Two KPMG accountants, a partner and a senior manager, asked the Securities and Exchange Commission to review their suspension from practice resulting from their audit of a failed bank during the financial crisis.
In June 2014, Administrative Law Judge Carol Fox Foelak suspended the engagement partner, John J. Aesoph, for one year, and the manager, Darren M. Bennett, for a period of six months. The SEC’s Enforcement Division also appealed, seeking longer suspensions.
Suspensions from practice are significant sanctions for accountants, as the order effectively prohibits them from working on financial statements, opinions, and other papers filed with the SEC.
ALJ Foelak found that the accountants engaged in “a single instance of highly unreasonable conduct” under the agency's rules of practice in connection with their review of the loan loss reserves of TierOne Bank. She stated that the respondents knew that the loss allowances required heightened scrutiny and that there was a specific risk of collateral overvaluation. The accountants unjustifiably relied on representations from management, despite "numerous red flags" indicating that "management was inept and had an incentive to understate losses."
In seeking dismissal of the proceeding, the respondents argued that they did not engage in improper professional conduct. They also asserted constitutional objections to the action, but it is highly unlike that due process or appointments clause arguments would be successful before the Commission.
Bennett also advanced a rather novel argument that the Enforcement Division’s interpretations of accounting principles and auditing standards differed from accepted interpretations within the profession, and that a finding based on the division’s “novel interpretations” would amount to impermissible “rulemaking by enforcement.”
ALJ Foelak rejected the argument, citing an earlier Supreme Court case holding that administrative law “does not require that all the specific applications of a rule evolve by further, more precise rules, rather than by adjudication.”
In the Matter of John J. Aesoph, CPA, and Darren M. Bennett, CPA, Initial Decision Release No. 624 (June 27, 2014) (original ALJ decision); SEC Oral Argument (July 12, 2016).
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