Being passed up for a promotion can cause a person to do really dumb things in a fit of anger. For now-former PCAOB inspections leader Jeffrey Wada, the really dumb thing he did was illegally tip off executives at KPMG—not once but twice—about which KPMG audits the PCAOB would be reviewing so the firm could improve its grade in regulatory inspections. And he did this hoping to land a job at KPMG while sticking it to the PCAOB.
Because of doing this really dumb thing, Wada will be spending time in a federal jail.
He was sentenced today to nine months in prison by U.S. District Judge J. Paul Oetken, seven months to the day Wada and former KPMG audit partner David Middendorf were convicted by a Manhattan jury of conspiracy to commit wire fraud and wire fraud charges.
In addition, Wada, 44, was sentenced to three years of supervised release.
In a statement following Wada’s sentencing, Geoffrey Berman, U.S. attorney for the Southern District of New York, said:
“Jeffrey Wada violated not just the terms of his employment with the PCAOB but also the law when he provided confidential information about upcoming audit reviews to co-conspirators at KPMG. Wada hoped to secure a job at KPMG. What he got was a nine-month prison sentence.”
So, of the six people who were indicted in January 2018 for their roles in the scheme, three have been sentenced to prison thus far.
Cynthia Holder, Wada’s former colleague at the PCAOB who later worked as an executive director at KPMG, was sentenced to eight months in federal prison on Aug. 9. She was ordered to report to prison on Oct. 15. Holder had 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.
Middendorf, former national managing partner for audit quality and professional practice at KPMG, was sentenced on Sept. 11 to one year and one day in federal prison.
The other three—David Britt, former co-leader of KPMG’s Banking and Capital Markets Group; Thomas Whittle, former national partner-in-charge of inspections at KPMG; and former KPMG partner Brian Sweet—have pleaded guilty and are awaiting sentencing.
The press release announcing Wada’s sentencing summarizes his indiscretions nicely:
WADA was an Inspections Leader at the PCAOB, who was obligated to keep confidential the PCAOB’s nonpublic information. WADA joined the conspiracy in the fall of 2015 and began passing confidential information to KPMG. In March 2016, WADA provided Cynthia Holder, a KPMG employee, with confidential information on certain of the PCAOB’s 2016 inspection selections. Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to KPMG executives David Middendorf, Thomas Whittle, and David Britt. Middendorf, Whittle, Sweet, and Britt then agreed to launch a stealth program to “re-review” the audits that had been selected, and agreed to keep their stealth re-reviews within their “circle of trust.” In order to cover up their illicit conduct, other KPMG engagement partners were given a false explanation for the re-reviews. The stealth re-review program allowed KPMG to strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.
In January 2017, WADA, who had been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder, referring to it in a voicemail as the “grocery list.” At the same time, WADA provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG. Sweet shared the preliminary inspection selections provided by WADA with Whittle, who in turn shared it with Middendorf, who approved its use to improve the audits on the list.
In February 2017, WADA texted Holder saying “I have the grocery list. . . . All the things you’ll need for the year.” WADA then spoke to Holder and provided her with the full confidential 2017 final inspection selections. Holder again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and Britt, so that it could be acted upon to improve the audits on the list.
In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter to her supervisor. The matter was ultimately reported to KPMG’s Office of General Counsel.
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.
