On January 24, the SEC announced the filing and simultaneous settlement of an administrative enforcement action charging KPMG with violating the Commission’s independence rules in connection with three public company audit clients. In settling the case, KPMG agreed to pay $8.2 million in penalties, fee disgorgement, and interest. The firm also agreed to enhance its training and compliance monitoring regarding independence and to engage an independent consultant to review the firm’s efforts. The SEC also issued a Report of Investigation discussing the application of the independence rules to situations in which an audit firm loans professional staff members to an audit client.
In the enforcement action, the SEC found that, between 2007 and 2011, KPMG provided prohibited non-audit services, such as restructuring, corporate finance, payroll, bookkeeping and expert services, to affiliates of three public companies that it audited. In one of these situations, KPMG provided non-audit services to a financial services firm. The controlling general partner of that firm was acquired by an exiting audit client. KPMG apparently failed to recognize the independence implications of the acquisition. Further complicating matters, six KPMG partners in the audit “chain or command”, and two partners in the office that conducted the audit, owned stock in the financial services firm. In another situation, KPMG hired a person who had recently retired from a senior tax position at an affiliate of an audit client and loaned the retiree back to the affiliate to perform the same work he had done as an employee before retiring. That work involved acting as a “manager, employee, and advocate” for the affiliate.
The separate Report of Investigation discusses KPMG’s practice of loaning tax professionals to audit clients to assist with tax compliance. During these staff loans, the KPMG personnel perform the same work as client employees, work at the client’s offices, and are supervised and evaluated by client managers. The SEC’s auditor independence rules, among other things, prohibit auditors from acting “temporarily or permanently, as a director, officer, or employee of an audit client, or performing any decision-making, supervisory, or ongoing monitoring
function for the audit client.” The Report states that “an auditor may not provide otherwise permissible non-audit services (such as permissible tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules (such as the prohibition against acting as an employee of the audit client).” The Report adds that both “accountants and audit committees [are required] to carefully consider whether the relationship or service in question would cause the accounting firm’s professionals to resemble, in appearance and function, even on a temporary basis, the employees of the audit client.” While the Report reaches no explicit conclusions regarding KPMG’s staff loans, it states that “[l]oaned staff arrangements, by their nature, appear inconsistent with the prohibition against acting as an employee.”
Comment: Audit committees should scrutinize the independence implications of any non-audit services the auditor provides to either the company or its affiliates. Special attention should be devoted to any loaned staff arrangements. Particular care should be taken in the acquisition context to make sure that the company’s auditor is not providing prohibited services to any new affiliate. As the Report of Investigation points out, when an audit report issued by an auditor that is not independent is filed with the SEC, both the company and the auditor commit a violation of the securities laws