Financial auditing is an attestation of a client’s financial records therefore, it is critical that those auditors remain impartial. KPMG is one of the largest public services companies in the world, and financial auditing is one of the services they provide. Possessing a global impact makes it especially important for a company such as KPMG to behave ethically. Even so, over the last several years, they have appeared in the media regarding several issues pertaining to corporate ethics. Most recently they have been charged by the Securities and Exchange Commission (SEC) with violating the rules mandating the independence of auditors from the companies they are auditing.
In an effort to clarify the rules regarding independence from clients, the SEC issued a report which states that audit firm employees cannot work for clients in a way that could be construed as the staff acting as employees for the client company. The SEC’s investigation determined that KPMG was allowing some of its staff to perform such tasks as bookkeeping to its affiliates for whom they were providing audit services. It was also determined that some of KPMG staff owned stock in the very companies that were their clients. This lack of independence gives the appearance of impropriety and creates a conflict of interest.
“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,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office. “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”
During the course of its investigation, the SEC found that reports submitted by KPMG continued to state that they were independent although they were knowingly committing various violations over a four-year period. These actions negated their independent status. One example of this lack of independence is the hiring by KPMG of a retired affiliate of one of their clients. They then “loaned” him back to the client firm from which he retired where he provided services to that client. These services that he provided violated Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934. This particular violation resulted in more violations of other sections of the Exchange Act.
Although KPMG neither admitted nor denied the allegations of the SEC, they agreed to pay $8.2 million to settle the allegations made by the SEC. This includes $5,266,347 in disgorgement fees, prejudgment interest in the amount of $1,185,002, and a penalty fee of $1,775,000. Additionally, they have agreed to make internal changes and more closely monitor their compliance with auditor independence requirements. They will also employ an independent consultation to make sure these changes are in place and effective.
With the field of financial auditing being both necessary and lucrative, it is imperative that those firms doing the auditing always perform these services in a conservative manner. The SEC’s chief accountant, Paul A. Beswick, states, “The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients. Resolving questions about permissibility of non-audit services is always best done before commencing the services.”
Blum Law Group represents clients who have been victimized by brokers. If you have been negatively impacted by the lack of independence of a financial auditing firm, please call 877-STOCK-LAW for your free consultation with the Blum Law Group.