September 29, 2022

Setback in Court For Ex-KPMG Execs, As Judge Refuses to Toss Out Counts in PCAOB Inspection Info Leak Case

As Mick Jagger sings, “You can’t always get what you want.”

What three former top KPMG executives and two former employees of the Public Company Accounting Oversight Board—who are accused of participating in a scheme in which confidential PCAOB inspection information was shared with the accounting firm—wanted was for their conspiracy and wire fraud counts dismissed in court. But a New York federal judge denied their request on July 17, finding the government’s allegations to be sufficient at this point, according to a Law360 report.

The two ex-PCAOB inspectors, Cynthia Holder, who wound up eventually working at KPMG, and Jeffrey Wada, are accused of illegally leaking the confidential information about planned KPMG inspections to the three accounting firm executives, who allegedly encouraged the malfeasance. At the time, KPMG had a high rate of audit deficiencies, and the executives allegedly wanted the information to help the firm improve its inspection results.

Holder and Wada were each indicted in January on charges of conspiracy to defraud, conspiracy to commit wire fraud, and two counts of wire fraud.

The three former KPMG executives—David Middendorf, national managing partner for audit quality and professional practice; Thomas Whittle, national partner-in-charge for inspections; and David Britt, co-leader of the firm’s Banking and Capital Markets Group—face similar conspiracy charges as Holder and Wada, as well as three counts of wire fraud.

According to the Law360 report, the defendants argued that the government failed to allege they agreed to use “deceitful or dishonest means” to defraud the government, but U.S. District Judge J. Paul Oetken shot that down:

“This court is bound to take the Second Circuit at its word: a conspiracy to defraud the government includes any scheme ‘to obstruct, through deceit, trickery, or dishonest means, the [government’s] lawful function,’” he said. “The Indictment alleges as much.”

While the government doesn’t allege that the defendants made the PCAOB report inaccurate information to the U.S. Securities and Exchange Commission, it does allege that defendants stole confidential PCAOB information with the goal of fraudulently impact the outcomes of the PCAOB inspections, which are used by the SEC, the judge said.

“In other words, defendants conspired to cause the PCAOB’s inspection results, although accurate, to paint a rosier picture of the integrity and quality of KPMG audits,” he said. “Thus the allegations in Count One are sufficient ‘to allege a crime within the terms of the applicable statute.’”

A sixth participant in the alleged scheme, Brian Sweet, a former PCAOB associate director and former partner at KPMG, pled guilty to conspiracy and wire fraud charges shortly after he was arrested in January.

Sweet admitted that as he was leaving the PCAOB for a role with KPMG, he downloaded confidential inspection-related information that he provided to KPMG executives upon taking a position with the firm.


Image: iStock/MorelSO

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