The trial of ex-KPMG partner David Middendorf keeps rolling along, as prosecutors on Feb. 19 called on one of the major players in the scheme to steal secret audit inspection information from the Public Company Accounting Oversight Board to testify against Middendorf.
Brian Sweet, a former associate director at the PCAOB who later became a partner at KPMG, told a Manhattan jury that Middendorf, KPMG’s national managing partner for audit quality and professional practice, and other high-ranking executives at the firm pressed him for confidential PCAOB inspection information pretty much right after he joined KPMG in May 2015.
Remember that KPMG was coming off of two god-awful inspection reports from the PCAOB. 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, KPMG audit bigwigs were looking for some kind of advantage.
As Caleb reported in January 2018, during Sweet’s first week on the job, Middendorf asked him at lunch “whether a particular issuer would be the target of a PCAOB inspection; and […] more generally, which KPMG engagements would be subject to inspection that year,” according to the indictment against Middendorf, Sweet, and three others who were charged for their roles in the scandal.
The indictment also said, “Sweet […] copied [PCAOB] documents, as well as other confidential documents, from Sweet’s PCAOB computer to a personal hard drive.” These included “internal PCAOB manuals and guidance; […] comment forms issued in connection with inspections on which Sweet had worked; [and] a list of KPMG engagements to be inspected by the PCAOB in 2015.”
Law360 reported that Sweet, who pled guilty to conspiracy and wire fraud charges in early January 2018 and is cooperating with the government, testified Tuesday that at that lunch with Middendorf, he asked Sweet whether PCAOB inspectors would be reviewing the firm’s audit of Wells Fargo at a meeting the regulators had requested in San Francisco:
“I remember kind of shrugging my shoulders and indicating, ‘Well, could it be anyone else?’” Sweet said.
“Why didn’t you just say yes?” asked Amanda Kramer, an assistant U.S. attorney.
“Directly answering ‘yes’ was a very clear violation of the PCAOB ethics code,” Sweet said. “I wanted to answer the question … but do it in such a way that might give me an out.”
“How did [Middendorf] respond?” Kramer asked.
“I remember him getting very animated and slapping the table and saying, ‘I knew it!’” Sweet told the jury.
Caleb also reported that according to the indictment, Middendorf spoke to Sweet toward the end of his first week with KPMG and told him “to remember where Sweet’s paycheck came from and to be loyal to KPMG.” Sweet confirmed this on the stand yesterday, according to Law360:
[Sweet’s] supervisor, Thomas Whittle, the head of the office’s Inspections Group, and Whittle’s boss Middendorf reminded him who signed his paychecks and encouraged him from Day 1 to share the PCAOB’s secret inspection plans, as well as more mundane insights from his nine years as a regulator.
Middendorf and co-defendant Jeffrey Wada, a former PCAOB employee, were both charged with conspiracy and wire fraud in connection with the scandal. They are pleading not guilty to both charges.
Sweet also told the jury that Middendorf and Whittle encouraged him to keep in touch with former colleagues at the PCAOB, like Cynthia Holder, who at that time was a PCAOB inspections leader before joining KPMG as executive director in August 2015.
Authorities have said that Holder used her position with the PCAOB to share confidential information about certain pending inspections with Sweet, who would later become her boss at KPMG. She did this while simultaneously seeking employment with the accounting firm.
Sweet said Tuesday that some of the internal PCAOB documents and tips about its inspection plans he received from Holder were given to her by Wada.
After joining the Big 4 firm, authorities said Holder received confidential PCAOB information on audit selections for KPMG from Wada in both 2016 and 2017, which she would share with Sweet, who then passed that info along to Middendorf, Whittle, and David Britt, co-leader of KPMG’s Banking and Capital Markets Group, so extra attention would be placed on these audits before they were inspected by the PCAOB.
Authorities said that Wada was willing to share inspection information with Holder because he also wanted a job at KPMG.
The six conspirators was indicted by federal authorities in late January 2018 and accused of participating in a scheme to defraud the PCAOB and the U.S. Securities and Exchange Commission.
On Oct. 16, 2018, Holder pleaded guilty in Manhattan federal court to one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud, and two counts of wire fraud. She is expected to be sentenced on April 5 and could face up to 20 years in prison.
Nearly two weeks later, Whittle pleaded guilty to wire fraud and conspiracy charges, pursuant to a plea agreement with the government, in Manhattan federal court. He is expected to be sentenced on Sept. 13.
Britt’s trial will reportedly begin in October.
Middendorf’s and Wada’s trial is scheduled to resume today.