TheCorporateCounsel.net

I am still trying to wrap my head around last week’s allegations against KPMG’s former partners & employees involving the misappropriation of PCAOB inspection data. “Shocking” doesn’t seem to be too strong a word here.

This case doesn’t involve ambiguous conduct that might just raise some eyebrows about the “revolving door.” No, this time, the revolving door smacked us right in the mouth.  As the SEC’s Co-Head of Enforcement Steve Peikin put it, what’s alleged to have gone down here was equivalent to “stealing the exam.”

The SEC’s press release and the DOJ’s indictment make for some tough reading.  In a separate statement, SEC Chair Jay Clayton went to great lengths to reassure the market that the scandal didn’t implicate the reliability of KPMG’s audits.  As this MarketWatch.com article points out, some prominent commenters aren’t so sure:

Former SEC Chief Accountant Lynn Turner is not convinced KPMG’s audits should still be relied upon. “This episode raises a serious question about the culture of the KPMG firm. Under the circumstances, how can the SEC expect investors to trust KPMG’s audits?” asked Turner.

The MarketWatch article says that the indictment suggests 5 other KPMG partners and an outside consultant “either knew – or chose to ignore – the illegal source of the information.”  That isn’t very reassuring either.

How Did KPMG Dodge the Bullet?

Since a number of pretty senior people were implicated in this situation, some have asked why KPMG wasn’t indicted?  The pains that SEC Chair Clayton took to reassure the market about the continued reliability of KPMG’s audits hints at one likely reason – the collateral damage that can result from charges against a major accounting firm.

Another reason KPMG may dodge the criminal bullet here is the way it handled the situation once it was brought to management’s attention by a whistleblower. As detailed in this NYT DealBook article from last April, KPMG promptly retained outside counsel to investigate the matter, fired the individuals involved, self-reported, and cooperated with regulators.

Given KPMG’s previous legal troubles, it probably didn’t take the firm’s lawyers long to conclude that it was dealing with a potentially existential threat – and had no alternative but aggressive efforts to cooperate with authorities.

Tomorrow’s Webcast: “Audit Committees in Action – The Latest Developments” 

Tune in tomorrow for the webcast – “Audit Committees in Action: The Latest Developments” to hear E&Y’s Josh Jones, Deloitte’s Consuelo Hitchcock, and Gibson Dunn’s Mike Scanlon discuss how to cope with the ever-growing demands on audit committees – including those arising out of the new revenue recognition standards and a host of other SEC, FASB & PCAOB requirements.

– John Jenkins