Adding to the accounting profession’s mounting credibility problems, the Securities and Exchange Commission (SEC) announced on January 14, 2002 that it had censured Big Five firm KPMG for purporting to serve as an independent accounting firm for a client while it held substantial investments in the client. As part of this enforcement action, the SEC ordered KPMG to improve its system of controls over investments in audit clients.
The client involved in the enforcement action was the Short-Term Investments Trust (STIT), a money market fund within the AIM family of funds. The SEC charged that KPMG audited STIT’s financial statements at a time when the firm's independence was impaired by investments of $25 million and more. At one point during the audit, the SEC says, the investments constituted approximately 15% of the fund’s net assets.
"The inadvertent investment was made only because we invested in what we thought was a mutual fund sponsored by an unrestricted entity. We thought we had opened a mutual fund account managed by the financial institution that brought the fund to us, which was not an audit client. We subsequently learned that the financial institution acted as an intermediary for an audit client," said Bob Zeitlinger, a KPMG spokesperson.
The SEC’s investigations indicated that this mishap occurred because there was no system that KPMG audit engagement partners could have used to confirm the firm's independence from its audit clients. Although KPMG did have an independence system, the SEC said it was ineffective because it lacked:
- Procedures directing KPMG’s treasury department personnel to check the firm's "restricted entity list" to confirm that a proposed investment was not restricted.
- Specific policies or procedures requiring participation by a KPMG partner in the investigation and selection of money market investments.
- Policies or procedures designed to put KPMG audit professionals on notice of where the firm's cash was invested, or requiring them to check a listing of the firm's investments, prior to accepting new audit engagements or confirming the firm's independence from audit clients.
"KPMG has already implemented a series of detailed policies and procedures designed specifically to prevent independence infractions. These procedures go beyond the ones specified in the SEC Order, " said Mr. Zeitlinger.
Never mind that no one complained, and there was no evidence of demonstrated investor harm or deliberate misconduct. The SEC is flexing its muscles to show auditors it means business when it says they must have adequate systems in place to prevent future independence violations.
KPMG consented to the SEC’s order without admitting or denying the SEC's findings.
"All of the money in the account was withdrawn immediately upon discovering the error. Moreover, we cooperated with our client and the SEC to minimize any impact to AIM and its shareholders." said Mr. Zeitlinger.