KPMG LLP’s former national managing partner for audit quality and a former staff member of the U.S. audit regulator were found guilty of multiple counts of fraud.
David Middendorf, the former firm leader, and Jeffery Wada, a Public Company Accounting Oversight Board inspections leader, were each convicted March 11 of wire fraud and conspiracy to commit wire fraud. But the Manhattan jury returned a split verdict, acquitting each of conspiracy to defraud the U.S. government.
Wada faces up to 60 years in prison and Middendorf faces up to 80 years, according to the U.S. Attorney’s Office for the Southern District of New York.
Prosecutors said the men tried to game the system instead of playing by the rules. The scheme tarnished the reputations of both KPMG and the PCAOB, which was created after the Enron Corp. and WorldCom Inc. accounting scandals to restore trust in financial reporting.
Middendorf, of Marietta, Ga., was accused of recruiting PCAOB insiders, including Wada, to funnel information to KPMG about which audits would be inspected in 2016. The list of audits slated for inspection were re-reviewed so the firm could double-check its work and in some cases performed additional audit work.
Wada, of Tustin, Calif., was an inspections leader at the PCAOB from 2004 to 2017 and was accused of transferring confidential information in an attempt to win a job at KPMG.
Another Trial to Come
Three others also charged in connection with the case have pleaded guilty. A fourth, David Britt, was a former KPMG partner who helped lead the firm’s banking and capital markets group and is slated to go on trial this fall.
Despite their efforts, the PCAOB still found problems in the tainted KPMG audits of financial services companies, the PCAOB’s 2016 inspection report of the firm showed. Since KPMG uncovered the plot and turned it over to regulators, the firm has restructured its audit practice and internal oversight for audit, including bringing in new leadership.
The PCAOB has added a chief risk officer to its staff tasked with ensuring the integrity of the regulator’s oversight duties.
The case is U.S. v. Middendorf, S.D.N.Y., No. 18-cr-36, 3/11/19.