Andersen is not the only Big Five accounting firm in hot water with the Securities and Exchange Commission. On Monday, the government’s top financial cop censured KPMG LLP for auditor independence violations. The reason? Apparently, KPMG audited a company it had an investment in.

According to the SEC, on May 5, 2000 KPMG invested $25 million in the Short-Term Investments Trust (STIT), a money market fund within the AIM family of funds. At one point, KPMG’s account balance amounted to about 15 percent of the fund’s net assets.

The SEC found that KPMG audited the fund at a time when the firm’s independence was impaired. According to the Commission, 16 of STIT’s SEC filings included KPMG’s audit. The SEC also found that KPMG repeatedly confirmed its independence from the AIM funds it audited, including STIT, during the period in which KPMG was invested in the short-term investment trust.

“The SEC’s decision to censure KPMG reflects the seriousness with which the SEC treats violations of the auditor independence rules, even in the absence of demonstrated investor harm or deliberate misconduct,” said Stephen Cutler, the SEC’s Director of Enforcement, in a statement. The SEC also ordered KPMG to undertake remedies that would prevent and detect future independence violations caused by financial relationships with, and investments in, the firm’s audit clients.

So what was the SEC’s biggest gripe? Officials in the enforcement division felt KPMG lacked adequate policies or procedures to prevent or detect audit independence violations. Further, the Commission says the steps which KPMG personnel usually took before initiating investments of the firm’s surplus cash were not taken in this instance.

The SEC also found that KPMG:

• Had no procedures directing its treasury department personnel to check the firm’s “restricted entity list” to confirm that a proposed investment was not restricted.

• Had no specific policies or procedures requiring any participation by a KPMG partner in the investigation and selection of money market investments.

• Had no policies or procedures designed to put KPMG audit professionals on notice of where the firm’s cash was invested, or requiring them to check a listing of the firm’s investments, prior to accepting new audit engagements or confirming the firm’s independence from audit clients

The SEC concluded that KPMG’s lack of adequate policies and procedures constituted an extreme departure from the standards of ordinary care. According to the Commission, that led to a “violation of the auditor independence requirements imposed by the SEC’s rules and by Generally Accepted Auditing Standards.”

Enron Employee Warned: “We Will Implode”

Here’s today’s Enron revelation:

It seems that an Enron Corp. employee warned chairman Ken Lay back in August of the company’s accounting problems and the role played by chief financial officer Andrew Fastow, according to congressional investigators cited in wire service reports.

“I am incredibly nervous that we will implode in a wave of accounting scandals,” the employee is said to have written, Reuters reports, citing House Energy and Commerce Committee Chairman Rep. Billy Tauzin and investigations subcommittee head Rep. James Greenwood.

The unnamed employee also allegedly questioned the ownership stake of former Enron chief financial officer Andrew Fastow in one of several off-balance-sheet partnerships. Reporteldy, the employee also questioned the accounting for the partnerships that were at the heart of Enron’s bankruptcy filing. “Is there a way our accounting gurus can unwind these deals now?” the worker allegedly asked Lay, according to Tauzin and Greenwood.

Enron apparently ordered an inquiry by the law firm of Vinson & Elkins into the employee’s concerns but the inquiry found no reason for “widespread investigation by independent counsels or auditors,” the congressmen said, according to Reuters. Vinson & Elkins allegedly said no further inquiry of the employee’s concerns was needed because she had “raised no facts that had not either been known or disclosed.”

Okay, so now we know the employee was a woman. The letter was discovered by the committee when it was sifting through the thousands of Enron documents as part of one of six congressional investigations of the company’s sudden collapse.

Aurora’s Former CFO Gets Jail Time

Former Aurora Foods Inc. chief financial officer M. Laurie Cummings was sentenced to 57 months in prison stemming from securities fraud charges, according to the Wall Street Journal. CFO.com last reported on the goings-on at Aurora in October (“Sticky Wicket: Aurora CFO Faces Prison Time.”)

Cummings was also ordered by U.S. District Judge Denise Cote to pay $2.6 million in restitution to Aurora, the maker of such well-known food products as Duncan Hines, Lender’s bagels and Mrs. Butterworth.

As CFO.com reported back in October, Cummings and three other executives, including her boss, former CEO Ian R. Wilson, pleaded guilty in September to securities fraud and other charges for manipulating Aurora’s financial statements.

According to Mary Jo White, U.S. Attorney for the Southern District of New York, Cummings and Wilson concealed “approximately $43.7 million in trades in 1998 and 1999 in an attempt to meet earnings-per-share and net income targets of Wall Street analysts and the expectations of Aurora investors, and to obtain one or more loans from Chase Manhattan Bank and other lenders.”

Cumming is the first of four Aurora executives who pleaded guilty to the scheme. The other executives are Wilson, Dick Grizzle, a former vice president of finance at an Aurora unit, and Ray Chung, Aurora’s former executive vice president.

“Chainsaw Al” to Pay $15 Million

Well, look who’s back in the news.

On Friday, “Chainsaw Al” Dunlap–turnaround specialist and former CEO at Sunbeam Corp–agreed on Friday to pay $15 million to settle a shareholder lawsuit accusing him and other Sunbeam executives of inflating stock share prices. A civil trial for the suit was scheduled to start Monday.

The class action lawsuit accused Sunbeam and its officers of misleading investors about the appliance maker’s sales and earnings in 1997 and 1998. The suit also alleged that the executives used inflated stock prices to complete mergers with Coleman, Signature Brands USA Inc. and First Alert Inc.

The company restated financial results for the six quarters before Dunlap was fired.

Sunbeam’s auditor at the time: Andersen, which also signed off on the financial statements of Enron Corp. and Waste Management.

For a look at the myth surrounding turnaround CEOs, see “Meet the Boss.”

Moody’s Predicts Big Slide in Junk Defaults

It looks like 2001 was worse than expected when it came to the global default rate for speculative-grade corporate bonds.

Moody’s prognosticators in January 2001 predicted this figure would come in at 9.5 percent for the entire year. But, now that the credit rating agency has finished adding up the figures, the default rate was actually 10 percent.

For 2002, Moody’s forecasts the global speculative-grade corporate bond default rate will fall to 7.2 percent “The spec-grade default rate is not expected to rise significantly from its current level,” said David Hamilton, director of default research at Moody’s, in a press release. “The slowdown in economic growth last year helped push some firms into default, particularly those having not only high leverage and fragile financial structures, but also dependence on continued credit access. We’re left with a stronger pool of credits with lower future default risk. In 2002, we also expect general credit quality to recuperate as the U.S. economy stabilizes.”

Another reason for Moody’s optimism: New bond issuers have better credit ratings. The average rating for new issuers improved substantially to Baa2 by the end of 2001 from a low of Ba2 in 1997. “Contributing to the surge in defaults was a glut of very low rated new debt issuers in 1997-1998,” Moody’s adds.

In fact, debt issuers that came to market with low-rated junk bonds in 1997-1998 comprise 40 percent of all defaulters since 1997. The surviving issuers result in a stronger credit pool, and in combination with stronger new issue ratings, will help lead to lower default rates in 2002, Moody’s adds.

Even so, the rating agency warned that although it expects the default rate to decline over 2002, default rates don’t figure to fall back to historical averages until 2003.

Among the industries most at risk: airlines and telecommunications, Moody’s says.

In 2001, 253 companies worldwide defaulted on a total of $110 billion of bonds, up 124 percent from 2000, when 167 companies defaulted on $49 billion of bonds, according to Moody’s. If you throw in sovereign debt defaulters Argentina and Moldova, last year’s defaulted bond total rose to $192.6 billion. That’s a whole lot of lenders getting the shaft

Among U.S.-based bond issuers, 182 companies defaulted on $86.3 billion of paper, pushing the domestic junk bond default rate to 11 percent, tying the 1991 record for U.S. issuers. The post-Depression default rate record for U.S issuers is 13 percent, set in the fiscal year 1990.

The biggest defaults last year: Enron defaulted on $9.7 billion in bonds, and Finova Capital Corp. defaulted on $6.3 billion of bonds in February.