August 21, 2018

Setback in Court For Ex-KPMG Execs, As Judge Refuses to Toss Out Counts in PCAOB Inspection Info Leak Case

As Mick Jagger sings, “You can’t always get what you want.”

What three former top KPMG executives and two former employees of the Public Company Accounting Oversight Board—who are accused of participating in a scheme in which confidential PCAOB inspection information was shared with the accounting firm—wanted was for their conspiracy and wire fraud counts dismissed in court. But a New York federal judge denied their request on July 17, finding the government’s allegations to be sufficient at this point, according to a Law360 report.

The two ex-PCAOB inspectors, Cynthia Holder, who wound up eventually working at KPMG, and Jeffrey Wada, are accused of illegally leaking the confidential information about planned KPMG inspections to the three accounting firm executives, who allegedly encouraged the malfeasance. At the time, KPMG had a high rate of audit deficiencies, and the executives allegedly wanted the information to help the firm improve its inspection results.

Holder and Wada were each indicted in January on charges of conspiracy to defraud, conspiracy to commit wire fraud, and two counts of wire fraud.

The three former KPMG executives—David Middendorf, national managing partner for audit quality and professional practice; Thomas Whittle, national partner-in-charge for inspections; and David Britt, co-leader of the firm’s Banking and Capital Markets Group—face similar conspiracy charges as Holder and Wada, as well as three counts of wire fraud.

According to the Law360 report, the defendants argued that the government failed to allege they agreed to use “deceitful or dishonest means” to defraud the government, but U.S. District Judge J. Paul Oetken shot that down:

“This court is bound to take the Second Circuit at its word: a conspiracy to defraud the government includes any scheme ‘to obstruct, through deceit, trickery, or dishonest means, the [government’s] lawful function,’” he said. “The Indictment alleges as much.”

While the government doesn’t allege that the defendants made the PCAOB report inaccurate information to the U.S. Securities and Exchange Commission, it does allege that defendants stole confidential PCAOB information with the goal of fraudulently impact the outcomes of the PCAOB inspections, which are used by the SEC, the judge said.

“In other words, defendants conspired to cause the PCAOB’s inspection results, although accurate, to paint a rosier picture of the integrity and quality of KPMG audits,” he said. “Thus the allegations in Count One are sufficient ‘to allege a crime within the terms of the applicable statute.’”

A sixth participant in the alleged scheme, Brian Sweet, a former PCAOB associate director and former partner at KPMG, pled guilty to conspiracy and wire fraud charges shortly after he was arrested in January.

Sweet admitted that as he was leaving the PCAOB for a role with KPMG, he downloaded confidential inspection-related information that he provided to KPMG executives upon taking a position with the firm.

[Law360]

Image: iStock/MorelSO

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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]