Former KPMG Partners, PCAOB Staffers, Charged with Conspiracy

By:
Chris Gaetano
Published Date:
Jan 23, 2018
Gavel

Three former partners at KPMG, along with two former PCAOB staff members, were charged with conspiracy and wire fraud concerning a scheme involving the use of confidential PCAOB documents to improve the firm's inspection results, according to the Wall Street Journal. The defendants include David Middendorf, a former KPMG national managing partner, Thomas Whittle and David Britt, both former audit partners, Cynthia Holder, a former PCAOB inspector who later went on to join KPMG, Jeffrey Wada, a former PCAOB inspector, and Brian Sweet, another former PCAOB inspector (Sweet has already pleaded guilty to conspiracy). 

The SEC orders on the matter said that Sweet, on his last day of working at the PCAOB in 2015, took sensitive inspection-related documents with him to use in his new job at KPMG's Department of Professional Practice. While at KPMG he is said to have further asked Holder for other confidential materials, which related to an upcoming inspection of a KPMG client (the SEC said that Holder was looking for a job at KPMG during this time). Other leaks happened in 2016 and 2017, this time from Wada, who sent Holder (who at this point was working for KPMG) confidential information about a planned PCAOB inspection of KPMG. The SEC noted that Wada, like Holder before him, was seeking employment with the Big Four firm. 

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. 

The KPMG partners, Middledorf, Whittle and Britt, 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. 

Manhattan U.S. Attorney Geoffrey S. Berman said:  “These defendants were each meant to be the watchmen of our financial system.  The defendants who formerly worked for KPMG were vested with the responsibility to audit publicly filed financial statements and issue audit opinions relied upon by the investing public.  The defendants who formerly worked for the PCAOB were supposed to help ensure the quality of the work behind those audits.  But, as alleged, these defendants chose to cheat the system and to undermine the safeguards put in place to protect investors.  We will work tirelessly with our law enforcement partners to root out corruption like this wherever it is found.”

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