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CASE ANALYSIS PCAOB INSPECTION DATA LEAKED TO KPMG TO IMPROVE INSPECTION RESULTS Brief Summary: - Five KMPG partners were charged with conspiracy and wire fraud related to receiving confidential information related to planned PCAOB inspections of the firm's audits. A sixth KPMG employee had previously pled guilty to conspiracy and has been permanently barred from auditing public company financial statements. - It has been alleged that Brian Sweet (a former PCAOB employee) was hired by KPMG at a time when their audit deficiency rate was high (46\%). As a result, it has been alleged that KPMG made his hiring a "top priority" given the pressure from firm leadership to improve audit inspection results. - "KPMG has zero tolerance for such unethical behavior," said Lynne Doughtie, KPMG's chairman and CEO. She also commented that the firm is "taking additional steps to ensure that such a situation should not happen again." - In response to the leak, the PCAOB has indicated that it would conduct a review of its information technology and security controls and its ethical protocols for employees. Additional Information: - This situation involved some of the highest-ranking partners in KPMG's audit quality area. Specifically, in April 2017, KPMG fired Mr. Scott Marcello, who had been the firm's Vice Chairman of audit, the firm's top executive that is responsible for the entire audit practice. In addition, KPMG also fired Mr. David Middendorf, who had been the firm's national managing partner for audit quality and professional practice. Mr. Marcello has not been charged but Mr. Middendorf is being charged. - As a result of this situation, the PCAOB is now mandating that senior inspection staff - As a result of this situation, the PCAOB is now mandating that senior inspection staff can't seek employment with an audit firm that they are responsible for inspecting for at least a year. - The firm was under a substantial amount of pressure to improve their inspection results. Discussion Questions: Based on the facts above, please answer the following questions: - Do you think that the "fraud triangle" can be applied to this situation? Please provide a detailed explanation - Do you believe that the employees at KPMG should be facing criminal charges for their actions? Or, is termination enough of a punishment? Please provide a detailed explanation - Do you believe that the cooling off period of one year imposed by the PCAOB is enough time? Why or why not? - Comment on the statements made by the CEO at KPMG that they would be "taking additional steps to ensure that such a situation should not happen again." What else do you think she needs to do in order to ensure that this behavior does not happen again? References: - KPMG Fires Partners Over Leak of Audit Regulator's Confldentlal Plan The Wall Street Joumal, April 11, 2017, D. Michaels and M. Rapoport, p. B1-B2 - Former KPMG Executlves Charged The Wall Street Joumal, January 23, 2018, R. O'Brien, D. Michaels, and M. Rapoport, p. B-B2 - KPMG Case Shines Light on Audit Quality The Wall Street Joumal, January 25 , 2018, M. Rapoport, p. B1-B2 - SEC Charges Former KPMG and PCAOB Officials with 'Stealing' Inspection Exam Accounting Today, January 22, 2018, M. Cohn - U.S. Audit Overseer Under Scrutiny as 6 Charged in KPMG Leak Accounting Today, January 22, 2018, M. Robinson and C. Dolmetsch - Six CPAs Accused of Rigging Audit Inspections CFO.com, January 23, 2018, M. Heller - SEC Brief \#1 is available at: httes://www. sec.gov/litigation/admin/2018/34- 82556.pdf - SEC Brief \#2 is available at: https://www. sec.gov/litigation/admin/2018/34 82557.pdf