A group of former senior partners at the accounting giant KPMG obtained information on upcoming audit inspections and used it to manipulate the firm's work to get passing marks, according to charges unveiled Monday.
The partners had the help of leaks from staffers inside the Public Company Accounting Oversight Board, the entity created by Congress more than a decade ago to make sure auditors are doing work that meets regulatory standards.
Calling the conduct "shocking" and "egregious," the Securities and Exchange Commission, which also announced civil charges on Monday, said that the investigation is continuing and more individuals could face charges. "These accountants engaged in shocking misconduct— literally stealing the exam — in an effort to interfere with the PCAOB's ability to detect audit deficiencies," SEC enforcement co-chief Steven Peikin said.
It is another bout of negative publicity for the accounting profession, which has been rocked by scandal since the implosions of Enron and WorldCom brought about new laws to shore up public company boards and the auditing process.
Six people were arrested Monday and charged with conspiracy to defraud regulators and misuse of confidential information. KPMG discovered the activity last year and alerted regulators, the SEC said.
"The alleged conduct is disturbing," SEC Chairman Jay Clayton said in a statement. The SEC said KPMG itself is not a target of the investigation and said investors could continue to rely on the firm's audits, though it wouldn't identify the audits affected by the conduct.
KPMG had been struggling in the years before the conduct is said to have occurred, having fared poorly in audit inspections by the PCAOB in 2013 and 2014, federal prosecutors said. In 2015 it set out to recruit PCAOB staffers to hire so it could clean up its act. The oversight board inspects about 50 audits a year by the big firms to make sure they meet regulatory standards, but it doesn't tell the accounting firms in advance which audits it wants to inspect.
One of those staffers was Brian Sweet, 40, a certified public accountant who has already pleaded guilty on the charges. He downloaded information from the oversight board about KPMG's upcoming inspection and brought it with him to a new job at KPMG in 2015. There, he shared the information with his new KPMG partners and obtained additional information from two former oversight board colleagues.
Having the information in advance enabled the KPMG partners to analyst and revise work papers to avoid negative findings by the oversight board, the SEC said.
A KPMG spokesman released a statement that said the firm has been cooperating with the government investigation. The former partners were fired last year. "KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm."
The PCAOB said in its own statement that it "has cooperated with and appreciates the government's actions to preserve and reinforce the integrity of the PCAOB's regulatory oversight programs that protect investors who rely on the audits of public companies."
Sweet's attorney, Richard Morvillo, said "In stepping up and cooperating with federal officials, Mr. Sweet has taken the first step to redress his mistakes."