Just when KPMG thought maybe everyone had forgotten about that whole cheating scandal debacle, the SEC announced Monday it settled charges with three more dirty cheaters who once called the firm home.
The Securities and Exchange Commission today announced settled charges against three former KPMG LLP audit partners for improperly sharing answers to internal training exams and for subsequent wrongdoing during an investigation of exam sharing misconduct at the firm. The SEC previously charged KPMG with violations concerning the exam sharing misconduct, as well as for altering past audit work after receiving stolen information about inspections that would be conducted by the PCAOB.
It’s been a while since we last discussed this and everyone has been fairly busy with that whole end-of-the-world thing so let’s catch you up briefly just in case. If you recall, there was a time when cheating ran rampant at KPMG. Not only did they tap a PCAOB insider to try and get forbidden information on audit inspections and then revised related workpapers in hopes of keeping the PCAOB off their asses over shoddy audit work but — and this is the part we’re going to talk about in a minute — at that same time the firm was also cheating on their own internal training courses “intended to test whether [auditors] understood a variety of accounting principles and other topics of importance.” So basically in terms of cutting corners, KPMG was operating a perfect circle. Hence why they were fined $50 million by the SEC last June.
The internal cheating is particularly bad because, well, it was just so profoundly bad. As laid out by the June 2019 SEC cease-and-desist order:
This misconduct took a variety of forms. KPMG audit professionals shared exam answers with one another. A number of audit partners gave exam answers to other partners, and a number also sent answers to and solicited answers from their subordinates. In addition, for a period of time up to November 2015, certain audit professionals made unauthorized changes to KPMG’s server instructions that allowed them to manually select the scores necessary to pass the tests, which they often lowered to the point of passing exams with less than 25 percent of the questions answered correctly. The exams related to a variety of subjects that were relevant to the test-takers’ audit practices, and included additional training required by a 2017 Commission Order after the Commission found that KPMG engaged in improper professional conduct and had caused a client’s reporting violations.
Now that you’re caught up, let’s get back to the SEC’s announcement yesterday. According to the SEC orders, former KPMG audit partners Timothy Daly, Michael Bellach, and John Donovan each engaged in misconduct in connection with exams KPMG administered to test whether its audit professionals understood certain accounting and auditing principles.
The SEC says that in October 2018, at Daly’s request, Bellach texted Daly images of the questions and answers to a training exam. Once KPMG opened an investigation to sniff out possible cheating at the firm, Daly deleted the texts and lied about having received any answers to the training exams. Daly also “encouraged” Bellach to delete the texts on his end, which he did.
As for Mr. Donovan, between April and September 2018 he shared training exam answers with his team three times. He didn’t cop to this, of course, and told firm investigators he had not sent, received, or shared answers (turns out he did all three).
“Audit professionals play a critical role in the integrity of the financial reporting process and the protection of investors,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “These actions reflect our commitment to hold these gatekeepers responsible for breaches of their professional obligations.”
The SEC’s orders find that the former audit partners’ conduct violated a PCAOB Rule requiring them to maintain integrity in the performance of a professional service. Without admitting or denying the findings, Daly, Bellach, and Donovan agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, with the right to apply for reinstatement after three years, two years, and one year, respectively.
In a statement to Going Concern, a KPMG spokesperson told us: “The actions against individuals who were separated from our firm more than a year ago was an expected development following the firm’s settlement with the SEC last June. We are a stronger firm as a result of the actions we are taking to strengthen our culture, governance and compliance program. We are committed to delivering the highest quality professional services and fulfilling our important role in the capital markets.”
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