London Has Fallen

Scott London seemed to have it all. One of three sons of a Los Angeles certified public accountant,

he followed his father into the accounting business. He graduated in $1984$ from California State

University$-$Northridge and soon landed a job at a firm that later became part of KPMG$.$ From an

outsider's perspective, London appeared to have an ideal personal life. He and his wife Michele

had two children and lived in an expensive home at the end of a cul$-$de$-$sac in a Los Angeles sub$-$

urb known as the gateway to the Santa Monica Mountains. Professionally, as the KPMG partner

in charge of the firm's Pacific Southwest Audit practice, he had more than $50$ partners and $500$

employees reporting to him. After $29$ years with the firm, he seemed to be set financially, making

close to $$900,000$ per year in salary.

With all this going for him, London shocked his colleagues and friends when he pled guilty to

passing confidential client information to his golf buddy Bryan Shaw who had then traded on the

information to make more than $$1\mathrm{.}5$ million in illegal gains. Although the information was initially

passed "innocently" in casual conversation on the golf course, London began accepting gifts of

cash and jewelry in exchange for the tips. Shaw was caught when his trading account began show$-$

ing up linked to trades made just before releases of corporate information to the public, a tell$-$tale

sign of insider trading. When confronted, he agreed to cooperate with authorities, including agree$-$

ing to wear a wire to gain evidence against London. The sting operation that nabbed London was

the result of a joint investigation by the FBI, SEC, and Department of Justice.

When first notified of the allegations, KPMG acted immediately and decisively, firing London,

who the firm said "violated the firm's rigorous policies and protections, betrayed the trust of cli$-$

ents as well as colleagues, and acted with deliberate disregard for KPMG$\text{'}$s long$-$standing culture

of professionalism and integrity." Due to independence concerns, the firm resigned as auditor of

Skechers and Herbalife, companies whose audits London oversaw. KPMG also announced that

it would reassess its quality control standards, which include employee training, monitoring key

employees' personal investments, and a whistleblowing hot line.

In return for the confidential information, London received more than $$50,000$ in cash and gifts,

including a $$12,000$ Rolex watch; however, the amount of these "gifts" was seemingly immaterial

given London's almost seven$-$figure annual salary. In addition to losing his job and being sued by

his former employer, London ended up serving $14$ months in prison and paying $$100,000$ in fines.

He is now out of jail. He has openly confessed to his misconduct and has expressed his remorse:

"I cannot begin to apologize for my incredibly stupid actions. There is no excuse for my wrongful

conduct." However, even in hindsight, London has trouble explaining his behavior: "I felt guilt

about it regularly$-$I can't explain it to be honest with you. $..$ I look back at when this started and

I can't explain it $....$ I guess $[$the$]$ best way to describe it is that humans make mistakes."

We may never know the true motives behind his actions, but we do know that London made a

conscious decision to betray his employer, his clients, and his profession, violating a number of

rules from the AICPA Code of Professional Conduct in the process.

DISCUSSION QUESTIONS

What code violations have occurred in this case?

What is the range of penalties that the PCAOB could have levied against London? By the California

State Board of Accountancy?

What do you think is the appropriate penalty?

What penalties were assessed?