Two former KPMG auditors who worked on the ill-fated audit of a not-for-profit college agreed to having their wrists slapped by the SEC for their roles in the school’s collapse:
The Securities and Exchange Commission today suspended two former KPMG auditors [Christopher Stanley and Jennifer Stewart] from practicing before the SEC in connection with settled charges against the two for improper professional conduct during an audit of the now defunct, not-for-profit College of New Rochelle. The SEC previously charged the college’s former controller with fraud in connection with the college’s fiscal year 2015 financial statements.
But before we get into what Stanley and Stewart did poorly, let’s take a look back at our Accountants Behaving Badly column on Sept. 2, 2019, where we mentioned a certain college controller being given a reservation at Club Fed:
Keith Borge, the former controller at the College of New Rochelle, was sentenced to three years in federal prison on Aug. 28 for doctoring the school’s financial records and hiding its debts, which eventually led to the college shutting its doors.
He was ordered to pay $25,000 in fines and will also have to pay restitution on charges of securities fraud and failure to pay payroll taxes.
Borge, 63, pleaded guilty in March to the charges, shortly after the college announced it would close this summer, done in by the debts after years of enrollment declines and financial instability.
His sentence will start on Oct. 11 and includes three years supervised release. The amount of restitution is currently at $13.2 million, but it’ll likely be significantly lowered or totally cleared after the college sells its assets.
In March 2019, the SEC charged Borge with “defrauding municipal securities investors by fraudulently concealing the college’s deteriorating finances.”
In a March 28 litigation release, the SEC said:
In recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college’s deteriorating financial condition from investors, the college’s former controller, Keith Borge, created false financial records, didn’t file payroll tax submissions, and didn’t assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations. Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Borge also falsely certified the accuracy of the college’s financial statements. The financial statements were published by Borge to an online repository in connection with the College’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds.
The SEC’s complaint, filed in federal district court in Manhattan, charges Borge with violating, and aiding and abetting violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Borge agreed to a partial settlement that would permanently enjoin him from future misconduct, with potential monetary sanctions to be determined at a later date. The partial settlement is subject to court approval.
According to the Federal Bureau of Prisons website, Borge is currently being held at the Residential Reentry Management facility in Kings County, NY, with a release date of April 30, 2022.
OK, back to our former Klynveldian auditors. The SEC accused Stanley, the engagement partner on the 2015 audit engagement, of approving and Stewart, the engagement manager, of authorizing “the issuance of an unmodified audit opinion on the college’s fiscal year 2015 financial statements, despite not having completed critical audit steps.”
The SEC continued:
As described in the orders, KPMG’s work on the audit had stalled because the college’s former controller had provided the audit team with inaccurate, incomplete, and contradictory information. On Nov. 30, 2015, the former controller and the college’s president informed Stanley and Stewart that the college needed KPMG to issue the audit report before the end of the day. That afternoon, despite the existence of numerous outstanding open items and unanswered questions, Stanley and Stewart decided to issue the audit report.
The SEC’s orders find that Stanley and Stewart violated Generally Accepted Auditing Standards by, among other things, failing to obtain sufficient appropriate audit evidence, properly prepare audit documentation, properly examine journal entries, adequately assess audit risk, and exercise due professional care and professional skepticism. The college’s fiscal year 2015 audited financial statements, which were submitted to the Municipal Securities Rulemaking Board pursuant to the college’s obligation to provide continuing disclosure to investors, fraudulently overstated the college’s net assets by $33.8 million.
Without admitting or denying the SEC’s allegations, Stanley and Stewart each agreed to be suspended from appearing or practicing before the SEC as an accountant. Stanley can apply for reinstatement after three years; Stewart after one year.
In addition, Stanley and Stewart also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until they are reinstated by the SEC.
Stanley, a CPA, began his career at KPMG in 2001 as an associate and was subsequently promoted to manager in 2004, managing director in 2014, and partner in 2015, according to the SEC. He resigned from the firm in March 2020.
Stewart, also a CPA, started her career at KPMG in 2008 as an associate and was subsequently promoted to senior associate in 2010, manager in 2013, and senior manager in 2015. Stewart also left KPMG last March.
Below are the disciplinary orders for both Stanley and Stewart: