KPMG Insider Trading Scandal Latest Blow to Accounting Industry's Reputation

By Frank Byrt

The insider trading scandal that has engulfed KPMG LLP, causing it to resign as auditor at two companies and fire a partner, contributes to the negative image the public accounting industry gained due to its role in the run-up to the 2008 financial crisis. But it's not likely to result in any immediate changes to regulations or oversight, accounting industry experts say.
 
KPMG said in an April 8 statement that the partner in charge of the firm's audit practice in Los Angeles, who was involved in the firm's audits of Herbalife Ltd. and Skechers USA Inc., had been fired after the firm learned of his involvement in providing nonpublic client information to a third party and then using the information in stock trades involving several West Coast companies. 
 
"This is a random event steeped in stupidity, so I don't think anything could be done that would have changed this" in regard to accounting regulations, Professor Charles Mulford, a CPA and director of Georgia Tech's Financial Reporting and Analysis Lab, told AccountingWEB.
 
"I think anytime something like this happens that calls into question audit reports for any reason, those that have a problem with the current audit environment and want to see change will use it as an opportunity to call for mandatory audit [firm] rotations or for the signatures of the auditors [on the audit report]," he said, referring to two proposals under consideration by the Public Company Accounting Oversight Board (PCAOB).
 
The incident is seen as yet another blow to the reputation of public accountants. "It's a blackened eye for the firm and the accounting profession," William Read, professor of accountancy at Bentley University in Waltham, Massachusetts, told AccountingWEB. That's because it reminds those in Congress, regulators, and the public of the role accountants played in the collapse of energy giant Enron and telecommunications firm WorldCom. 
 
The failure of Enron led to the implosion of the then Big Five accounting firm Arthur Andersen LLP and contributed to Congress' creation of the Sarbanes-Oxley Act of 2002 and, within it, the PCAOB.
 
Questions have been raised whether a PCAOB proposal under consideration since 2011 that calls for the immediate disclosure of the name of the engagement auditor in the event of improprieties, such as in this case, would have been helpful in mitigating the potential repercussions from the current scandal.  
 
In addressing the issue, but not the specific KPMG case, Colleen A. Brennan, director of the Office of Public Affairs for the PCAOB told AccountingWEB, "Having the name of the engagement partner disclosed in the audit report as well as Form 2 would enable investors to research the number, size, and nature of companies that the partner has audited, and industries in which the partner has served as engagement partner. Disclosures pursuant to the proposed amendments also would enable investors to learn whether the engagement partner was named in a public disciplinary proceeding."  
 
But accounting firms have been reluctant for the PCAOB to set the new regulation for several reasons, including increased legal liability.
 
J. Thomas Hood III, CPA, CEO and executive director of the Maryland Association of CPAs (MACPA) told AccountingWEB, "There's no question that anytime this type of thing happens, there is a risk of regulatory pile on. But the question is: does anyone think that something like auditor rotation would have stopped this? I don't think so," he said. 
 
Read said it's unlikely that the scandal will result in a long-term hit on revenue for KPMG, as it's doubtful that the firm will be dismissed by other clients because (1) the firm took steps immediately to disclose the issue and mitigate damage by resigning as auditors, and (2) it's costly and time consuming for a company to make such a move.
 
KPMG didn't identify the partner or the third party involved in the alleged insider trading; however, in an interview with the Wall Street Journal, Scott London, the KPMG partner who was fired, admitted to passing on stock tips about clients to a friend who gave him cash and gifts.
 
KPMG hasn't issued any statements since its original disclosure April 8.
 
Skechers said in a press release it was told that the former KPMG partner is now under federal investigation, which could mean the Federal Bureau of Investigation or the US Securities and Exchange Commission (SEC), or most likely both.
 
On its website, the SEC says pursuing insider trading cases is a high priority. Over the past three years, the SEC filed 168 insider trading actions, the most ever in a three-year period. So far in 2013, the SEC has brought six insider trading cases, most involving hedge fund managers trading on stock tips.
 
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