KPMG, arguably one of the biggest global auditing firms, was charged by the Securities and Exchange Commission (SEC) in 2014 for breaching legislation and professional ethics that require auditing firms to sever all other ties with their clients so that they remain objective and impartial (Rapoport, 2016). The rules stipulate that an auditing firm shall not have any interests whatsoever in the company it engages as a client and subsequently renders auditing services. In this instance, KPMG came under fire for having ties that were not audit-related to the companies whose books they were auditing. In the ensuing litigation claims and report tabled by SEC, KPMG was found culpable of breaching the rules by (1) providing other services such as tax advisory, and bookkeeping services to affiliates of the client companies, (2) loaning out employees who had previous professional relationships with their client companies to affiliates of the same clients to do auditing tasks, and (3) allowing its employees to have financial interest in the clients' businesses in the form of stocks ("SEC.gov | SEC Charges KPMG With Violating Auditor Independence Rules", 2016).
Although KPMG did not admit nor deny the claims, the company was forced to pay a settlement of close to $8.5 million. Considering that the company's Australian affiliate had been forced to pay out a settlement under similar circumstances, the litigation had a considerable impact on the firm. The company had to do an internal overhaul of its management as top employees with any interest in any of its clients were transferred to various departments to avoid future conflict of interest. Further, KPMG had to introduce and implement programs that would see to the education of employees on such matters regarding independent auditor rules. Finally, the company agreed to engage independent consultants occasionally in evaluating its stand on independence from clients.
Corporate ethics and accounting principles dictate that an entity remains impartial and objective while providing services to its clients. In auditing matters, this objectivity aims at ensuring that the relevant stakeholders receive information that accurately reflects the company's financial health and thus help them in making informed decisions. In this case, KPMGs impartiality was compromised as it had maintained non-auditing relationships with their clients affiliate companies. Consequently, the audit reports that it presented on the same clients could not be ascertained to be impartial. As such, litigation on the basis of misinforming the stakeholders and misrepresenting the clients true financial status is justified. Additionally, internal controls that are aimed at preventing such scenarios were overlooked when KPMG failed to conduct enough research before loaning out its employees to affiliates of their clients. As such, it became challenging to ascertain whether the loaned employees in question acted to drive KPMGs agenda, the audit clients, or their personal agendas. In light of all these irregularities, the litigation and fines were justified.
Although it was unclear whether the irregularities were conducted with full knowledge and cooperation of KPMGs management, the fact that there were irregularities in the first place points to deteriorating ethical standards in the firms leadership(Weber & Zhang, 2008). The leadership at the company should have been in a position to identify the irregularities particularly those concerning employee interests in the client's companies. Moreover, the ethical standards of the management in any company dictate that the management should put the company's interests first. The leadership at KPMG were contrary to these standards by failing to notice the independence issues before assigning employees to audit tasks, Additionally, by loaning out employees to client companies where they had worked before, they put the interests of those clients before the enterprise (KPMG).
The fines which totaled $1.7 million, though hefty, were justified as the reports proved beyond a reasonable doubt that KPLG engaged in unscrupulous dealings. The SEC did not opt for enforcement action because it noted that the company had responded swiftly to the accusations leveled against it and had also taken measures to settle the situation and prevent future re-occurrences. Furthermore, since the irregularities had occurred in separate incidences from 2007-2011 and there was no indication that the company still encouraged such practices, the SEC opted to impose fines and force KPMG to pay back the disgorged funds. This was the correct option based on current industry standards as civil lawsuits, or criminal prosecution would not have been in the best interest of any of the concerned parties. In any case, such severe legal measures would have made the SEC and Public Company Accounting Oversight Board susceptible to litigation for failing in their mandate to prevent such irregularities or arrest them as they are happening.
Preventing similar scenarios in the future entails a joint effort between industry players and the oversight authorities. Furthermore, regulators should adopt a sensitization policy that would educate relevant stakeholders on the applicable laws, the need to uphold these laws, and report irregularities as soon as they happen. They should also impose criminal proceeding on individuals who are found to be willing complacent to such behavior as a way to deter managers from engaging in unscrupulous activities in the future.
Rapoport, M. (2016). KPMG to Pay $8.2 Million to Settle SEC Charges. WSJ. Retrieved 5 August 2016, from http://www.wsj.com/articles/SB10001424052702303448204579340820706911040
SEC.gov | SEC Charges KPMG With Violating Auditor Independence Rules. (2016). Sec.gov. Retrieved 5 August 2016, from https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540667080
Weber, J., Willenborg, M., & Zhang, J. (2008). Does auditor reputation matter? The case of KPMG Germany and ComROAD AG. Journal of Accounting Research, 46(4), 941-972.
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