Auditing

KPMG Sanctioned for Improper Conduct

According to the SEC, the conduct of the firm and four individuals resulted in ''repeated audit failures'' in connection with Gemstar's financial s...
Stephen TaubOctober 22, 2004

The Securities and Exchange Commission settled charges with KPMG LLP, two former partners, and a current partner and senior manager for “improper professional conduct” as auditors for Gemstar-TV Guide International Inc.

The Big Four accounting firm, which agreed to settle the action without admitting or denying the SEC’s findings, was not fined by the commission. However, it did agree to compensate Gemstar shareholders who were harmed, to the tune of $10 million — the largest payment ever made by an accounting firm in an SEC action, according to the regulator.

The four individuals — former partners Bryan E. Palbaum and John M. Wong; Kenneth B. Janeski, a partner in KPMG’s Los Angeles office; and David A. Hori, a manager in the Phoenix office — also agreed to settle the action without admitting or denying the findings. They are barred from appearing or practicing before the SEC for periods ranging from one year to three years.

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The SEC asserted that from September 1999 through March 2002, the conduct of KPMG and the individuals resulted in “repeated audit failures” in connection with Gemstar’s financial statements. During this period, the company overstated its revenues by $250 million, including revenues from both advertising and from licensing of its interactive program guide.

KPMG’s auditors also repeatedly relied on the representations of Gemstar management, maintained the SEC, even when those representations were contradicted by their audit work. “The auditors thus failed to abide by one of the core principles of public accounting — to exercise professional skepticism and care,” insisted SEC regional director Randall R. Lee, in a statement. “This case illustrates the dangers of auditors who rely excessively on the honesty of management.”

According to the settlement, KPMG has agreed to conduct additional training for its partners and managers on qualitative materiality, accounting for multi-element transactions, and disclosure issues. The firm will also adopt a policy that requires more-effective consultation between audit engagement teams and KPMG’s national office in connection with possible restatements.

The SEC has a pending lawsuit in federal court against four former executives of Gemstar — former chief executive officer Henry C. Yuen, former chief financial officer Elsie M. Leung, former general counsel Jonathan B. Orlick, and former TV Guide CFO Craig Waggy. The trial is scheduled to begin January 18.

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