The first prison sentence was handed out today in Manhattan federal court to one of the five former KPMG executives indicted in a scheme to steal confidential audit inspection information from the PCAOB.
Cynthia Holder, a former PCAOB inspections leader who later worked as an executive director at KPMG, was sentenced to eight months in federal prison by U.S. District Judge J. Paul Oetken.
In addition, Holder, 53, of Houston, was sentenced to two years of supervised release. She will also have to pay restitution but the amount is TBD.
Oetken ordered Holder to report to prison on Oct. 15, according to Law360.
Holder pleaded guilty to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud on Oct. 16, 2018.
After Holder’s sentencing today, Geoffrey Berman, U.S. attorney for the Southern District of New York, issued the following statement:
“As a former employee of the PCAOB, Cynthia Holder understood the importance of the organization’s work: to protect investors and the public by overseeing the audits of public companies. But she undermined the Board’s and the SEC’s regulatory missions when she stole confidential inspection information and provided it to KPMG, her new employer. KPMG, in turn, used this confidential information to cheat on PCAOB inspections. Holder’s sentence should be an example to others that stealing confidential information and corrupting regulatory processes are crimes that this Office takes very seriously.”
Three former KPMG partners have also either pleaded guilty or were convicted for their roles in the cheating scandal. Thomas Whittle, national partner-in-charge of inspections at KPMG, pleaded guilty last Oct. 29 to wire fraud and conspiracy charges as part of a plea agreement with the government. He is expected to be sentenced on Sept. 13.
A Manhattan jury on March 11 convicted David Middendorf, former national managing partner for audit quality and professional practice at KPMG, of conspiracy to commit wire fraud and wire fraud, but he was acquitted of conspiracy to defraud the United States.
Ex-KPMG partner Brian Sweet pleaded guilty to conspiracy and wire fraud charges in January 2018. A fifth ex-KPMG executive, David Britt, co-leader of the firm’s Banking and Capital Markets Group, is expected to go on trial on Oct. 21.
Sweet and Whittle testified against Middendorf, whom they reported to. Holder did not testify.
In addition, Jeffrey Wada, a former PCAOB inspections leader, was found guilty of conspiracy to commit wire fraud and wire fraud during the same jury trial as Middendorf’s. He also was acquitted of conspiracy to defraud the U.S.
Holder, who was a PCAOB inspections leader before joining KPMG in 2015, used her position with the audit regulator to share confidential information about certain pending inspections with Sweet, who she knew from his time as an associate director at the PCAOB. She did this while simultaneously seeking employment with KPMG.
The firm was coming off really bad inspection reports from the PCAOB in 2013 and 2014. In KPMG’s 2013 inspection report, the firm had deficiencies in 46% of audits inspected by the PCAOB; in 2014’s report, the PCAOB found deficiencies in more than half (54%) of audits inspected. So, the KPMG executives put a plan in place to cheat the regulatory system.
Once she left the PCAOB to become an executive director at KPMG, Holder took some more inspection information out the door with her and gave it to Sweet, her new boss.
In March 2016, Wada provided Holder, his former colleague at the PCAOB, with confidential information on certain PCAOB 2016 inspection selections because he was pissed at being passed up for a promotion. Holder passed this info along to Sweet, who then gave it to Middendorf, Whittle, and others.
The KPMG partners then agreed to launch a stealth program to “re-review” the audits that had been selected. They covered their asses by giving KPMG engagement partners a false explanation for the re-reviews. The stealth re-review program allowed KPMG to double-check its audit work, strengthen its workpapers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.
In February 2017, Wada allegedly read Holder a “grocery list” of about 50 stock ticker symbols, which represented the full confidential list of KPMG clients to be inspected by the PCAOB that year. Authorities said Wada was again willing to leak secret inspection information to Holder because he again didn’t get promoted at the PCAOB and was hoping that giving Holder the info she requested could help him land a job at KPMG.
Once again, Holder shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and others. Middendorf, Whittle, and Sweet agreed to tell engagement partners about the list so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections.
But the scheme started to unravel in February 2017 when a KPMG partner in Chicago learned from Sweet that one of her audits was on the PCAOB inspection list and told her supervisor about it, who then told KPMG’s Office of General Counsel, which eventually launched an internal investigation.
Authorities said Holder and Sweet destroyed or fabricated evidence relevant to the investigation. For example, Holder deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a “burner phone” so her conversations couldn’t be monitored. Sweet had burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG investigators.
Sweet, Holder, Middendorf, Whittle, Britt, and Scott Marcello, a partner and the head of the KPMG’s audit practice, were fired in April 2017. Unlike the other five, Marcello was not indicted.
The SEC announced a settlement with KPMG on June 17 in which the firm will pay a $50 million fine and take “significant remedial actions” to improve its ethics and integrity, not only because of the PCAOB cheating scandal, but also because several KPMG auditors, at all levels of seniority, were found to have cheated on internal training exams by improperly sharing answers and manipulating test results.