Former KPMG partner David Middendorf and former PCAOB official Jeffrey Wada were each found guilty of conspiring to steal secret Board inspection schedules for KPMG to give the firm an edge in the process. U.S v. Middendorf, No. 1:18-cr-00036 (S.D.N.Y.). Each was found guilty of conspiracy to commit wire fraud and wire fraud but acquitted of conspiracy to defraud the government. Previously, co-defendants Thomas Whittle and Brian Sweet entered into plea deals which in part required them to testify for the government. Defendant Britt was severed from the case and is awaiting trial.
The charges stem from the fact that the PCAOB is obligated under the Sarbanes-Oxley Act of 2012 to oversee audit firms, according to the SEC’s parallel actions. In connection with its obligations, the Board inspects audits by registered public accounting firms. The inspection process is highly confidential to ensure its integrity.
In September 2014 the PCAOB issued an inspection report regarding KPMG’s 2013 audits. It concluded that almost half – 23 of 50 – of the engagements reviewed were deficient. The prior year only 34% of the engagements reviewed were found to be deficient. KPMG was ranked third among the big four accounting firms based on the 2013 inspections.
Subsequently, Mr. Sweet was hired by the audit firm as a partner in the Department of Professional Practice. He was responsible for conducting internal inspections of KPMG audits. Mr. Sweet reported to Thomas Whittle who was responsible for overseeing both the Board’s and KPMG’s internal inspections. Mr. Whittle reported to David Middendorf who oversaw the National Office’s audit quality and professional practice work.
On his first day at the audit firm in May 2015 Mr. Sweet had lunch with Mr. Middendorf, other National Office colleagues and David Britt, the co-leader of KPMG’s Banking and Capital Markets Group. Mr. Sweet was asked various questions about the PCAOB inspection process. During the conversation he was asked if the audit for a particular banking client would be part of the inspection for that year. Mr. Sweet indicated it would, although he did not directly answer the question. The next day Mr. Whittle asked for the list of KPMG banking clients that would be inspected. Mr. Sweet complied. The information was forwarded to Mr. Middendorf. He also shared information about the inspection process with a consultant KPMG had hired regarding the process at the direction of Messrs. Middendorf and Whittle.
Prior to leaving the PCAOB Mr. Sweet discussed the prospect of seeking a position at KPMG with colleague Cynthia Holder, then Inspections Leader. After joining the audit firm Mr. Sweet had Ms. Holder retrieve certain notes he had prepared while at the Board to discuss with KPMG colleagues. She furnished the notes and later other information.
Ms. Holder recused herself at the PCAOB from matters involving KPMG to seek a position with the firm. It was offered in July 2015. The next month she became an Executive Director, performing internal inspections and advising banking engagement teams on their audits. Later PCAOB employee Jeffrey Wada furnished confidential inspection information about KPMG to Ms. Holder after learning he would not receive a promotion.
In February 2016 Mr. Middendorf and others from the audit firm met with the staff from the SEC’s Office of the Chief Accountant. The staff expressed significant concerns regarding KPMG’s audit performance. Mr. Middendorf told the group that his highest priority was to protect the efforts of the National Office to improve in this regard.
On the date of the KPMG – SEC staff meeting, Mr. Wada furnished the audit firm with the list of Board inspection targets. At the time the work papers for KPMG audits were not “locked” – closed for additions. Firm policy allotted a period after the work to complete them. Those work papers were completed after the KPMG accountants were furnished the PCAOB information.
In early January 2017 Mr. Wada also furnished KPMG a preliminary list of PCAOB inspection targets. When the information was circulated among certain engagement partners, one notified the General Counsel’s office which launched an investigation. During the initial phase of that investigation Messrs. Sweet and Holder agreed to conceal how they obtained the PCAOB’s 2017 inspection targets. See also In the Matter of Brian Sweet, CPA, Adm. Proc. File No. 3-18347 (Jan. 22, 2018); In the Matter of Cynthia Holder, CPA, Adm. Proc. File No. 3-18346 (Jan. 22, 2018).