Five persons were criminally charged in a federal court in New York City with engaging in a scheme to illicitly obtain confidential information from the PCAOB to benefit KPMG, a major accounting firm.
The individuals were charged with orchestrating a scheme to help KPMG obtain nonpublic information from the PCAOB regarding which prior KPMG audits of public companies the PCAOB would review during upcoming inspections in order to assess KPMG’s performance. The individuals were David Britt, Cynthia Holder, David Middendorf, Jeffrey Wada and Thomas Whittle. A sixth individual, Brian Sweet, pleaded guilty to conspiracy and wire fraud charges in connection with the same matter. All individuals, except for Mr. Wada, were KPMG employees during relevant times, while Ms. Holder, Mr. Sweet and Mr. Wada were all PCAOB employees at relevant times; Ms. Holder and Mr. Sweet joined KPMG as employees from the PCAOB.
All the individuals were also the subjects of administrative proceedings filed by the Securities and Exchange Commission. Mr. Sweet simultaneously settled his SEC action.
Generally, in both the criminal and civil matters, KPMG employees were claimed to have solicited and obtained the confidential information from the named former PCAOB employees either while they were employed at the PCAOB and/or after they joined KPMG.
According to the US Attorney’s Office in New York City, which oversaw the criminal charges, KPMG “fared poorly” in its PCAOB inspections for 2013 and 2014 and the SEC formally met with KPMG in 2016 “in light of concerns about audit quality work from KPMG’s poor PCAOB inspection results.” As a result, claimed the indictment against the non-settling defendants, KPMG engaged in numerous efforts to improve its PCAOB audit evaluations, including hiring former PCAOB employees. With information regarding pending audits, KPMG purportedly reviewed and augmented relevant work papers to help avoid deficiency findings by the PCAOB.
When the defendants’ actions began being investigated, Ms. Holder, Mr. Sweet and Mr. Wada attempted to cover up their activities, charged the indictment.
If convicted of charges against them, each of the non-settling defendants could be imprisoned up to 65 or 85 years as well as being subject to fines and other penalties. In connection with his SEC settlement, Mr. Sweet agreed never to appear or practice before the SEC as an accountant, among other penalties.
The PCAOB, established as part of the Sarbanes-Oxley Act of 2002, oversees the audits of public companies to protect the interests of investors, among other purposes. It endeavors to achieve its purpose through inspection of audits of public companies by registered public accounting firms. A version of PCAOB's inspection results is made public. (Click here for background regarding the PCAOB; click here for background regarding Sarbanes-Oxley.)
Culture and Ethics: As most know, for many years, I was Group General Counsel of Fimat and Newedge, a subsidiary of Société Générale. I will allow my effectiveness to be assessed by others, but one thing of which I am very proud is my nearly evangelical ongoing exhortation of the necessity of all employees to abide by a simple universal base-line compliance standard – the grandmother test. Quite simply, if you would be embarrassed to sit at breakfast with your 90-year-old grandmother when she picks up her morning tabloid and reads about your conduct on the front page, don’t do it! It’s simple, but it works – at least for most grandmothers!