What prompted partners at KPMG to facilitate cheating on internal training exams? In 2018, Timothy Daly, a former lead engagement partner, solicited and received questions and answers to the examination from a colleague, who was a second audit partner on one of Daly’s engagements teams. After learning of KPMG’s internal investigation of its audit professionals’ cheating, Daly deleted text messages with his colleague in which the colleague had relayed the questions and answers to the exam, after receiving a notice from the firm requiring Daly to preserve them. Daly also made a misrepresentation to KPMG’s investigators, which he subsequently self-corrected. What follows is a summary of the facts of an SEC action against Daly.¹⁰⁶

The legal matter with Timothy Daly pertained to a continuing professional education online training program that qualified for CPE credit. KPMG required its auditors to pass an examination at the conclusion of each online training program. Audit professionals are given three opportunities to pass each examination. If one of KPMG’s audit professionals is unable to pass after two attempts, their Performance Leader is notified. If they are unable to pass after three attempts, the consequences are more significant including: to retake the training; they are prohibited from conducting audit work until they pass the exam; and others at the firm may be notified. Audit professionals also understood that failing to pass an exam could lead to their compensation being reduced.

In the fall of 2018, KPMG required its audit staff to complete trainings and exams related to a new lease accounting standard. In late September, Daly asked Michael Bellach, the second partner on a significant KPMG engagement for which Daly was the lead engagement partner, about his progress on the lease testing. Bellach told Daly he had completed the last lease exam, and it was difficult. Bellach also told Daly he had pictures of the questions and his responses that he had taken after he failed his first attempt for his own use in preparing to retake the exam. In early October, Daly sent Bellach a text message asking for the photographs of the failed lease exam, and Bellach texted the images back to Daly.

After learning of potential cheating on internal training exams, KPMG leadership began an internal investigation. The firm’s Board of Directors then formed a Special Committee led by an independent board member to oversee an investigation of this conduct.

As part of its investigation, KPMG’s Office of General Counsel e-mailed an “Urgent Request” to all KPMG personnel to preserve all documents related to KPMG’s training requirements or training sessions. The November 1, 2018 e-mail emphasized the importance of “strict compliance” with the document preservation order, cautioning that failure to comply could expose individuals and the firm to serious consequences. After receiving the November 1 document preservation notice, Daly deleted the text message and photos of the failed lease exam Bellach had sent him and encouraged Bellach to do the same.

In December 2018, the firm required certain audit professionals to complete a questionnaire that probed whether individuals had shared exam materials. Daly falsely answered “no” to the question of whether he had received any answers to KPMG training exams. Early the next week, Daly self-corrected by informing KPMG senior management that he had, contrary to his response to the questionnaire, received a colleague’s answers to a training exam.

The SEC found that Daly willfully violated PCAOB Rule 3500T, which required Daly to comply with ethics standards, including to maintain integrity, as described in the AICPA’s Code of Professional Conduct. As a result, Daly failed to comply with the meaning of Section 4C(a)(2) of the SEC Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

As a result of SEC’s legal finding, it issued an Order requiring Daly to do the following and/or had his practice of public accounting restricted:

• Cease and desist from committing or causing any violations and any future violations of PCAOB Rule 3500T.
• Denied the privilege of appearing or practicing before the Commission as an accountant.
• After three years from May 18, 2020, the date of the legal finding, Daly may request that the Commission consider his restatement by submitting an application to resume appearing or practicing before the Commission as a preparer or reviewer, or a person responsible for the preparation or review, of any public company’s financial statements that are filed with the Commission (other than as a member of an audit committee).

The SEC also found that numerous KPMG audit professionals had cheated on internal training exams during a threeyear period by improperly sharing answers and manipulating test results. John Donovan, another audit professional, had received answers to the exams from subordinates on several occasions and shared answers with others. Certain employees actually lowered the pass rate for their test scores so failing scores would become passing scores. They did this through manipulation of the software program which scored the exam.

Senior partners including lead audit engagement partners who were responsible for compliance with PCAOB standards in auditing their clients’ financial statements down to junior level employees were sharing the examination answers freely between themselves. They shared this information via e-mail and even sent screen shots of pages with correct answers.

The SEC Order did not state how this unethical behavior became known to the Board of Directors. It only stated, “Upon learning of the potential cheating, KPMG leadership alerted the SEC staff and began an internal investigation.” The Order did specifically note that during the duration of the conduct, “Prior to the firm’s investigation, no one reported sharing of exam answers to the firm’s Ethics and Compliance Hotline.”

The KPMG cheating on internal training exams raises many questions about how such a practice could have occurred at a Big Four CPA firm.

Questions

1. Evaluate the facts of this case from the perspective of KPMG’s culture. What are the key factors that allowed the  cheating on training exams to persist?
2. It could be said that senior partners that shared exam answers believed the goal of helping partners and others  pass the internal training exams justified the way test questions and answers were shared and lowering the passing  rate. Evaluate this statement from the perspective of “end justifies the means” ethical reasoning. How else might  the firm have evaluated whether what it was doing was proper? 
3. Assume you are preparing to interview for a job with KPMG. You are aware of the cheating scandal. The interview went well and you received an offer of employment. Would knowledge of the scope of the cheating  scandal and the SEC’s ruling in that matter change your decision to accept an offer? Why or why not?