SEC, USAO Charge Six With Misappropriating PCAOB Data
The SEC and the U.S. Attorney’s Office for the Southern District of New York took the unusual step of charging six accounts from KPMG and/or the PCAOB with misappropriating and using confidential information from the Public Company Accounting Oversight Board for use in connection with inspections of the accounting firm by the Board. SEC Chairman Jay Clayton sought to reassure issuers, noting in a statement that the agency would work with them to minimize any impact on them. 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).
Those charged in the actions are: Brian Sweet, CPA, a partner in KPMG’s Professional Practice group and previously an Associate Director, PCAOB inspections group; Cynthia Holder, CPA, an Executive Director in KPMG’s Department of Professional Practice group after being an Inspections Leader at the PCAOB; Jeffrey Wada, CPA, an Inspections Leader at the PCAOB; David Middendorf, CPA, KPMG’s National Managing Partner for Audit Quality and Professional Practice; Thomas Whittle, CPA, KPMG’s National Partner-In-Charge for Inspections; and David Britt, CPA, KPMG’s Banking and Capital Markets Group Co-Leader.
The facts alleged
The PCAOB is obligated under the Sarbanes-Oxley Act of 2012 to oversee audit firms. 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 did recuse 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.
Mr. Sweet settled, consenting to the entry of a cease and desist order from committing or causing any violations and any future violations of certain PCAOB Ethics Code Sections. He is also denied the privilege of appearing or practicing before the Commission as an accountant. Mr. Sweet agreed that a hearing will be held at the conclusion of all related proceedings on questions of monetary sanctions. The other proceeding naming five accounts as Respondents will be set for hearing.