“These accountants engaged in shocking misconduct — literally stealing the exam,” Steven Peikin, co-director of the SEC’s enforcement division, said in a statement.
The allegations are a major embarrassment for KPMG, one of the nation’s four big accounting firms, and the Public Company Accounting Oversight Board, known informally as “Peekaboo.” The board was established to act as a watchdog for corporate accounting after bookkeeping scandals at Enron and WorldCom that cost investors billions. But the board has been criticized in the past as weak.
PCAOB and KPMG both said they acted quickly once they discovered the problem and had taken steps to prevent it from happening again.
“The new PCAOB Board will conduct an ongoing review of the organization’s information technology and security controls, as well as its compliance and ethics protocols, to assess their effectiveness,” board chairman William D. Duhnke said in a statement.
SEC Chair Jay Clayton called the case “disturbing,” noting “audited financial statements are at the heart of the SEC’s disclosure-based regulatory regime. . . . In matters of this type, I am also concerned about potential adverse collateral effects, including on our Main Street investors.”
The scheme began in 2015 when then-PCAOB associate director of inspections, Brian Sweet, prepared to leave the regulator to join KPMG, according to prosecutors. KPMG had already spent years trying to improve the poor grades it received from PCAOB. In 2014, for example, it received about twice as many negative comments, on average, during its inspections as its competitors, according to court documents. As part of its efforts, KPMG made hiring Sweet a priority, according to court documents.
Before leaving PCAOB, Sweet copied PCAOB data onto a personal hard drive and began sharing it with KPMG executives during his first week on the job, according to court documents. Sweet, for example, allegedly told the executives which financial documents the PCAOP planned to inspect, allowing KPMG extra time to prepare for the exam.
Sweet’s actions were repeatedly encouraged by KPMG executives, court documents claim. David Middendorf, then-managing partner for audit quality and professional practice, told Sweet to “remember where [his] pay check came from and to be loyal to KPMG,” according to court documents. Another executive, Thomas Whittle, then-partner-in-charge for inspections, told Sweet after a welcome lunch he “was most valuable to KPMG at that moment and would soon be less valuable” once he left the agency.
Sweet also helped another PCAOB employee land a job at KPMG, prosecutors argue. The inspector, Cynthia Holder, allegedly lied to the PCAOB about pursuing a job at the accounting firm, allowing her to continue to have access to confidential data about PCAOB inspection plans. “While actively pursuing employment at KPMG [Holder] also remained actively employed on the PCAOB team tasked with inspecting KPMG,” according to court documents.
Holder allegedly sent Sweet one confidential document from her personal email with the image of a “winking smiley face.” In another case, she apparently called Sweet while actively conducting an inspection and asked his advice before deciding not to give KPMG a negative mark on an issue.
Holder eventually landed a job with the company. Like Sweet, she copied confidential PCAOB data before leaving, the court documents claim.
Despite receiving the illicit information, by early 2016, KPMG found itself in the crosshairs of the SEC, which had grown frustrated with the firm, including the quality of its audits and lack of communication. At a February 2016 meeting, the SEC laid out its concerns about the “audit quality of KPMG.” KPMG officials acknowledged the problem, according to court documents.
Meanwhile, another PCAOB employee, apparently frustrated he had not received a promotion, began feeding confidential information to KPMG and asking about potential job opportunities. In emails, the employee, Jeffrey Wada, allegedly claimed he was “screwed” and called himself a “failure.” Wada said in a text to Holder, if PCAOB was “so desperate to hold onto me they should have [expletive] promoted me.”
Before Wada could land a job, KPMG’s office of general counsel began an investigation into the information the company was receiving. Sweet and Holder allegedly plotted multiple ways to avoid detection, including deleting texts with Wada and confidential PCAOB documents from their company computers, but were eventually fired.
“When KPMG first discovered the issue in early 2017, we promptly notified the authorities and have been fully cooperating with the Government in its investigation,” Manuel Goncalves, a KPMG spokesman, said in a statement. “KPMG took swift and decisive action, including the engagement of outside legal counsel to conduct a detailed investigation and the separation of involved individuals from the Firm.”
Middendorf, the former KPMG partner, and David Britt, KPMG’s former banking and capital markets group co-leader, who was also charged in this case, deny the allegations, their attorneys said.
Middendorf “is a guy who has spent his whole life in public accounting,” said Gregory Bruch, his attorney. “We’re going to defend his record and his good name.” Britt’s attorney, Melinda Haag, said: “The government has unfairly targeted Mr., Britt in this case. The allegations in the indictment against David involve conduct that is simply not a crime, and we look forward to proving his innocence in court.”
Attorneys for Holder and Whittle could not be immediately reached for comment. An attorney for Wada could not be identified, and Wada could not be immediately reached for comment.
Sweet has agreed to settle with the SEC and pleaded guilty to conspiracy to defraud the U.S. government and wire-fraud conspiracy. His attorney could not be immediately reached for comment.