Actions Constitute an Act Discreditable to the Profession
On May 18, 2020, the Securities and Exchange Commission (SEC) announced settled charges against three former KPMG LLP audit partners for improperly sharing answers to internal training exams. The exams were administered to determine whether its audit professionals understood certain accounting and auditing principles that are essential to the firm’s providing professional services to clients.
Essentially, partners texted each other images of the questions and answers to a required training examination. After KPMG began investigating possible cheating by its professionals and required strict compliance with a document preservation notice sent to all KPMG personnel, the partners deleted text messages that implicated them in the theft of answers.
The SEC settlement order found that between April 2018 and September 2018, one partner supported sharing the exams and answers within his audit team. So, three KPMG partners basically stole the exam and answers and shared it among themselves. If this were a college course, all three would have failed and, perhaps, suspended from college.
According to Steven Peikin, Co-Director of the SEC’s Division of Enforcement, “Audit professionals play a critical role in the integrity of the financial reporting process and the protection of investors…These actions reflect our commitment to hold these gatekeepers responsible for breaches of their professional obligations.”
The SEC order found the former audit partners’ conduct violated a rule of the Public Company Accounting Oversight (PCAOB) requiring them to maintain integrity in the performance of a professional service. Each of the three partners agreed to accept the SEC’s sanction without admitting or denying the findings. As a result, they agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, with the right to apply for reinstatement after three years, two years, and one year, respectively.
The stealing of exam questions and answers is more than just a violation of integrity, which is bad enough. Each of the three partners, in my opinion, committed an act discreditable to the profession.
The rules of conduct in the American Institute of CPAs (AICPA) Code of Professional Conduct address professional behaviors that bring discredit to the profession through the “Acts Discreditable” rule. Acts Discreditable violations are often indicative of failings on a personal level. Examples include discrimination and harassment in employment practices and “social crimes” including lapses such as driving under the influence, nonpayment of child support, and drug possession.
I believe stealing exam questions and answers that are designed to ensure accounting and audit professionals possess up-to-date knowledge and the ability to exercise due care in the performance of professional services, is a shocking lapse in judgment and threatens the ability of an accounting firm to provided services that protect the public interest.
This not the first time KPMG partners violated the rules of professional conduct. In an unprecedented event, on January 22, 2018 it was announced that a former PCAOB staffer, Brian Sweet, who was hired by KPMG in 2015, leaked confidential information about PCAOB's plans to audit the company. 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. Providing this kind of “inside information” about audits to be inspected by the PCAOB also constitutes an act discreditable to the profession.
The only way to makes sense of these violations is to conclude that KPMG has holes in its corporate culture. These violations occurred at top levels of management and were, most likely, sanctioned if not blindly dismissed as not violating rules of conduct. The PCAOB has found deficiencies in about 50 percent of its audit inspections of KPMG oftentimes because of inadequate internal controls over financial reporting.
It’s not a stretch to conclude the stealing of exams and gaining inside information about audit targets by former PCAOB staff was motivated by the poor record of audit quality and a desire to show the SEC that it is improving the quality of its audits.
CPA firms are supposed to put the public interest ahead of other interests including their own. These actions by KPMG bring into question whether the tone at the top of the firm echoes this standard.
Posted by Steven Mintz, aka Ethics Sage, on May 28, 2020. You can sign up for our newsletter and learn more about Dr. Mintz’s activities at: https://www.stevenmintzethics.com/. Follow him on Facebook at: https://www.facebook.com/StevenMintzEthics.