Another fiasco at KPMG

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There is as much missing from reporting on this story as has already been made public.

Here is what I can figure out:

An employee of PCAOB leaked to someone at KPMG a list of audit engagements that were going to be inspected. Recipient of the leaked info was previously an employee at PCAOB.

Lots of stuff we don’t know happened next.

When someone told senior leadership at KPMG about this back in February, KPMG took several steps. They hired external legal staff to investigate, notified the PCAOB of the leaked info, and then fired 6 people.

Amongst the fired staff are

  • two named partners, including the Vice Chair of Audit (who was in charge of all audit work in the US firm) and the national managing partner for audit quality and professional practice
  • three other unnamed partners
  • one other person, whose job level and responsibilities were not identified.

The leaker at PCAOB has resigned.

What is missing from the reporting?

What happened inside KPMG between the leak and the firings is not visible in the few articles I’ve found on the incident.

For your own research, check out:

Once I get beyond those articles, the coverage is basically rewrites of the first two articles above. Consider this rewrite:

Comments at the Going Concern post linked above raise the same question that comes to my mind. Specifically:

  • What did the KPMG partners do wrong?

The articles I’ve seen do not answer the question.

Having inside information is not wrong, unethical, or illegal. Partners in CPA firms gain access to confidential, or private, or inside information on a routine basis, maybe one or two dozen times a week.

The person at PCAOB leaking the info and the person at KPMG receiving the info are clearly wrong, on several levels.

People in KPMG who learned about the leaked info probably had an obligation to pass that info up the chain of command. I’m not aware of the KPMG code of conduct and I stay as far away from the PCAOB world as I possibly can, but I seriously doubt there is a rule in either organization that specifically addresses what to do when becoming aware of leaked scheduling information.

My speculation

What then is the resign-or-we-will-fire-you offense?

Here we must speculate, since the reporting does not address the question.

I’ll put my guess on the table: file clean up.

The reporting says PCAOB gives the names of engagements to firms in batches of 5 or 10 at a time with around two weeks notice in order to have enough time to gather the files and prepare the required questionnaires. The full list of engagements is developed well in advance but parceled out in small pieces.

If an unscrupulous audit team got wind a month or two early that an engagement was going to be inspected, the files could be reviewed and scrubbed. Extraneous stuff could be tossed, misfiled stuff could be filed in the right place, and missing documentation could be found in old emails and filed.

Most seriously this advance notice could allow someone, well after the audit was complete, to prepare some memos or checklists or other documentation that was missed during the audit. Under AICPA rules this is allowed, on the massive assumption that the after-the-fact addition to workpapers is very clearly identified as having been added to the file after the audit documentation date, with clear indication of the date added and who made the addition or correction or change.

I’ll provide an actual situation. It has happened that I’ve prepared a 990 tax return more than 60 days after releasing an audit report. In that situation, I would need to make additional calculations on audit workpapers in order to accumulate info for the return.

That means I was changing audit documentation after the 60 day cutoff. I clearly identified the date of the changes, initialed the workpaper, described nature of changes, and added a note explaining why the workpaper were changed. That is acceptable, proper, and ethical.

On the other hand, not documenting changes is a major issue. Identifying late changes will still result in a criticism from the PCAOB.

Cleaning up the workpapers is the only reason I can figure out why so many partner resignations were accepted.

If my wild guess is correct, then we will see more staff terminated, additional action by PCAOB, and in a year or two we will see disciplinary action by various state boards of accountancy.

We will see more on this story in the near future.

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