPMG’s board of directors. The SEC’s order requires KPMG to complete this investigation by taking steps reasonably necessary to identify audit professionals who violated ethics and integrity requirements related to training exams that were administered in the last three years.
“To ensure that KPMG’s process is robust, the order requires the independent consultant to review and assess the firm’s investigation and whether it is taking appropriate employment actions or other remedial steps,” he told reporters. “The settlement provides the independent consultant is authorized to make binding recommendations they believe are appropriate relating to the firm’s investigation, employment actions, and remediation. Finally, KPMG is being ordered to conduct supplemental ethics and integrity training for its audit personnel over the next three years.”
KPMG has ignored requests from Going Concern for a statement regarding the SEC’s punishment, but this seems to be the comment from the firm that is making the rounds on the Internet:
“Integrity and quality remain our focus, as always. The foundation of our role as auditors and advisers is trust. We have learned important lessons through this experience and we are a stronger firm as a result of the actions we are taking to strengthen our culture, our governance and our compliance program. As we move forward, we are committed to delivering the highest quality and fulfilling our important role in the capital markets.”
OK, guys, after knowing everything you already knew about the ex-KPMG executives’ involvement in the PCAOB inspection cheating scandal, and now this cheating and results manipulation by auditors and audit engagement partners in these training exams, KPMG should be paying WAY more than a $50 million fine, right? At a minimum, the firm should be paying double this amount, and that would still seem too low to me. KPMG should be paying the SEC a much larger fine in addition to all the other crap the SEC is forcing the firm to do.
So, during the media conference call this morning, I asked Peikin how the $50 million fine was decided upon by the SEC and whether there was any consideration given to fining the firm more. And his answer was:
“I can’t discuss with you the process at arriving at any recommended penalty. I can tell you that we view a $50 million fine as a significant penalty that is appropriate given the egregiousness of the misconduct for the reasons I stated, meaning that it involved people at very senior levels with the firm, involved numerous audit professionals, was extensive in scale, and the cheating occurred over an extensive period of time.”
Nope. Sorry, I don’t agree that the fine was either significant or appropriate. KPMG officials were MANIPULATING THE REGULATORY INSPECTION PROCESS. Three of its former partners and a former executive director ARE PROBABLY GOING TO JAIL. And there’s a good chance a fourth former partner could also get prison time. Now we find out today that auditors were MANIPULATING INTERNAL TRAINING EXAM SCORES. I mean, read this:
Prior to November 2015, KPMG hosted exams to training programs on an internal server with software provided by a third party. KPMG sent participants in training programs a hyperlink that directed them to the applicable exams. Embedded in the hyperlink was an instruction to the server that specified the score necessary to pass the exam. Thus, the characters “MasteryScore=70” meant participants were required to answer at least 70 percent of the answers accurately to pass the exam.
By changing the number in the hyperlink, audit professionals could change the score required to pass. For a period of time up to November 2015, certain audit professionals, including one partner, altered the URLs for their exams to lower the scores required to pass. Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25 percent of the questions correctly.
Seriously, SEC. You are letting KPMG off the hook.
Peikin wouldn’t say how many KPMG professionals were involved in the training exam cheating, and he wouldn’t say if charges against individuals involved in the training exam cheating were forthcoming. The investigation is still ongoing.
TL;DR: KPMG royally screwed up and did a bunch of cheating and is pretty much getting a slap on the wrist. The end.