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SEC fines KPMG $8.2m for independence lapses

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27th Jan 2014
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Big Four accountancy firm willhave to pay $8.2m to settle charges from the US Securities and Exchange Commission (SEC) arising from a string of audit independence rule violations.

KPMG has two weeks to settle the bill, which was announced in an administrative order on Friday based on an investigation that found KPMG provided non-audit services such as book-keeping to subsdiaries of the companies that it audited. KPMG staff were also found to own shares in KPMG audit clients.

The SEC investigation concentrated on three of the firm’s audit clients and uncovered a string of situations going back as far as 2007 that violated the US independence code and undermined the audits’ compliance with generally accepted auditing standards. The findings in essence were:

  • At Company A KPMG hired the former senior tax counsel after the client company offered him an early retirement. The audit firm then “loaned” him back to the former employer to perform the same work, which involved tax compliance advice. This arrangement with General Electric was originally exposed by Francine McKenna in 2011, according to our US sister site, Going Concern.
  • KPMG had been providing legitimate non-audit services to a financial services provider, Company B, but when it was acquired by a group that the firm audited, providing those services became prohibited under the auditor independence rules.
  • At Company C, KPMG’s audit engagement and independence teams were aware that the firm provided non-audit services to a subsidiary while pitching for the parent group’s audit in 2008, but decided they did not compromise the firm’s independence. The SEC investigation did not agree.

While each case was assessed on its merits, the SEC investigators found that the loaning of staff and providing non-audit services to an audit client can impair the auditor’s independence.

“Moreover, auditors who provide non-audit services in a manner which impairs independence should expect to be held accountable. Consequently, auditors must be rigorous in assessing the independence implications inherent in providing such services and be mindful that auditors must strictly assess, not only whether the proposed non-audit services fall within one of the enumerated categories of expressly prohibited services, but also whether the manner in which the services are to be provided potentially impairs the auditors’ independence, in fact or appearance,” the SEC investigation report concluded.

Without admitting or denying the findings KPMG consented to pay back $5,266,347 from fees received from the three clients plus $1,185,002 in interest, along with an additional penalty of $1,775,000. The SEC settlement also requires KPMG will to implement internal changes to go through a re-educate process that will be subject to independent evaluation after six months.

KPMG told AccountingWEB.com it is “fully committed to ensuring our independence with respect to all of our audit clients.

“In the years since the events discussed in this SEC action, KPMG has implemented internal changes that are designed to ensure its ability to comply with restrictions on providing nonaudit services to SEC audit clients and/or their affiliates.”

The SEC issued a second report last Friday setting out a reminder of its audit independence rules. 

The KPMG investigation is reminiscent of similar probes into PwC in 1999-2002, which were brought into starker relief by major corporate collapses including Enron and WorldCom. The upshot of those events were the Sarbanes-Oxley Act and the formation of the Public Company Audit Oversight Board (PCOAB) that now sets stricter rules and enforces them more energetically, as KPMG has found to its cost.

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Replies (4)

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By mikenorthampton
28th Jan 2014 12:51

KPMG lapse

The title suggests  lapses happen now and then; is lapse appropriate for consistent behaviour?

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By The Black Knight
28th Jan 2014 13:46

You have to laugh?

"KPMG told AccountingWEB.com it is “fully committed to ensuring our independence with respect to all of our audit clients."

Just not on the ones that were looked at. What are the chances of that?

 

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By redboam
28th Jan 2014 14:01

Auditing Lapses

In the US all of those that were party to the scandal of bank balance sheets bearing no comparison with the reality continue to be called to account. Quite how the big four here who were responsible for signing off this country's big banks' accounts have escaped the same level of scrutiny is a mystery to put it mildly.

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Stepurhan
By stepurhan
28th Jan 2014 14:43

Pull their certificates

Car drivers can be forced to retake their tests if they commit serious or multiple driving offences. Why is the same not true of auditors who commit serious or multiple auditing offences? It is the responsibility of the auditor to perform checks for independence, so they clearly need to be re-tested on their abilities if they fail to do so.

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