KPMG agreed to pay $8.2 million to settle charges that it broke rules designed to keep auditors independent of their clients, a resolution that caps a tough week for the Big Four accounting firms at the hands of federal regulators.
The Securities and Exchange Commission, which announced the deal Friday, alleged that KPMG provided non-audit services to the affiliates of three clients from 2007 through 2011, and loaned employees to some of those clients, compromising the auditors’ independence. Some KPMG employees owned stock in the client firms, the agency said.
The settlement comes on the heels of another legal battle involving the Big Four’s Chinese affiliates, which the SEC accused of refusing to turn over auditing documents of several China-based firms suspected of fraud. An SEC administrative law judge sided with the agency this week and said that the affiliates should be barred for six months from auditing companies traded on U.S. exchanges. The auditors plan to appeal the decision, which has yet to take effect.
Scrutiny of the Big Four — DeloitteTouche, Ernst & Young, KPMG and PricewaterhouseCoopers — is not likely to let up any time soon. In July, the SEC formed a task force devoted in part to “audit failures.” The 12-member group, which also will more closely examine the financial disclosures that companies make, is made up of enforcement attorneys and accountants scattered throughout the agency’s offices nationwide.
The origins of this week’s enforcement actions predate the task force. But some experts who track auditing issues say the cases highlight entrenched problems that have not been fixed because of a lack of aggressive regulatory oversight.
“These stories are always a black eye for the Big Four,” said Lynn Turner, former SEC chief accountant and a former partner at the firm now known as PricewaterhouseCoopers. “Unfortunately, over the years, they’ve learned that time tends to heal all wounds, and they have a difficult time making changes.”
In Friday’s settlement, KPMG did not admit or deny wrongdoing. In a statement, the company said it is committed to ensuring its independence with respect to its 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 non-audit services to SEC audit clients and/or their affiliates,” Manuel Goncalves, a KPMG spokesman, said in a statement Friday.
In its administrative order, the SEC alleged that KPMG hired an individual who had retired from a high-level position at a KPMG client’s affiliate. KPMG then loaned that person back to the affiliate, where he essentially continued to perform his old job.
The SEC did not identify the company or the individual.
Federal rules prohibit auditors from having their staff act as employees of the companies they audit. They also bar auditors from having a financial interest in the firms they audit. Yet the KPMG employee held stock in his old company for more than a year while he was on KPMG’s payroll, the SEC said.
Other alleged infractions cited by the agency include non-audit services that KPMG provided to two other companies it audits, though it did not name those companies. Some of those services were provided by KPMG staff on loan to clients.
“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 T. Dugan, associate director for enforcement in the SEC’s Boston office, said in a statement.
The SEC’s investigation also yielded some instances in which KPMG loaned non-manager tax professionals to assist audit clients with tax compliance work. The SEC did not charge KPMG in those incidents, and an agency spokesman declined to comment on the reason. But the regulator released a report to clarify the rules in such arrangements.