Who Will Audit the Auditors?
KPMG/PCAOB Theft Scandal Casts Doubt on Audit Quality
 |
Graphic: Pixabay/mohamed_hassan
|
By Hannah Ross and Tony Gelderman, Guest Columnists
Investors rely on auditors to provide neutral, independent, and
accurate assessments of the financial condition of public companies. Reliable
outside accounting and an auditor’s signed statement are the bedrock of company
valuation.
However, despite a wave of major accounting scandals and
legislative fixes in recent years, audits of public companies contain a
shockingly high rate of errors and new scandals have arisen undermining public
confidence.
A 2017 inspection of public company audits by The International Forum of Independent Audit Regulators found that 40 percent contained serious
errors, including issues pertaining to accounting estimates and internal
control testing, and a 2014 analysis by the Public Company Accounting Oversight Board found that one third of audits were so deficient that they should
not have been issued.
In the face of these misrepresentations, ensuring the validity
of audits has become even more important. Unfortunately, within the past year,
KPMG, a “Big Four” audit firm, was embroiled in a scandal regarding the theft of confidential information from the PCAOB, which also brings into question the
ability of the PCAOB to do its job and meaningfully “audit the auditors.”
In January 2018, the SEC and DOJ initiated an enforcement action
against several former KPMG employees and one PCAOB employee in connection with
attempts by KPMG to cheat on PCAOB inspections. At the same time, in a parallel
proceeding, the DOJ issued an indictment against the same individuals in USA v. Middendorf et al., in federal
court in the Southern District of New York. Earlier this year, defendants in
the DOJ criminal action tried but failed to have several counts from the case
dismissed. In October 2018, two of the defendants in the DOJ action pled
guilty. One, KPMG’s former partner-in-charge of inspections, admitted that he
and “other partners and employees of KPMG…agreed to share and use confidential
information from PCAOB, to which we were not entitled.”
In his January 2018 statement announcing the actions, SEC
Chairman Jay Clayton wrote that, based on discussions with SEC staff, he
believed that investors could continue to rely on KPMG’s audit reports —
despite the fact that KPMG was attempting to steal information from the PCAOB
specifically in order to game the PCAOB’s inspection of its audits.
Since that time, court filings have revealed details about some
of the KPMG clients whose audits were implicated in the scandal, and experts
believe that Chairman Clayton’s statement should be re-evaluated in light of
these disclosures. According to Nell Minow, a corporate governance expert, the
“breadth and seriousness of the charges and the importance to the financial
markets of the companies affected should require a thorough internal
investigation with results made public. If the SEC or KPMG do not insist on it,
investors and clients should.” Lynn Turner, the SEC’s former chief accountant,
echoed such sentiments, stating: “I believe chairman Clayton misled investors
when he said they could rely on the audits report issued by KPMG. In my
opinion, the information that has come to light raises a serious question with
respect to the integrity, objectivity and professionalism of the audits.”
Trial in the ongoing litigation is scheduled for February 2019,
and given the conflicting views from the SEC and governance experts, investors
and their counsel should think carefully about how much faith to put in these
audits.
 |
| Hannah Ross |
 |
| Tony Gelderman |
About the Authors:
Hannah Ross is a partner and Tony Gelderman is counsel at Bernstein Litowitz Berger & Grossmann LLP. They
specialize in advising and representing institutional investors in securities
fraud and corporate governance matters in state and federal courts nationwide.
No comments:
Post a Comment