SEC Settles Four Auditing Cases With Major Accounting Firms
The Commission brought four auditing actions centered on members of international accounting firms working with a local affiliates in violation of the applicable professional standards and The Sarbanes-Oxley Act. Specifically, in each case an affiliate of KPMG International and BDO International conducted an audit using either a local affiliate of KPMG or Deloitte in a manner that failed to comply with the applicable auditing standards and SOX.
The two actions involving affiliates of KPMG International are illustrative. In the Matter of KPMG, Inc., Adm. Proc. File No. 3-18400 (March 13, 2018); In the Matter of KPMG, Adm. Proc. File No. 3-18402 (March 13, 2018). KPMG, Inc. is a public accounting firm registered with the PCAOB located in Johannesburg, South Africa (“KPMG South Africa”). The firm is a member of KPMG International Cooperative, a Swiss entity. KPMG is also a member of KPMG International. It is based in Zimbabwe and has never been registered with the PCAOB (“KPMG Zimbabwe”). The audit client involved is Issuer A, a company incorporated in Canada with its principal executive offices in South Africa. The firm’s stock is registered with the Commission under the Exchange Act. The issuer files periodic reports.
In 2013 and 2014 KPMG South Africa audited the financial statements of Issuer A. Those financial statements were filed with the Commission on Form 20-F. The audit opinion in each instance represented that the work had been done, and the opinion issued, in accord with PCAOB auditing standards which is incorrect. In each instance KPMG South Africa used the work of a firm which did not comply with PCAOB standards. Specifically, in each instance KPMG Zimbabwe played a substantial role in the preparation of the audit reports for Issuer A having audited most of that firm’s assets and substantially all of its revenues.
KPMG South Africa served as the principal auditor but failed to comply with AU 543.02. That standard requires that when serving as a principal auditor the firm determine if its participation in the audit is sufficient for it to serve in that role. In making that decision the firm should consider a number of factors such as the materiality of the portion of the financial statements it audits in comparison to the portion done by the other firm. The decision making firm should also consider its knowledge of the overall financial statements and the importance of the components audited in relation to the entire enterprise. KPMG South Africa failed to conduct the required AU 543 analysis.
An inquiry should also be made about the affiliate firm in accord with AU 543 and 230. If the inquiries were conducted properly in each year KPMG South Africa would have known that KPMG Zimbabwe was not registered with the PCAOB. Since that firm was not registered, KPMG South Africa should not have used its work. By failing to conduct the required inquiries, KPMG South Africa engaged in improper professional conduct within the meaning of Rule 102(e). Since the audit reports were incorrect, the firm violated Rule 2-02(b)(1) of Regulation S-X of the Exchange Act as well as Exchange Act section 13(a).
As to KPMG Zimbabwe, Section 102 of Sarbanes-Oxley makes it unlawful for any person that is not a registered public accounting firm to participate in the preparation or issuance of, any audit report with respect to any issuer. The firm violated Section 102.
To resolve the proceedings KPMG South Africa consented to the entry of a censure, a cease and desist order based on the provisions cited above and agreed to pay a penalty of $100,000.
To resolve the proceedings KPMG Zimbabwe consented to the entry of a cease and desist order based on Section 102 of Sarbanes Oxley and to pay disgorgement of about $130,000 along with prejudgment interest.
See also In the Matter of BDO Canada LLP, Adm. Proc. File No. 3-18399 (March 13, 2018); In the Matter of Deloitte & Touche Chartered Accountants, Adm. Proc. File No. 3-18401 (March 13, 2018); (BDO Canada engaged Deloitte & Touche of Zimbabwe to do work; BDO issued six audit opinions based on circumstances similar to the proceedings above; BDO resolved the proceedings by consenting to a censure, a cease and desist order based on the same provisions as KPMG South Africa and paid a penalty of $50,000; Deloitte resolved the proceedings on substantially the same terms as KPMG Zimbabwe except that it agreed to pay disgorgement totaling $83,077.84 and prejudgment interest of $15,979.50).
Program: Insights Into SEC Enforcement, is roundtable discussion of the Former Directors of the SEC’s Division of Enforcement that will be held on April 3, 2018 beginning a 4:30 p.m. at Georgetown University Law School. The program will be followed by a reception. Registration is available here without charge. The program is sponsored by the SEC Historical Society, the Federal Bar Association, and the Association of SEC Alumni.