Audit Firms’ Problems Are Also Cultural

The SEC's case against KPMG demonstrates that sloppy audits and conflicts of interest aren't the only challenges the Big Four face.
Vincent RyanJune 18, 2019

Is cheating on an exam worse than using data stolen from an industry watchdog? Probably not, but the revelations in a Securities and Exchange Commission order against KPMG do not cast audit professionals or the firm in a good light.

The SEC charged KPMG on Monday with altering past audit work in connection with the revelations last April that six KPMG auditors had improperly received advance information from an employee of the Public Company Accounting Oversight Board about upcoming inspections. The charges resulted in a $50 million penalty and measures to review and assess the firm’s ethics and integrity controls.

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A second part of the order, however, dealt with a situation that occurred internally. The SEC, alerted by KPMG, found that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

To help its audit professionals satisfy training requirements, KPMG administers its own set of online training programs. The exams relate to mandatory continuing professional education, ethics, and integrity. KPMG requires its auditors to pass an examination at the conclusion of each training program, according to the SEC.

If one of KPMG’s audit professionals is unable to pass after two attempts, their performance management leader is notified. If they are unable to pass after three attempts, the consequences are more significant: they are required to retake the training; they are prohibited from conducting audit work until they pass the exam; and others at the firm may be notified. KPMG audit professionals also understand that failing to pass an exam could lead to their compensation being reduced, according to the SEC.

So, what happened? The SEC found that, as far back as 2015, numerous KPMG audit professionals cheated on the exams by improperly sharing answers and manipulating test results.

Some auditors that passed training exams sent their answers to colleagues to help them also attain passing grades. (They sent images of their answers by email or printed answers and gave them to colleagues.) The cheaters included lead audit engagement partners who not only sent exam answers to other partners but also solicited answers from and sent answers to their subordinates.

The SEC also found that certain KPMG audit professionals manipulated an internal server hosting training exams to lower the score required for passing. By changing a number embedded in a hyperlink, they manually selected the minimum passing scores required for exams. Twenty-eight of the auditors did so on four or more occasions.

Clearly, this cheating wasn’t sanctioned by the firm. When it discovered the cheating, KPMG leadership alerted the SEC, and the board of directors launched an independent investigation. The investigation revealed “extensive sharing of exam answers.”

Prior to the firm’s investigation, though, no one reported the improper sharing of exam answers to the firm’s ethics and compliance hotline, the SEC said. In addition, according to the SEC, after KPMG began to investigate the misconduct, “certain now-former audit professionals, including a few lead audit engagement partners, attempted to conceal what they had done.”

KPMG said it has been taking disciplinary action against certain partners and others in connection with its investigation.

As part of the settlement with the SEC, KPMG is required to evaluate its quality controls relating to ethics and integrity; identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years; and comply with a cease-and-desist order.

The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation.

“The sanctions will protect our markets by promoting an ethical culture at KPMG,” Melissa Hodgman, associate director of the SEC’s enforcement division, stated in a press release.

Is cheating on an exam a criminal act? No. But for professionals that have a standard code of ethics they are supposed to uphold to in part assure the integrity of our capital markets, it is troubling.

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