Ex-KPMG Auditors Settle Tenet Charges

The audit team logged more than 500 hours in altering more than 350 working papers in its audit of Tenet Healthcare, the SEC asserted.
Stephen TaubMarch 31, 2006

The Securities and Exchange Commission has reached a settlement with three former KPMG auditors on charges they had improperly changed the working papers for their audit of Tenet Healthcare 2002 financials.

The SEC had accused two of the auditors of improperly completing the audit and of making “after-the-fact modifications” to the audit working papers, “which created the false impression that the audit had been adequately performed.” The commission also charged the KPMG manager on the Tenet audit for his role in the improper changes.

Altogether, the audit team logged more than 500 hours altering more than 350 working papers, according to the SEC. The improper changes included adding substantive comments to the working papers, backdating documents, and producing audit documentation after the fact. Some of the changes happened even after commission investigators issued a subpoena to KPMG, according to the regulator.

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The settlement comes amid other problems at the embattled Big Four accounting firm, which is embroiled in investigations stemming from its tax-shelter business. In February, the SEC accused a senior manager and an engagement partner at KPMG of “improper professional conduct” in their audit of U.S. Foodservice Inc.

In the current settlement, the participating ex-KPMG employees were Clete Madden, partner in charge of the Tenet audit; David Huffman, the senior manager on the audit; and Aron Carr, a former KPMG manager.

Without admitting or denying the SEC’s findings, Madden, Huffman, and Carr agreed to be barred from appearing or practicing before the commission as accountants. Under the terms of the settlement, Huffman may apply for reinstatement after four years, while Carr may apply after three years. Madden cannot apply for reinstatement.

“By failing to perform a proper audit and then altering documents, thereby concealing their audit failures, the KPMG auditors were derelict in their most basic gatekeeping functions,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement.

The issue came to light in October 2002 when a securities analyst reported that Tenet had been exploiting Medicare through an aggressive pricing strategy designed to trigger an increase in outlier payments, according to the SEC. (To counter hospitals’ incentive to avoid extremely costly patients, Medicare makes “outlier” payments for those patients in addition to what it would normally pay for such cases.)

As a result of the report, Tenet’s market cap plunged 47 percent, or by a market value of more than $11 billion. That caused government investigators to begin a probe into Tenet’s pricing strategies.

In August 2002, Madden issued a report stating that KPMG had produced an audit in accordance with generally accepted auditing standards, according to the SEC. When the audit report was released, however, Madden and Huffman “knew, or should have known,” that the audit team had not finished several procedures in critical audit areas, the regulator asserted.

In November 2002, the Tenet audit team, led by Madden and Huffman, began making changes in the 2002 audit working papers that mainly involved outlier payments, the SEC charged. The alterations “created the false impression that the audit was complete when the audit report was issued and that Madden had concluded that Tenet’s outlier pricing strategy did not need to be disclosed,” according to the commission.

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