Accounting Ethics at KPMG is an Oxymoron

It was just announced that that the California Board of Accountancy has fined KPMG $1.3 million for violations of the Accountancy Act. The Board’s action arose from KPMG admitting to being disciplined by the Securities and Exchange Commission over its actions to obtain confidential information from the Public Company Accounting Oversight Board (PCAOB) between 2015 and 2017, which KPMG used to prepare and improve its results in PCAOB’s inspections of KPMG’s public company audits. In addition, as part of the SEC discipline, KPMG admitted that many of its CPA’s cheated on internal continuing education training exams by sharing answers, and some also manipulated the exam scoring system. Additional information follows.

Cheating on Internal Continuing Education Exams

I have previously blogged about the problems at KPMG and questions about ethics. I summarize some of the issues below.

In 2018, a former lead engagement partner, solicited and received questions and answers to the examination from a colleague. After learning of KPMG’s internal investigation of its audit professionals’ cheating, that partner deleted text messages with his colleague in which the colleague had relayed the questions and answers to the exam, after receiving a notice from the firm to preserve them.

After learning of potential cheating on internal training exams, KPMG leadership began an internal investigation. The firm’s Board of Directors then formed a Special Committee led by an independent board member to oversee an investigation of this conduct.

As part of its investigation, KPMG’s Office of General Counsel emailed an “Urgent Request” to all KPMG personnel to preserve all documents related to KPMG’s training requirements or training sessions. The November 1, 2018 email emphasized the importance of “strict compliance” with the document preservation order, cautioning that failure to comply could expose individuals and the firm to serious consequences. After receiving the November 1 document preservation notice, the lead engagement partner deleted the text message and photos of the colleague’s failed exam.

The SEC Order states that, “Prior to the firm’s investigation, no one reported sharing of exam answers to the firm’s Ethics and Compliance Hotline.” The KPMG cheating on internal training exams raises many questions about how such a practice could have occurred at a Big Four CPA firm.

Hiring Former PCAOB Staffers

Audits of public companies are inspected each year by the PCAOB to determine whether the audits have followed all prescribed standards. These inspections report an audit deficiency rate and provide useful data to the public whether the firm has met its responsibilities to place the public interest ahead of all other interests including their own.

At KPMG, the deficiency rate had as high as 50 percent, an astonishing number. Other Big Four CPA firms generally have deficiency rates between 20 and 40 percent.

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. KPMG was motivated by reducing the deficiency rate. Having inside information enabled it to tweak the workpapers and “improve” audit quality.

The Public Interest

An auditor’s reputation depends on integrity and quality, which is the foundation of public trust. The fact that KPMG violated that trust in these two instances, and has a higher rate of audit deficiencies when compared to other Big Four firms, raises the question whether the firm has lost its moral compass.

Posted by Steven Mintz, aka Ethics Sage, on November 4, 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 and on Twitter.