For a year we have known of a fiasco at KPMG in which the firm obtained a list of PCAOB’s plans for inspecting KPMG audit workpapers. That information was floated around at the senior levels of the firm. Multiple people were fired.
This week, the Department of Justice unsealed indictments against four former KPMG employees and one former PCAOB employee.
There is little new information on the leak from PCAOB to KPMG since the first reports.
I’m expecting to hear a lot more, most likely after PCAOB and SEC finish their investigation. If I read this situation correctly, and if public reports are correct, there will be sanctions from SEC against some of the KPMG staff. At that point, the SEC public documents will tell us a lot more.
While we wait, here are two articles that give some general background.
4/17/17 – Francine McKenna at re:The Auditors – KPMG takes its turn with a Big 4-sized scandal– If you’ve been looking for an article with a long time horizon to survey the assorted scandals in the Big 4 world, this post will give you the deep background you want.
Leak from PCAOB to KPMG
Post describes the current information that is public on the leak of inspection engagements from someone at PCAOB to someone at KPMG. Article illustrates there still is not a lot visible in the public realm to answer all the questions that come to mind.
Ms. McKenna quotes my comment earlier on the PCAOB-KPMG leak feeling to me like a red flag of something deeper. She agrees with me.
Each firm has their own round of fiascos
All the firms have had their turn of embarrassing publicity, often with fines or undisclosed settlements.
A minor update on the leak from a now-former PCAOB staffer to a now-former KPMG staffer giving advance notice of audits selected for inspection. Also, many questions come to my mind after thinking about this situation.
The KPMG representative says that KPMG discovered the issue and notified the SEC and PCAOB.
Most significant piece of new information is that the six people who left the firm were fired.
They did not resign.
Why is this significant, at least to me? In the initial reports, I saw verbs used indicating all of the following possibilities for the partner’s departure. They may have:
resigned (which means sorta’ kinda’ voluntary terminations), or
were fired (which means the firm unilaterally terminated them), or
departed (which doesn’t addressed which party made the termination decision; in other words could have been a summary firing, or truly voluntary, or under the proverbial threat of you-can-either-resign-or-I’ll-personally-throw-you-out-the-window).
At first read, I did not analyze which of the above options actually was in play. I put together all the reports I read and assumed (you know what that means) these were all forced resignations, as in “I think it’s time for you to resign.”
Other comments by the PR person confusing me are statements that the fireable offenses were possessing the leaked information or knowing others knew about it.
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.
If you casually pay attention to what is going on in the land of Big 4, a world far, far away from most of us in the accounting world, you might have interest in two recent articles from Jim Peterson, pondering the survivability of the huge firms. I will summarize what I think are a few highlights.
2/13 – Jim Peterson at Re:Balance – If the Big Four Went “Ex-advisory” – Deja Vu? Or Worse?– Regulators don’t like the huge consulting practices in the Big 4 and the partners in the Big 4 consulting arms don’t like the constraints on their growth, opportunities, and compensation from being tied to the audit & tax practices.
Article speculates on the impact if the consulting work were to be spun off, as happened back in 1998 through 2001.
Manual accounting records. Anyone miss those? Didn’t think so. Image courtesy of Adobe Stock.
A few fun reads for accountants:
Why no Hollywood movie will ever show a profit.
Adrienne Gonzalez is back at Going Concern, talking about the idea of TBTF Big 4 firms possibly, maybe, becoming SIFI (not likely to ever happen, but a fun read anyway).
Several years ago I took a fraud education CPE course in which the instructor went on a tangent to explain why no Hollywood movie has ever made a profit and none of them ever will.
I am constantly amazed at how massively big the Big 4 firms are in terms of revenue. Inside Public Accounting published their list of the 100 biggest accounting firms for 2016. This is quite current, since many firms have a May or June 2016 fiscal year-end.
Here’s the income number for the 10 largest firms, in millions of dollars, along with comparable data from a year ago: …
That threaten its business phrase in the headline actually means could take down the entire firm.
There are three major cases, each with a serious enough impact, that an adverse ruling in any one could take out the firm. One is in court now, another expected next February, with the final one in court within a year.
Work with me as I try to process through the cases. Here is the thumbnail version.
Two lawsuits over one client
Taylor Bean & Whitaker Mortgage Corp allegedly generated massive amounts of fraudulent loans, a large portion of which were sold to Colonial Bancgroup. Both companies failed during the financial crisis.
PwC audited Colonial Bank and allegedly did not discover the bad loans that their client, Colonial Bank, bought from PwC’s non-client Taylor Bean.
A ‘virus’ that can infect your quality control system.
How to quickly check if someone is licensed.
Risks of working for the Big 4.
Deep background on the Private Company Council.
2/10 – CPA-Scribo – How Internal Viruses Affect Accounting Firms – No, not the kind of viruses you were thinking. This is caused by staff doing a quick search on the ‘net to find a sample note and pull down an erroneous example, which spreads to most financial statements issued over the next year.
Charles Hall provides a frighteningly real illustration how such a virus could hit a firm.
If we took our magic wand and split up each firm along 3 product lines, the resulting firms would be larger than the currently fifth largest firm.
If we took those Big 12 firms and waved our magic wand again to split each of the 4 audit firms in half, the former Big 4 would make up 16 of the 18 largest firms.
Here is some more info. The breakout of the seven biggest firms along product lines, as reported by the Accounting Today magazine I mentioned earlier. …
The Accounting Today magazine that arrived yesterday had a supplement with info on the 100 largest CPA firms. It is available on line here with subscription and explicit permission for vendors to contact you.
Look at the revenue info for the ten largest firms: …
Inside Public Accounting released their annual list of revenue for the 100 largest accounting firms. It can be found here.
When I saw the article, I did what any self-respecting CPA would do – – paste the data into a spreadsheet and start crunching the numbers. Here are a few of my observations: …
Stat data from the AICPA lists information for CPA firms sorted by size: big 4, top 100, large (21-75), medium (11-20), small (2-10), and sole practitioners. Table includes number of firms in each category, total revenue for that sector, number of professional staff in each category. This is 2009 data.
