U.S. Audit Overseer Mulls Safeguards on KPMG Leak Scandal

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By Steve Burkholder

The Public Company Accounting Oversight Board is working to prevent future breaches of conduct that tipped off KPMG LLP about audit inspections and led to the firing of six employees of the firm, including its chief U.S. auditor.Confidentiality is a hallmark of annual inspections of audit firms. That apparently was broken in the KPMG episode, according to the board and the Big Four firm.

It is unusual for an accounting firm to carry out so many firings at once, especially of high-ranking partners. In addition, an alleged PCAOB leak of information of the magnitude of what was provided to KPMG hasn’t previously been known, at least publicly.

PCAOB Chairman James Doty, in a statement provided to Bloomberg BNA April 13, referred to the improper disclosure of confidential information by a board staff member on KPMG audits that were to be scrutinized by the agency.

The PCAOB staff member—no longer at the board—leaked the sensitive information to a former PCAOB employee who worked at KPMG, according to the accounting firm, which has been rocked by the revelations made April 11.

Additional Safeguards

“I want to take a hard look at what additional safeguards may be necessary to reinforce the integrity of our regulatory processes,” Doty said.

The PCAOB chairman said the board has “a strong ethics code” and an active ethics program that requires annual compliance.

“The improper disclosure here was clearly a violation of that code and does not reflect the integrity and honor that the majority of PCAOB employees bring to their jobs every day,” Doty said.

The accounting oversight board writes and enforces standards for auditors of public companies. As part of its work, PCAOB conducts annual inspections of audit firms, in which audits are scrutinized carefully.

The board, which operates under the aegis of the SEC, was created by the 2002 Sarbanes-Oxley corporate and accounting reform law. Congress passed the legislation to respond to the Enron and WorldCom scandals.

KPMG Spurred to Action, Too

Lynne Doughtie, KPMG’s chairman and chief executive, said the firm is “taking additional steps to ensure that such a situation should not happen again.” KPMG says it continues to cooperate with regulators.

Spokeswomen for the PCAOB and SEC declined comment April 14 when asked if each of their respective agencies was investigating the matter that ed to the firings of the KPMG employees.

An apparent whistleblower tipped off KPMG about the situation that led to the firings and scrape with PCAOB.

“The firm learned in late February, from an internal source, that an individual who had joined KPMG from the PCAOB subsequently received confidential information from a then-employee of the PCAOB, and shared that information with other KPMG personnel,” according to the Big Four firm’s April 11 news release. “That information potentially undermined the integrity of the regulatory process.”

Scott Marcello, the former KPMG LLP vice chair of audit who was sacked because of the episode, couldn’t be reached for comment April 14. Frank Casal, a 38-year-veteran of KPMG, was named to succeed Marcello.

KPMG has declined to name the others who were said to be involved in the leak incident. The PCAOB spokeswoman declined to name the former board employee who made the improper disclosure.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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