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KPMG Heads to Court Next Week to Defend Itself for Being KPMG

Merrimack College in North Andover, MA, is trying to get some of that Klynveld money, alleging in a lawsuit that KPMG committed professional malpractice, breach of contract, negligence, and negligent misrepresentation.

From Courtroom View Network:

Accounting giant KPMG heads to trial next week in Massachusetts state court in a malpractice lawsuit filed by Merrimack College over KPMG’s supposed failure to catch fraudulent activity in its financial aid office.

Merrimack accuses KPMG of negligence, claiming audits performed from 1998 to 2004 should have detected misconduct by the school’s former director of financial aid, that Merrimack claims eventually cost the private Catholic college $6 million.

KPMG denies the allegations, arguing that Merrimack should not be able to seek monetary damages for illegal actions carried out by their own employee.

According to the lawsuit, Merrimack v. KPMG LLP, on several occasions KPMG noted issues with the college’s financial aid office, including delayed reconciliations, discrepancies between loan amounts recorded in the billing system and loan amounts recorded on the ledger, and Perkins loans disbursed without the required promissory notes.

The lawsuit also states:

KPMG also noted a lack of formal policies and procedures relating to the disbursement of grants and loans. KPMG reported these issues to Merrimack’s management and to its board of trustees.

OK, so far KPMG’s work doesn’t seem bad. Let’s see what the next sentence says:

However, for every fiscal year between 1998 and 2004, KPMG issued an unqualified opinion that Merrimack’s financial statements were free from material misrepresentation and also issued an opinion, based on its A-133 audits, that Merrimack was in material compliance with Federal program requirements.

Ah, there it is. KPMG auditors KPMGing all over themselves.

The case stems from a fraud scheme carried out by Merrimack’s former director of financial aid, Christine Mordach. The lawsuit states that Mordach “regularly replaced grants and scholarships that had previously been awarded to students with Perkins loans, often without the students’ knowledge or consent and in some cases creating false paperwork with false names and false Social Security numbers.”

One consequence of Mordach’s fraud was that it made the financial aid office’s budget appear more balanced, because grants and scholarships reduce tuition revenue, whereas Perkins loans, because they are expected to be repaid in the future, are recorded as an asset on Merrimack’s balance sheet. Another consequence of her fraud was that many students ended up shouldering student debt they had not sought and did not even know they had. Mordach did not tell anyone else at Merrimack that she was issuing fraudulent loans.

Mordach’s fraud went unnoticed until 2011, when the college instituted a new system for keeping track of its student borrowers, and many students started getting billing statements for Perkins loans they never knew they had.

In 2014, Mordach pleaded guilty to mail and wire fraud charges for mishandling student loans and falsifying records. She was sentenced to a year in prison and was ordered to pay more than $1.5 million in restitution to former Merrimack students.

Merrimack sued KPMG later that year, claiming that KPMG should’ve detected Mordach’s fraud. A trial court judge initially sided with KPMG, granting the firm’s motion for summary judgment. However last October, the Massachusetts Supreme Judicial Court overturned that decision, ruling that Merrimack can seek damages from KPMG because Mordach was not part of the school’s senior management, according to CVN.

Massachusetts-based public accounting firms might want to keep tabs of how this trial ends because they could potentially find themselves in a similar situation as KPMG.

According to CVN:

The decision marks the first time the Massachusetts’ high court weighed in on the issue of whether a client can sue its accounting firm over wrongdoing that it was supposedly involved in, thus teeing up a first-of-its-kind jury trial in the state with potentially industry-wide implications.

Or, accounting firms, you could just not be bad at auditing. That would be good too.