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KPMG Settles SEC Charges Over Violating Auditor Independence Rules

Jan 24th 2014
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KPMG LLP has agreed to shell out $8.2 million to settle charges from the US Securities and Exchange Commission (SEC), which found that the Big Four firm violated auditor independence rules by providing certain nonaudit services, such as bookkeeping, to affiliates of companies whose books KPMG was auditing.

An SEC investigation also revealed some KPMG personnel owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules, the regulatory agency said on January 24.

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” John Dugan, associate director for enforcement at the SEC Boston regional office, said in a written statement on Friday. “KPMG compromised its role as an independent audit firm by providing prohibited nonaudit services to companies that it was supposed to be auditing without any potential conflicts.”

In audit reports, KPMG repeatedly represented that it was independent despite providing services at various times from 2007 to 2011 to three audit clients, which the SEC said “impaired KPMG’s independence.”

“KPMG provided various nonaudit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client,” the SEC stated. “KPMG provided such prohibited nonaudit services as bookkeeping and payroll to affiliates of another audit client. In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client. KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client. These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934.”

The SEC noted that – without admitting or denying the findings – KPMG agreed to pay $5,266,347 in disgorgement of fees received from the three clients plus prejudgment interest of $1,185,002. The Big Four firm also agreed to pay an additional penalty of $1,775,000. In addition, KPMG will implement internal changes to educate firm personnel and monitor the firm’s compliance with auditor independence requirements for nonaudit services. An independent consultant will evaluate these changes, the SEC stated.

In a statement emailed to AccountingWEB on Friday, KPMG emphasized it is “fully committed to ensuring our independence with respect to all of our audit clients.”

“In the years since the events discussed in this SEC action, KPMG has implemented internal changes that are designed to ensure its ability to comply with restrictions on providing nonaudit services to SEC audit clients and/or their affiliates,” the statement said.

The SEC’s investigation also looked at whether KPMG’s independence was impaired by its practice of loaning nonmanager tax professionals to assist audit clients on-site with tax compliance work performed under the direction and supervision of the clients’ management.

While the SEC did not bring enforcement action against KPMG on this matter, it noted so-called “loaned staff arrangements” between auditors and audit clients “appear inconsistent with Rule 2-01 of Regulation S-X, which prohibits auditors from acting as employees of their audit clients.”

Also on Friday, the SEC issued a separate report about the scope of the independence rules. In the report, the SEC emphasized the following:

  • An auditor may not provide otherwise permissible nonaudit services (such as permissible tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules.
  • An arrangement that results in an auditor acting as an employee of the audit client implicates Rule 2-01 regardless of whether the accountant also acts as an officer or director, or performs any decision-making, supervisory, or ongoing monitoring functions for the audit client.
  • Audit firms and audit committees must carefully consider whether any proposed service may cause the auditors to resemble employees of the audit client in function or appearance – even on a temporary basis.

“The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients,” Paul Beswick, SEC chief accountant, said in a written statement. “Resolving questions about permissibility of nonaudit services is always best done before commencing the services.”


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