KPMG is one of the "Big Four" accounting firms: that means that whenever a plan for a business or a public project has a box that says, "Make sure no one is cheating," it means that you hire KPMG or one of its rivals to come in and check the books and make sure that everything is on the level. If you can't trust the accounting firm, the whole thing falls apart.
You'll never guess what happened next.
For more than a year, regulators have known that KPMG employees had been stealing regulatory information and using it to cheat on inspections of its audits -- they'd steal the FEC's list of upcoming inspection targets and revise their work to make sure the inspections didn't find any flaws. The SEC was set to hand down a $50m fine.
Then, yesterday, the SEC announced that they'd found a second, even more disturbing pattern of cheating, one that went right to the top, with KPMG's most senior staff cheating on their integrity exams (!!), sharing answers in advance, and hacking the tests to lower the score needed to pass it (the tests were delivered online, and in the URL for the test was a variable that set the percentage needed for a passing grade: "MasteryScore=70" -- by lowering this value, cheaters could turn any number of right answers into a pass). Some auditors "passed" their ethics exams with a score of only 25%.
These exams tested auditors on their ethics, their expertise, and their mastery of the continuing education courses they were required to take to remain licensed to practice.
As Matt Kelly says, the scandal reveals "chronic, widespread and intentional illegal behavior by senior partners including some leading public company audits for the firm."
We've known that the Big Four auditors were rotten since the Carillion Scandal, but we continue to behave as though they can be trusted -- even though we know they can't be trusted. The thing is that every public project and every business plan has an "insert trust here" box that's shaped exactly like the Big Four firms, and that's made them both too big to fail and too big to jail.
KPMG has admitted that the accusations are true.
Five former KPMG officials — including its former national managing partner for audit quality and professional practice — and one former PCAOB official were charged last year in a case that alleged they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG. The SEC said the senior KPMG partners sought and obtained confidential PCAOB lists of inspection targets and then led a program to review and revise certain audit work papers after the audit reports had been issued in order to reduce the likelihood of deficiencies being found during inspections.
Three have pleaded guilty, two were found guilty and one is still pending trial.
The SEC’s order says KPMG must “cease and desist” violating the securities laws and is required to evaluate its quality controls relating to ethics and integrity and identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years. KPMG must also hire an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation of the cheating scandal.
The KPMG cheating scandal was much more widespread than originally thought [Francine McKenna/Marketwatch]
Day of Reckoning for KPMG-Failures in Ethics [Thomas R Fox/Compliance Report]
(via Naked Capitalism)