Yesterday, the SEC filed charges against six CPAs, including former staffers at the PCAOB and former partners of KPMG, arising out of “their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.” All have now been separated from KPMG or the PCAOB, and the U.S. Attorney’s Office for the SDNY has filed criminal charges. Here is the press release, which advises that the “SEC stands ready to work with issuers to ensure that collateral effects, if any, to issuers and, in particular, their shareholders are minimized.”

Essentially, the former PCAOB staffers are alleged to have leaked to KPMG the plans for PCAOB inspections of KPMG—“literally stealing the exam.” More specifically, while preparing to leave the PCAOB to join KPMG, an accountant downloaded confidential inspection-related materials that he thought would help him succeed at KPMG to reduce its audit deficiencies. After he left, he was aided in gaining access to confidential PCAOB materials by two other PCAOB staffers, who also later joined or sought employment at KPMG. Several high-level former KPMG partners were alleged to have encouraged the conduct: according to the federal indictment, a former KPMG partner told one of the former PCAOB staffers who had joined KPMG to remember where his “paycheck came from and be loyal to KPMG.” The leaked information enabled KPMG “to analyze and revise audit workpapers in an effort to avoid negative findings by the PCAOB.” Apparently, they reviewed the workpapers for at least seven entities they were told the PCAOB would inspect.

In a statement, SEC Chair Jay Clayton characterized the conduct as “disturbing.” However, he attempted to ease the concerns of issuers and others about their ability to continue to rely on KPMG audits, including audit reports filed with the SEC:

“In matters of this type, I am also concerned about potential adverse collateral effects, including on our Main Street investors. Based on discussions with the SEC staff, I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports. I do not expect that these actions will adversely affect the orderly flow of financial information to investors and the U.S. capital markets, including the filing of audited financial statements with the Commission.”

According to the FT, Steven Peikin, co-director of Enforcement, indicated that “investigations were continuing to identify all the audits affected but said investors could continue to rely on KPMG’s work. ‘The PCAOB can find deficiencies in its inspection process but that doesn’t mean the audits aren’t of sufficient quality and can’t be relied on,’ he said.” The SEC is continuing to monitor.