Six Charged in PCAOB Inspections Leak

Wild story from the world of corporate auditing today: six accountants charged with stealing confidential information from the Public Company Accounting Oversight Board, to help KPMG improve its standing in PCAOB audit firm inspections.

Worse, three of the six are former PCAOB staffers, who leaked the information to KPMG while trying to score jobs there — and, according to the SEC complaint, the three KPMG audit partners on the receiving end of the intel were only too happy to get it.

Leaks like that are a gross violation of companies’ most sensitive financial information, and may well give heartburn to the CFOs of other KPMG audit clients. The incident even prompted SEC chairman Jay Clayton to take the unusual step of publishing a special statement to soothe any frayed nerves.

“In matters of this type, I am also concerned about potential adverse collateral effects, including on our Main Street investors,” Clayton said. “Based on discussions with the SEC staff, I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.”

The scandal isn’t entirely fresh news; last year KPMG fired six employees related to the mess after the firm learned of the leak from an internal complaint. KPMG then reported the matter to the SEC and PCAOB, so kudos to the firm distancing itself from a few bad apples. Today, however, we can read all the gory details in the SEC’s complaints — and boy, they make for juicy reading.

The main culprit is Brian Sweet, a 40-year-old accountant from Fresno. Sweet joined KPMG as a partner in its professional practices group in 2015, and prior to that was an associate director in the PCAOB’s inspections division from March 2014 to April 2015.

On his way out the door, Sweet took information about which KPMG audits the PCAOB planned to inspect, and which parts of those audits the PCAOB planned to scrutinize. As the complaint against Sweet drily notes, “This was valuable information to KPMG, which had experienced a high rate of audit deficiency findings and had made a priority of improving its PCAOB inspection results.”

Sweet began supplying that information to his then-bosses at KPMG, David Middendorf and Thomas Whittle. They were only too happy to read the files and encouraged Sweet to share them with other KPMG colleagues. Then audit partners amended their work papers on the audits in question, to give themselves the best chance of looking good when the PCAOB inspectors finally showed up.

Meanwhile, Sweet also worked with two other PCAOB employees, Cynthia Holder and Jeffrey Wada, to leak more information to KPMG as Holder and Wada both tried to land jobs at KPMG, too. Holder actually did: she was an executive director in the firm’s professional practices group from 2015 to April 2017. (Apparently Wada never made the cut, despite sending his resume to Holder and telling her, “I am now trying to sell myself to KPMG.”)

The rest of the tale includes secrecy, evidence destruction, and a few corny glimpses into how clandestine capers unfold. Wada, for example, while working at the PCAOB, also sent a text message to Holder at KPMG telling her “I have the grocery list” of KPMG clients that the PCAOB planned to audit. (And he still didn’t get the job.)

All six people will face future disciplinary hearings in front of the SEC. They were also hit with criminal charges today by the U.S. attorney’s office in New York.

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