International accounting firm KPMG has been slapped with a $1.8 million fine and a year of probation after being found guilty of gross negligence and unprofessional conduct for its handling of the 1992 and 1993 audit and financial statements of Orange County, California. The California Board of Accountancy also ordered three years of probation and 100 hours community service for KPMG partner Margaret Jean McBride and two years of probation each for former KPMG accountants Joseph Horton Parker and Bradley J. Timon. All were found guilty of gross negligence and unprofessional conduct.
The county declared bankruptcy in late 1994 after it lost $1.7 billion in its investment pool. County treasurer Robert L. Citron oversaw the investment pool. Mr. Citron was convicted of faking interest earnings and falsifying accounts. The Board claims that KPMG, attempting to save money on what turned out to be an underbid audit, cut corners by allowing junior staff members to conduct certain areas of the audit and by not helping the county solve its problem of a lack of internal controls with regard to the investment pool. KPMG auditors did not speak with the county treasurer regarding the investment pool, nor did they determine the true market value of the highly leveraged and speculative investments. KPMG paid a settlement of $75 million to Orange County in 1998.
KPMG refutes the claims and says the accountancy board wasted millions of dollars with the goal of making KPMG a scapegoat. "The claims by the board incorrectly challenge how KPMG reached its conclusions rather than claim our conclusions were wrong," said KPMG spokesman George Ledwith.
State officials claim their decision was appropriate and that KPMG did not follow correct auditing standards. Administrative Law Judge Humberto Flores stated that he found an "extreme departure from professional standards" in the way in which KPMG conducted its audit. He accused Mr. Timon of preparing misleading audit work papers and also stated that Ms. McBride acted unprofessionally by not advising other county offices that were KPMG audit clients of the potential for failure of their investments that duplicated those of the Orange County treasurer.
KPMG plans to appeal the ruling.