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December 9, 2022

The SEC is Not Pleased With KPMG’s Independence

Oh man. It's been a pretty crappy week for KPMG except for that whole Phil Mickelson sponsorship renewal… hopefully that will make up for this:

The Securities and Exchange Commission today charged public accounting firm KPMG with violating rules that require auditors to remain independent from the public companies they’re auditing to ensure they maintain their objectivity and impartiality. 

The SEC issued a separate report about the scope of the independence rules, cautioning audit firms that they’re not permitted to loan their staff to audit clients in a manner that results in the staff acting as employees of those companies.

An SEC investigation found that KPMG broke auditor independence rules by providing prohibited non-audit services such as bookkeeping and expert services to affiliates of companies whose books they were auditing.  Some KPMG personnel also owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules.

KPMG agreed to pay $8.2 million to settle the SEC’s charges.

Though not specifically mentioned, Francine tweeted earlier that this sanction comes as a result of the GE staff loaning story she wrote.

The SEC mentions three clients, though obviously not by name:

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office.  “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”

According to the SEC’s order instituting settled administrative proceedings, KPMG repeatedly represented in audit reports that it was “independent” despite providing services to three audit clients that impaired KPMG’s independence.  The violations occurred at various times from 2007 to 2011.

According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client.  KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client.  In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client.  KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client.  These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934.

See our earlier reporting on the tails of Francine's report here.

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