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KPMG Cheating Pervasive, SEC Says in $50 Million Settlement (2)

June 17, 2019, 4:29 PMUpdated: June 17, 2019, 10:50 PM

At least two KPMG LLP audit partners implicated in a scheme to circumvent internal training tests by sharing or receiving test answers are no longer with the firm, according to charges outlined in a $50 million settlement order with the SEC.

The June 17 order describes wide-scale cheating on routine training intended to assess auditors’ professional knowledge in addition to extra training required by an unrelated 2017 Securities and Exchange Commission order at one of the largest accounting firms in the U.S.

“This cheating was extensive,” said Steven Peikin, co-director of the SEC’s Enforcement Division. “While many of those who cheated on exams did so only once, others sent or received answers to multiple exams. KPMG auditors at all levels including engagement partners were involved.”

KPMG also admitted as part of the settlement that former staff members conspired to cheat on the firm’s annual regulatory inspection. That cheating scandal has tarnished the firm’s reputation and laid bare its struggles to comply with U.S. audit standards.

The firm agreed to hire an independent consultant to oversee its internal investigation plus a review of its ethics and integrity processes and controls.

“We have learned important lessons through this experience and we are a stronger firm as a result of the actions we are taking to strengthen our culture, our governance and our compliance program. As we move forward, we are committed to delivering the highest quality and fulfilling our important role in the capital markets,” a KPMG spokesperson said in a statement to Bloomberg Tax.

Cheating on the Public Company Accounting Oversight Board regulatory inspection and the internal training violated the basic requirement that auditors act with integrity. Both involved KPMG staff attempting to compromise efforts to evaluate their performance over a period of several years, Peikin said.

KPMG informed the SEC of the newest revelations of cheating late last year, he said.

Identifying Cheaters

The firm started its own internal investigation and has begun taking disciplinary action against partners and other auditors as a result, according to the order.

The order describes auditors who manipulated online testing to lower the score required to pass—in some cases changing the minimum pass rate to as low as 25 percent.

They shared images of their answers via email or printed them out to hand to colleagues. Partners shared test answers with and also received them from subordinates, the order states.

Peikin said the SEC probe continues, but he declined to say whether charges would be brought against any additional auditors.

The order requires KPMG to identify which auditors may have cheated on the training tests, the extent of their involvement and to recommend “employment actions or other remedial steps.” The firm must also provide supplemental ethics and integrity training to all audit staff, among other steps.

KPMG has made sweeping changes to its audit practice since it confessed in early 2017 that staff knew in advance which audits would be reviewed as part of its annual PCAOB inspection and altered work papers in order to improve the outcome.

Among the changes, the firm has replaced four leaders at the top of the audit practice and added two independent directors to the firm’s governing board.

Six former KPMG and PCAOB staff members were charged in federal court for their role in the inspection scheme. Three have pleaded guilty, two were found guilty, and a sixth is awaiting trial.

The fresh allegations will renew questions about whether KMPG staff are trustworthy and whether the firm provides reliable audits of public company financial statements, said Jon Baumunk, who teaches accounting ethics at San Diego State University.

It is possible that the independent consultant could uncover more ethical lapses and uncovers facts not previously known to the firm, Baumunk said. But how KPMG responds and the actions it takes will be critical to regaining public confidence.

“The way I think KPMG can restore the trust that it’s lost here is by making this investigation as transparent as possible,” Baumunk said. “The important thing is to make sure that the public knows what’s happened and how it’s been addressed.”

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Steven Marcy at smarcy@bloombergtax.com