PCAOB Cheating Crackdown Continues

U.S. accounting regulators today fined KPMG’s Dutch affiliate $25 million for rampant employee cheating on the firm’s training exams, and then topped that eye-popping enforcement action with two more smaller fines against Deloitte’s Indonesia and Philippines affiliates for similar offenses. 

The Public Company Accounting Oversight Board dropped this news bomb on Wednesday morning, and it’s a doozie. According to the PCAOB and Dutch accounting regulators, KPMG’s Netherlands affiliate (KPMG NV) engaged in cheating well into 2022 — years after other branches of the firm had already been sanctioned for cheating offenses. Hundreds of employees were involved, including Marc Hogeboom, KPMG NV’s head of assurance. He was fined $150,000 personally and barred from public accounting permanently. The $25 million fine against the firm is the largest monetary penalty in PCAOB history.

The Dutch exam cheating scandal is only the latest in a long list of KPMG cheating scandals around the world in the last five years. The U.S. firm first was nailed by the Securities and Exchange Commission in 2019 for a scandal where staffers who had passed CPE training exams shared the correct answers with colleagues so they could improve their scores. Another sanction arrived against KPMG Australia in 2021, where more than 1,000 staffers shared answers with each other to boost their chances of success on internal tests and professional licensing exams. KPMG affiliates in Colombia, India, and Britain were sanctioned for cheating in 2022. 

Needless to say, this latest scandal left PCAOB chairman Erica Williams displeased. 

“The PCAOB will not tolerate cheating nor any other unethical behavior, period,” Williams said in a statement today. “Impaired ethics threaten the investor confidence our system relies on, and the PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity.”

As usual with enforcement actions these days, the firm and Hageboom neither confirm nor deny the PCAOB’s findings. KPMG NV also agreed to improve its quality control policies and procedures for internal training, and to report its compliance to the PCAOB. 

The Gory KPMG Details 

The complaint against KPMG NV makes for painful reading. From at least 2017 until the end of 2022, the firm failed to implement policies and procedures to administer employee training tests, including exams for employees to maintain their professional certifications. Those quality control failures, in turn, prevented KPMG NV from identifying that hundreds of employees were involved in improper answer sharing — either by providing access to test questions or answers, or by receiving such access and not telling anyone about it.

Worse, numerous senior leaders at KPMG NV either knew that cheating was going on, participated in the cheating themselves, or “failed to correct multiple inaccurate representations” to the PCAOB during its investigation. 

For example, Hageboom “repeatedly engaged in improper answer sharing with his subordinates,” and in one instance had a subordinate sit with him and assist while Hageboom took a test as part of mandatory training for audit supervisors.

Hageboom wasn’t the only one. The chairman of the firm’s supervisory board received assistance from a staff member while taking mandatory training that the board had assigned to the chairman. “The staff member sat next to the supervisory chairman while he took the two training tests,” the PCAOB settlement order says, “and the staff member finished one of the tests for the supervisory chairman when he left for a meeting before completing the test.”

At one point, PCAOB investigators asked KPMG NV whether it was aware of any cheating that happened before July 2022. The firm replied no, it was not aware, in a statement that had been reviewed by both the management and supervisory boards — when members of both boards had engaged in cheating themselves during that same time period. 

We could go on from there, with other examples of willful blindness, executives not speaking up when they should have, and various other instances of misconduct that are appalling at a firm that is paid to, ya know, confirm that its clients obey accounting rules and uphold an ethical environment. 

And Yet More Exam Cheating

KPMG’s misconduct is so bad that it almost eclipses the other news that Deloitte affiliates in Indonesia and the Philippines were sanctioned for essentially the same offenses. Each firm was fined $1 million.

As described by the PCAOB, Deloitte Philippines’s audit partners and other personnel engaged in widespread answer sharing from 2017 to 2019. Typically they either provided answers on mandatory training courses to others or used answers from others; or received answers without reporting that misconduct up the chain of command. The firm’s  former national professional practice director “directly and substantially contributed” to the cheating. He was hit with a $10,000 civil penalty and barred from the profession for at least three years. 

From 2021 to 2023, more than 200 Deloitte Indonesia professionals engaged in answer sharing. The firm’s failure to detect and deter improper answer sharing “occurred despite numerous warnings from Deloitte Global and regional leadership that answer sharing was impermissible,” the PCAOB said.

“Today’s orders should send a signal to firms and their leadership that they have a responsibility to set an appropriate tone at the top, particularly with regard to issues of integrity and personnel management,” Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations, said in a statement. 

Words to remember, since this isn’t likely to be the last cheating sanction we see in the audit world.