The three – David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, Thomas Whittle, KPMG’s former national partner in charge for inspections, and David Britt, KPMG’s former banking and capital markets group co-leader – have been charged with conspiracy to defraud the US and conspiracy to commit wire fraud, as well as three counts of wire fraud.
Their former colleague, Cynthia Holder, who worked at the US audit watchdog the Public Company Accounting Oversight Board (PCAOB) before joining KPMG, and former PCAOB inspector Jeffrey Wada face similar charges although only two counts of wire fraud. If found guilty, they could both be sent down for up to 65 years.
All five were arrested and appeared in court on Monday.
A sixth defendant, former PCAOB employee and KPMG partner Brian Sweet pleaded guilty to conspiracy and wire fraud at the beginning of January and is cooperating with the government.
Commenting on the case, Manhattan US attorney Geoffrey Berman said, “These defendants were each meant to be the watchmen of our financial system.
“The defendants who formerly worked for KPMG were vested with the responsibility to audit publicly filed financial statements and issue audit opinions relied on by the investing public. The defendants who formerly worked for the PCAOB were supposed to help ensure the quality of the work behind those audits.
“But, as alleged, these defendants chose to cheat the system and to undermine the safeguards put in place to protect investors. We will work tirelessly with our law enforcement partners to root out corruption like this wherever it is found.”
Philip Bartlett, the inspector in charge, added, “As alleged, the defendants took advantage of confidential information stolen from the PCAOB and used it to tip off KPMG partners about impending audit inspections.
“This undermined the overall integrity of the programme. The PCAOB was created by Congress as part of the Sarbanes Oxley Act to reduce accounting scandals but, in this case, certain former employees and KPMG insiders created their own corruption scandal.”
Papers lodged in the Manhattan Federal Court reveal more details about the five’s alleged activities than those released on Monday by the Securities and Exchange Commission.
According to the papers, within a week of Sweet’s joining KPMG in 2015, Middendorf, Whittle and Britt started asking him for confidential PCAOB information about which KPMG audits would be inspected by the PCAOB that year.
It is alleged that Middendorf told Sweet to remember where his paycheck came from and to be loyal to KPMG, while Whittle told Sweet that he was most valuable to KPMG at that moment and would soon be less valuable. As requested, Sweet shared the PCAOB’s confidential 2015 list of inspection selections.
Not long after, Sweet helped former PCAOB colleague Holder to get a job at KPMG, where she reported to him. While she was going through the process of obtaining employment at KPMG, violated PCAOB rules by continuing to work on KPMG inspections at the PCAOB.
Once she secured a job at KPMG, like Sweet had done, she stole valuable confidential information on her way out of the PCAOB and then passed it on to Sweet.
In March 2016, she managed to get hold of the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but had recently been passed over for promotion. She gave the list to Sweet who then passed it on to the three senior KPMG partners.
Middendorf, Whittle, Britt and Sweet then agreed secretly to “re-review” the audits that had been selected. To cover up their illicit conduct, Britt allegedly gave other KPMG engagement partners a false explanation for the re-reviews.
As a result of the re-review, KPMG was able to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.
Wada, who meanwhile had been passed over for promotion again, stole more confidential PCAOB information in January 2017. This time he passed on a preliminary list of confidential 2017 inspection selections for KPMG audits to Holder, together with his CV. He asked for her help in getting him a job at KPMG.
Sweet shared the data with Britt and Whittle who wanted to know if they would get the final list as well.
A month later, Wada texted Holder to say, “I have the grocery list... All the things you’ll need for this year”. He then gave her the full confidential 2017 final inspection selections.
When the list reached the three senior partners, they agreed with Sweet warn the engagement partners on the list to pay extra attention to the audits. However, one of the engagement partners reported the matter and the firm asked its general counsel team to investigate.
The court papers allege that Holder and Sweet then tried to destroy or fabricate evidence relevant to the investigation.
“For example, Holder deleted a number of relevant text messages, emails, and documents, and said she was going to purchase a ‘burner phone’ so her conversations could not be monitored. Similarly, Sweet burned evidence of the 2017 inspection list and provided a falsified version of the list to KPMG counsel.”
The Attorney’s Office of the Southern District of New York, which brought the indictment, stressed that the charges were “merely accusations” and that the defendants would be “presumed innocent unless and until proven guilty”.