Merrimack College suffered two defeats on/in court yesterday. Its men’s basketball team got blown out by the Providence Friars 93-56. And it lost a case in a courtroom in Massachusetts to KPMG, although the jury found that KPMG wasn’t completely blameless in the student loan fraud case.
A Boston jury said negligence by KPMG was only 15% to blame for the failure to detect a Merrimack College financial aid official’s fraud.
After deliberating for a day and a half, the Boston jury returned with a verdict mostly in favor of the accounting giant, even though the jurors found that KPMG’s auditors had been negligent when conducting audits of the North Andover-based private college’s financial statements from 1998 to 2004 when Merrimack’s then-financial aid director, Christine Mordach, was perpetrating the fraud.
KPMG’s negligence was only 15% to blame for the fraud going undetected, however, and Merrimack bears the remaining 85% of the fault, according to the jury’s verdict.
Even though the jury found that Merrimack suffered $100,000 in damages, KPMG won’t owe the college anything, according to Law360:
[U]nder Massachusetts law, a plaintiff whose own negligence contributes to their injury can only recover damages if their share of the blame is less than that of the defendant.
Merrimack had filed a malpractice lawsuit against KPMG in 2014 claiming that audits performed from 1998 to 2004 should have detected Mordach’s misconduct.
The lawsuit stated 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.”
On several occasions, KPMG auditors pointed out 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, according to the lawsuit.
Auditors also discovered a lack of formal policies and procedures relating to the college’s disbursement of grants and loans, which was reported to Merrimack’s management and to its board of trustees.
However, for every fiscal year between 1998 and 2004, KPMG auditors 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, the lawsuit stated.
During the trial, which began on Oct. 28, the jury heard from accountant Simon Platt, founder of advisory firm StoneTurn, who said, after reviewing the annual audits KPMG conducted for the college from 1999 through 2004, that KPMG had failed to meet generally accepted auditing standards in several ways, including failing to apply professional skepticism.
“I believe that KPMG did not respond to the indicia of problems that they found in the course of their audit with sufficient skepticism, didn’t go beyond the explanation, didn’t say ‘Show me,’” he said.
Steve Caron, KPMG’s partner in charge of the school’s audits from 1999 to 2004, also took the stand during the trial and squarely put the blame for the fraud on the college, according to Law360.
Caron told the jury that during those years the auditors would meet twice a year with an audit committee consisting of members of the school’s board of directors to discuss their findings and to share any issues they had uncovered.
KPMG attorney George Salter of Hogan Lovells asked Caron if it was the school’s responsibility to address these issues, saying “it’s not KPMG’s responsibility to run Merrimack,” and Caron agreed.
Salter then ran Caron through the engagement letter KPMG had signed with the school, highlighting a portion in which it stated that Merrimack’s management acknowledges its responsibility for preventing and detecting fraud, and for adopting sound accounting policies and internal controls.
A former PwC partner, Lee Ann Leahy, who specialized in university and college audits, told the jury that based on her experience and her review of the KPMG auditors’ workpapers, as well as the testimony from the trial, her opinion was that KPMG has “planned and performed reasonable audit procedures from 1999 to 2004,” Law360 reported.
Mordach, who also testified during the trial, pleaded guilty in 2014 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.