Our teaching case on KPMG/PCAOB scandal has won an award!

It's an honor and a thrill

Just received this message from the co-leaders of the American Accounting Association’s 2020 Ethics Symposium. I am a full academic member (by virtue of my adjunct role for the MBA program at American University) and a member of its Audit and Public Interest Sections:

Although the Accounting Ethics Research Symposium was cancelled this year, we wanted to recognize your teaching case “Corruption in the Auditor Inspection Process: The Case of KPMG and the PCAOB”. 

Accordingly, we are pleased to announce that it was selected as the 2020 Accounting Ethics Award for Best Innovation for Teaching. You will be receiving the award from the AAA after the annual meetings. 

Congratulations and we look forward to seeing your paper in its published form!

The teaching case focuses on the scandal that broke in 2017 in which KPMG partners received confidential information from the Public Company Accounting Oversight Board (PCAOB) about the audits the regulator planned to inspect and used it to cheat on inspections for three years. I worked as an equal academic partner on the team with Tzachi Zach and Amy Sheneman of Ohio State University and Mikhail Pevzner of Univ. of Baltimore.

I taught the case in my custom-developed accounting ethics course for Ohio State’s Masters of Accounting and MBA students last month. It has also been piloted at several other schools. (Let me know if you are interested in teaching it!)

Because the case explores various ethical aspects of the scandal, there is not a single correct solution to the required discussion questions. But I have plenty of opinions about what happened, and about what happened to the professionals who violated their public duty by perpetrating these crimes on their fellow professionals, clients and shareholders, and the global capital markets.

Full disclosure: The saga is especially sad for me because I worked proudly for KPMG and its successor consulting firm, BearingPoint, from 1993 until 2001, in the U.S. and Latin America. I was a Managing Director, leading BearingPoint’s Industrial, Automotive, and Transportation Practice in Mexico, Brazil, Colombia, Venezuela, and Argentina when I was held up unexpectedly in the U.S. in the fall of 2001, after the tragic events of 9/11, and reluctantly decided to leave the firm to return to work in the U.S..

It's a rotten idea to fold the U.S. audit industry regulator into the SEC

That's because SEC is part of the problem with auditing, not the potential solution

An SEC Fine for KPMG in the PCAOB Data Theft Scandal and Another Horrible Revelation

The Securities and Exchange Commission settled charges with KPMG LLP on Monday June 17 for altering past audit work after receiving stolen information about inspections of the firm that would be conducted by its regulator, the Public Company Accounting Oversight Board or PCAOB.

In an even more egregious violation of public trust, the SEC’s order also finds that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results. Five former KPMG officials were charged last year in the case that alleged they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG. Two have pleaded guilty, two were found guilty and one is still pending trial.

The SEC’s order finds that KPMG audit professionals, including lead audit engagement partners sent exam answers related to mandatory continuing professional education, ethics and integrity, and training mandated by a prior SEC order finding audit failures to other partners, and also solicited answers from and sent answers to their subordinates to help them also attain passing scores.

It’s not clear from the order how KPMG found out about the latest scandal but the SEC’s settlement document says, “Prior to the firm’s investigation, no one reported the improper sharing of exam answers to the firm’s Ethics and Compliance Hotline.”

KPMG Takes Its Turn With a Big 4 -Sized Scandal, April 17, 2017

After all, KPMG is the firm of Scott London, the convicted inside trader who served his own self-interest while the regional partner in charge of KPMG’s audit clients in Southern California and the southwest United States. KPMG lost the Herbalife audit to PwC as a result of London’s illegal and unethical actions. Skechers, whose CFO told the FT he bore no ill will towards London or KPMG London, also replaced KPMG as its auditor shortly after the revelations and had to re-audit two years of financials.

KPMG is also the firm that audits or audited some of the biggest bailouts, failures and forced acquisitions of the financial crisis.

• Citigroup

• New Century

• Countrywide

KPMG has audited Wells Fargo for more than 85 years. The bank not only had a huge portfolio of fraudulent foreclosures after its forced acquisition of Wachovia during the crisis—also audited by KPMG — but WFC is now under severe scrutiny for  a fake accounts scandal KPMG seems to have missed, or worse, ignored.

KPMG was the original auditor of Fannie Mae before fraud, financial restatements and a lawsuit forced it out.

KPMG audited HSBC, notorious for its money laundering failures.

KPMG audits Credit Suisse which paid $5.2 billion in fines for selling toxic mortgage debt without proper disclosures.

KPMG audits Deutsche Bank, which has a rap sheet of legal and regulatory enforcement actions totaling billions.

KPMG audits Fifa.

KPMG was almost out of business once before, in 2005, as a result of an almost criminal indictment for tax shelter fraud. Looking into the abyss, regulators established the implicit “too few to fail” policy.

Every remaining Big 4 firm has has weathered, at one time or another, a similar critical mass of audit failures and litigation threats, sometimes verging on a full-blown crisis in confidence, in the 15 years since Arthur Andersen closed up shop and the Sarbanes-Oxley Act was passed to supposedly end all doubts about auditors.

© Francine McKenna, The Digging Company LLC, 2020