The firm was facing allegations that it repeatedly represented itself in audit reports as “independent” when it was providing non-audit services (NAS) to clients that compromised its independence.
According to the SEC, KPMG provided a range of non-audit services, including restructuring, corporate finance and expert services to the affiliate of one audit client, and book-keeping and payroll to affiliates of another audit client.
In a third case, the firm employed someone who had recently retired from a senior position in an affiliate of an audit client and then loaned him back to the affiliate to do the same work he had done before – in other words, he acted as manager, employee and advocate for the same client.
All these incidents were in breach of SEC regulations and laws.
Although KPMG did not admit or deny the charges,the settlement included $5,266,347 which represented the fees it had been paid by the clients, plus $1,185,002 which was prejudgment interest.
The firm also agreed to carry out internal changes to educate its staff on auditor independence requirements.
“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John Dugan, associate director for enforcement in the SEC’s Boston Regional Office.
“KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”
The SEC said it had also separately looked at the firm’s practice of seconding non-manager tax professionals to clients to help them with their tax compliance work under the direction of the clients’ management.
Although it did not issue an enforcement action against the firm, it has made it clear that these so-called “loaned staff arrangements” between auditors and audit clients are “inconsistent with” the rules banning auditors from acting as employees of their audit clients.
Audit firms and audit committees, it added, will have consider carefully whether any proposed service could “cause the auditors to resemble employees of an audit client in function or appearance even on a temporary basis”.