The Securities and Exchange Commission this week sanctioned KPMG LLP, two former KPMG partners, and a current partner and senior manager for engaging in improper professional conduct as auditors for Gemstar-TV Guide International, Inc. KPMG and the auditors agreed to settle the action without admitting or denying the SEC's findings. As part of the settlement, KPMG was censured and agreed to pay $10 million to harmed Gemstar shareholders. This represents the largest payment ever made by an accounting firm in an SEC action.
The auditors, all of whom are certified public accountants, agreed to suspensions from practicing before the SEC.
The SEC's administrative order finds that from September 1999 through March 2002, the respondents' conduct resulted in repeated audit failures in connection with KPMG's audits of Gemstar's financial statements. The order also finds that the respondents reasonably should have known that Gemstar improperly recognized and reported in its public filings material amounts of licensing and advertising revenue. Gemstar, based in Hollywood, Calif., publishes TV Guide magazine and licenses and sells advertising on an interactive program guide (IPG) for television that enables consumers to navigate through and select television programs.
Stephen M. Cutler, the SEC's Director of Enforcement, said, "Our action today holds KPMG as a firm accountable for the audit failures of its partners. The sanctions in this case should reinforce the message that accounting firms must assume responsibility for ensuring that individual auditors properly discharge their special and critical gatekeeping duties."
In addition to KPMG, the order names as respondents Bryan E. Palbaum, 41, of Encino, Calif., a former KPMG partner; John M. Wong, 43, of Huntington Beach, Calif., also a former partner; Kenneth B. Janeski, 55, of Tarzana, Calif., a partner in KPMG's Los Angeles office; and David A. Hori, 35, of Scottsdale, Ariz., a manager in KPMG's Phoenix office.
The settlement provides that Palbaum, Wong, Janeski, and Hori are denied the privilege of appearing or practicing before the SEC, with the right to reapply after periods of three years (Palbaum), one year (Wong and Janeski), and eighteen months (Hori).
The SEC's order finds that the audit failures on the part of KPMG and its auditors involved both licensing and advertising revenue.
Despite these indications of Gemstar's improper accounting and disclosure, the respondents issued unqualified audit reports representing that KPMG had conducted its audits in accordance with generally accepted auditing standards (GAAS) and that Gemstar's financial statements fairly presented its financial results in conformity with GAAP.
In addition to the censure and the $10 million payment by KPMG, the firm has agreed to conduct training for its partners and managers on qualitative materiality, accounting for multi-element transactions, and consideration of appropriate disclosure related to complex accounting issues. KPMG will also adopt a policy that requires more effective consultation between audit engagement teams and its national office in connection with possible financial statement restatements.
The SEC has a pending lawsuit in federal court in Los Angeles against four former executives of Gemstar -- Henry C. Yuen, its former CEO; Elsie M. Leung, its former CFO; Jonathan B. Orlick, its former general counsel; and Craig Waggy, the former CFO of TV Guide. The trial of this matter is scheduled to begin on Jan. 18, 2005. On June 30, 2004, the court entered a judgment against Gemstar as part of a settlement in which the company agreed to pay a $10 million civil penalty to be distributed to harmed shareholders pursuant to Section 308 of the Sarbanes-Oxley Act. On Aug. 10, 2004, Peter C. Boylan, a former Gemstar co-president, settled the SEC's action against him by agreeing to the entry of a judgment and to the payment of $600,000 in disgorgement and penalties.
George Ledwith, a KPMG Spokesman told AccountingWEB, "KPMG resolved this matter with the Securities and Exchange Commission on an amicable basis and to avoid any further distractions in achieving our goal to restore public confidence in the capital markets."
"The settlement involves KPMG's audits and reviews of the financial statements of Gemstar-TV Guide International Inc., from the quarter ended September 30, 1999, through the quarter ended March 31, 2002. The settlement involves KPMG, three of the firm's current or former partners, and a current manager."
"As a condition of the settlement, KPMG neither admits nor denies the SEC's allegations. Under terms of the settlement, KPMG will pay $10 million for the benefit of Gemstar shareholders. This is neither a fine nor a penalty imposed by the order."
"The SEC first filed a complaint against Gemstar's CEO and CFO in June 2003, charging the executives with a widespread and complex scheme to inflate licensing and advertising revenue and to mislead investors about the company's financial performance. In its complaint, the SEC noted that the executives did, in fact, deceive the company's auditors."
"KPMG is dedicated to continuously improving audit quality, which is a strategic priority for our firm. The firm has already taken certain steps to strengthen our policy on consultation with its Department of Professional Practice in connection with possible restatements. We fully understand the importance of strengthening the profession and our firm as we work toward fully restoring the public's trust in the capital markets."
For further infomrmation, you may read the entire SEC release.