Former KPMG Managing Partner Sentenced to a Year and a Day in Prison for PCAOB Cheating Scandal

By:
Chris Gaetano
Published Date:
Sep 12, 2019
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David Middendorf, a former managing partner with KPMG, was sentenced to 366 days in prison for his role in a scheme that saw the firm coordinating with former and current staffers at the Public Company Accounting Oversight Board (PCAOB) to get information about what its inspectors would be focusing on during its routine examinations, according to Crain's New York. He was convicted of wire fraud and conspiracy to commit wire fraud by a jury in federal court in Manhattan this past March, according to Reuters.

The scandal involved a former PCAOB inspector, Brian Sweet (who has already pleaded guilty to conspiracy charges), taking sensitive inspection-related documents with him to use at his new job at KPMG. While there, he asked a former colleague, Cynthia Holder (who has also been charged in relation to the scheme), for more confidential materials related to an upcoming inspection of a KPMG client. Holder was apparently angling for a job there at the time. Once she secured the position, the two reached out to another inspector there, Jeffrey Wada (also charged), who sent further confidential information about a planned PCAOB inspection of KPMG; like Holder before him, Wada had been looking for a job. 

Most of the leaked information concerned which audit engagements the PCAOB planned to inspect, the criteria it was using to select engagements for inspection, and on what these inspections would focus. The SEC noted that this information was particularly valuable to KPMG, as it had experienced a high rate of audit deficiency findings and had made improving its inspection results a priority. 

Middledorf, along with two audit partners who've also been charged, had known about these leaks and, according to the SEC, encouraged Sweet to share the confidential information with them, with other KPMG colleagues, and with an outside contractor. The criminal indictment said that during Sweet's first week at KPMG they asked, knowing his background with the PCAOB, whether there were any plans to inspect a client of theirs. While Sweet demurred at first, only vague alluding to future inspection plans, Middendorf is said to have later told Sweet to "remember where [his] paycheck came from" and "to be loyal to KPMG." Sweet was asked about the plans again a few days later, this time by Whittle, who implied that his position within the firm was not secure. Sweet showed Whittle the inspection list later that day. The audit partners used this information to analyze and review audit workpapers relevant to the inspection and suggested revisions to avoid possible findings of deficiencies by the PCAOB. 

The scheme began to fall apart when the partners began using the information to inform several engagement partners that their work was about to get inspected. One partner reported this tip-off to their supervisor who, in turn, reported the matter further up the chain until, on Feb. 13, 2017, it had reached KPMG's general counsel. The defendants, according to the indictment, scrambled to cover their tracks: they provided the general counsel's office with an edited list made to fit the lies they are said to have told the lawyers, deleted incriminating information, bought burner phones once they were aware they were being monitored, and used code to communicate. 

Middendorf remained unrepentant even upon his sentencing, saying that his actions were more a mistake than a crime. While the judge disagreed, saying that these crimes were serious, he also noted that Middendorf did not directly profit from his crimes and isn't likely to be a repeat offender, and so the judge imposed a more lenient sentence than the 37 to 46 months suggested by federal guidelines. Middendorf's attorneys still plan to appeal the sentence.  

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