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July 9, 2020

21 Scandals, Settlements and Corporate Crimes of Big 4 Accounting Firms in 2019

by Mahesh Mara in Compliance Law, Corporate Law

21 Scandals, Settlements and Corporate Crimes of Big 4 Accounting Firms in 2019

With humanity facing a whole heap of global concerns like the climate change, political violence, religious intolerance, terrorism and many more challenges, economic crisis is also something that needs our attention. Fraud, corruption, and corporate crime serve as examples of white-collar crime. Alone or in combination, they can contribute to the collapse of corporations or even be instrumental in a national or global financial crisis as happened in 2007–2008. The economic crisis of 2008, and the rise in unemployment followed by that, resulted in more than 2,60,000 cancer related cases according to a study from Harvard T.H. Chan School of Public Health, Imperial College London, and Oxford University.

“At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable,” says Stephen Haddrill, the FRC’s chiefexecutive.

As Financial Reporting Council (FRC) none of the Big Four – Deloitte, EY, KPMG, and PwC managed to surpass the 90% target of its audits. With audit quality not up to the mark, audit firms need to take steps to identify the problems and take proper actions to improve quality of audit. Investors hard earned money, people’s pension plans, stakeholder’s livelihood, a lot depends on the auditors. Inefficiency in audit is resulting in loss of this money and is putting a question on the credibility of audited financial statements.

Top accounting firms have been in the news for all the wrong reasons. Here are few instances from 2019 which highlight the accountability issues in the firms.

1) Unified Health Infrastructure Project (UHIP)

The Unified Health Infrastructure Project (UHIP) is a project, undertaken by Deloitte Consulting, designed for Rhode Island. This project was supposed to streamline eligibility verification for the food stamp  program,  now  known  as  SNAP  (which  provides  nutrition benefits to supplement the food budget of needy families so they can purchase healthy food and move towards self-sufficiency), Medicaid, subsidized child care and cash assistance.

This project went live in September 2016, but it was launched without a backup. This created a lot of problems for the company and the people. Due to these problems, Deloitte never got paid for its services. At the height of the crisis in February, there was a backlog of 15,000 applications for assistance – from cash to food stamps to medical care.

In April, when Deloitte’s contract was about to expire, Governor Gina Raimondo extended the state’s contract with Deloitte for two years and agreed not to sue the firm because she didn’t want the state to be “tied up in expensive litigation for years.”

As part of that agreement, Deloitte agreed to pay $50 million to Rhode Island as follows: $30 million to the State of Rhode Island and $20 million to be shared by the Centers for Medicare and Medicaid Services and the U.S. Food and Nutrition Service.

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2) Age Discrimination of PwC

In April, 2016, Steve Rabin, an older CPA who was denied employment at PricewaterhouseCoopers LLP (PwC), filed an age discrimination class and collective action on behalf of himself and all other unsuccessful PwC accountant applicants aged 40 and over from 2013.

The lawsuit is titled Rabin v. PricewaterhouseCoopers LLP

According to Forbes, in a 2011 report, PwC boasted the average age of its workforce was 27 and that two out of three PwC employees were in their 20s and early 30s. According to government statistics, the median age of accountants and auditors in the U.S. at the time was about 43 years old.

In March, 2020, PwC has agreed to pay $11.625 million to settle a lawsuit claiming the global accounting firm discriminated against older applicants for certain positions.

3) KPMG in Oman

In 2018, Capital Market Authority (CMA) found major financial and accounting irregularities during an investigation of some listed companies audited by KPMG. KPMG was then given a 1 year ban by the authority. Following the investigation, the regulator said some audit firms showed “professional negligence” that “warranted disciplinary measures against them in the interests of the investors and other stakeholders.”

After this, an independent body considered this appeal against CMAs decision and after hearing the argument of both parties, issued its judgment on 28th February 2019 upholding the decision taken by CMA.

4) KPMG Bermuda fined by PCAOB

It all started when The Public Company Accounting Oversight Board (PCAOB) decided to inspect the auditing firm in May 2015.

Damion Henderson was head of KPMG Bermuda’s Ethics and Independence (E & I) Department during 2014 and 2015. At the time, the department’s quality control policies and procedures required that firm personnel execute written independence confirmations, or independence affidavits, periodically during their employment at the firm. The completed, hard-copy documents are then reviewed and signed off by a senior manager, who then would give the independence affidavits to Henderson to initial and approve.

In October 2014, those documents went missing. KPMG found out that the PCAOB inspectors would be coming in May 2015.

Thus, the E & I department asked employees to re-execute the affidavits and to backdate the re-executed affidavits to approximate the date that they had signed the originals. Most employees complied and returned these documents to the E&I Department.

Of course, PCAOB found out and fined Damion Henderson $10,000 on 9th April. KPMG Bermuda was criticized and fined $2,50,000 for failing to establish and maintain a system of quality control to provide reasonable assurance that firm personnel would comply with applicable professional standards and the firm’s own standards of quality.

5) KPMG Mexico Data Leak Case

KPMG Mexico did not take apt measures to safeguard the confidential payroll data of 41 of its clients. “It is important to re-emphasize that the database that was hosted in the unauthorized environment was installed with default settings, which resulted in it being accessible without a password to anyone on the Internet,” KPMG said in the report. According to a partner in IT legal advisory firm Lex Inf. if KPMG is found to have violated federal data protection laws, they could be fined around 30 million pesos ($ 1.57 million).

Some of the employee data that was allegedly exposed, according to El Economista (Spanish Daily Newspaper), includes:

  • Federal Taxpayer Registry Codes
  • Unique Code of Population Registration (CURP)
  • Social security numbers
  • Bank account numbers
  • Salary information

6) KPMG & Lloyd’s Syndicate 218

In April 2019, KPMG LLP and three executives were fined after an investigation that found misconduct in relation to the audit of financial statements of a Lloyd’s of London insurance syndicate.

The Financial Reporting Council, fined KPMG £6 million ($7.8 million) for its failings in relation to audits of Lloyd’s Syndicate 218, a motor insurance provider. Taylor and Hulse (Engagement Partner at that time) made insufficient inquiries into Syndicate 218’s processes to review insurance claims, and didn’t take action when reserves used to cover these claims declined, according to the FRC.

  • Taylor was fined £100,000 and will be required to have a second partner review his audits until the end of 2020, according to the Wall Street Journal. He also received a severe reprimand from the FRC.
  • Hulse, who no longer works for KPMG, received a fine of £100,000 and a severe reprimand. KPMG also agreed to conduct an internal review and to report to the FRC on aspects of its 2018 insurance audits.

7) KPMG and Co-operative Bank PLC

The FRC, handed KPMG a fine of £5 million ($6.51 million) in connection with the audit of financial statements of Co-op Bank for 2009, the year the lender merged with Britannia Building Society. The penalty was reduced to £4 million because KPMG agreed to settle.

As per wall street journal report, the FRC said KPMG and its audit partner Andrew Walker admitted that their conduct fell short in two areas: the audit of fair-value adjustments of loans in the commercial loan book acquired from Britannia, and the audit of a series of securities acquired from Britannia called leek notes.

KPMG and Mr. Walker failed to obtain “sufficient appropriate audit evidence” and to exercise “sufficient professional skepticism,” the FRC said. They also failed to inform Co-op Bank about inadequacies in disclosures relating to the leek notes.

  • KPMG was fined £5 million (discounted for settlement to £4 million) and severely

reprimanded. The firm will also pay £5,00,000 toward the FRC’s costs.

  • Walker was fined £1, 25,000 (discounted for settlement to £1, 00,000) and severely reprimanded.
  • All of KPMG’s audit engagements with credit institutions for audits with 2019, 2020, and 2021 year-ends will be subjected to an additional review by a separate KPMG audit quality team, who will provide reports to the FRC.

8) KPMG Screws up BNY Mellon Compliance Reports

The Bank of New York Mellon Corporation BNY Mellon is an American worldwide Banking and Financial services holding company headquartered in New York City. At their peak, their assets held by the bank were worth more than £1 trillion.

In April 2015, BNY Mellon was fined £126 million by Britain’s Financial Conduct Authority for failing to keep customer money safe during the financial crisis. And KPMG, as BNY Mellon’s auditor, was supposed to be responsible for reporting to the FCA that BNY Mellon was complying with the FCA’s rules on client assets.

The FRC investigation, which began in June 2015, found that KPMG and Partner Richard Hinton “failed to give adequate consideration on whether the records of custody relationships maintained by BNY Mellon were compliant with certain rules.”

In addition, KPMG and Hinton “failed to undertake sufficient audit procedures to support the opinions set out in the 2011 client asset reports made to the FCA,” the FRC said in September 2018.

Reports suggest that KPMG would be fined 12.5 million pounds ($15.9 million) or more for misconduct. KPMG said the fine should be just a fraction of that size, at 1.4 million pounds.

9) SEC Says $50 Million Fine for KPMG Is ‘Significant’ and ‘Appropriate’

In 2015, KPMG held exams to train employees on an internal server with software provided by a third party. The participants were sent hyperlinks that directed them to the exams. Embedded in the hyperlink was an instruction to the server that specified the score necessary to pass the exam. Thus, the characters “Mastery Score=70” meant participants were required to answer at least 70 percent of the answers accurately to pass the exam. By changing the number in the hyperlink, audit professionals could change the score required to pass.

Certain audit professionals, including one partner, altered the URLs for their exams to lower the scores required to pass. Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25 percent of the questions correctly.

These professionals even shared exam answers with one another. A number of audit partners gave exam answers to other partners, and a number also sent answers to and solicited answers from their subordinates.

Steven Peik in, SEC co-director of enforcement, said the SEC views this as “an extraordinary situation that warrants an extraordinary response. KPMG has admitted the conduct detailed in today’s commission’s order. It will pay a $50 million penalty and it’s being ordered to take significant remedial actions to improve its ethics and integrity.” It is still unclear about how many professionals were involved and if individuals who were cheating will be charged or not.

The investigation is still ongoing.

10) Securities and Exchange Commission’s settlement with a former KPMG LLP partner

Thomas Avent, a partner at KPMG in Atlanta from 1999 until 2016, was accused of tipping off a stockbroker about the upcoming acquisitions of three publicly traded companies.

  1. NCR Corp.’s 2011 purchase of Radiant Systems Inc.
  2. TBC Corp.’s 2011 acquisition of Midas Incorporated Inc.
  3. Ingram Micro Inc.’s 2012 takeover of Bright Point Inc.

They would pass on information to their friends and arrange to buy stocks or call options of all three target companies before the acquisitions were announced to the public. As a result, they got an illegal edge over other investors, they made over $111,000 in illicit insider- trading profits, according to the SEC.

In August 2019, the district judge said, Thomas Avent will be required to pay a $1, 25, 000 civil penalty but will not be required to admit to the allegations against him.

11) KPMG & PCAOB Scheme (“KPMG 5”)

In October 2019, David Britt admitted guilt for participating in a scheme to steal confidential audit inspection information from the PCAOB. All of the five ex-employees are examples of failed ethical leadership in public accounting.

They all have either pleaded guilty or have been found guilty by the jury.

They all had obtained confidential data and lists that contained details about the audits that PCAOB was going to review. Using this information, these ex-executives tried to improve the results of those firm’s audits. Independent reviews of accounting firm audits exist to ensure their integrity and accuracy.

Cynthia Holdera former PCAOB inspections leader who later worked as an executive director at KPMG.sentenced to eight months in federal prison on 9thAugust, 2019. She was ordered to report to prison on 15th October, 2019.one count of conspiracy to commit wire fraud, and two counts of wire fraud
David Middendorfformer  national managing partner for audit quality and professional practice at KPMGsentenced on 11th September to one year and one day in federal prisonConvicted by a jury on three counts of wire fraud and one count    of conspiracy to commit wire fraud.
Thomas Whittlenational partner-in- charge of inspections at KPMGsupposed to be sentenced in September, but that was postponed in anticipation of Whittle testifying against Brittwire fraud and conspiracy charges as part of a plea agreement with the government
Brian SweetEx-KPMG partnerNo information available on any sentencepleaded guilty to conspiracy and wire fraud charges in January 2018.

The SEC announced a settlement with KPMG on 17th June in which the firm will pay a $ 50 million fine and take significant actions to improve its ethics and integrity.

12) EY’s 2017 PCAOB Inspection Report

PCAOB released the inspection report of EY in October 2019. The audit deficiency rate of EY was 31%. EY has had worst deficiency rates in the past – 50% deficiency rate in 2013, 48%     in 2012, and 36% in both 2011 and 2014. Hence, this can be seen as an improvement.

EY ranks third in the list of worst deficiency rates in Big 4s – Deloitte at 20%, PwC at 24% and KMPG at 50%.

13) EYs Ex-Audit Partner’s Audit Judgment

The PCAOB has barred William Trainor, former partner at EY, over its allegations that Trainor bungled the 2013 audit of internal control over financial reporting for Forest Oil Corp. Trainor was the engagement partner with ultimate responsibility for the audit of financial statements and internal controls.

The PCAOB reported it found during its 2014 inspections that Trainor failed to adequately evaluate whether the company’s internal controls were effective. The engagement team identified “pervasive deficiencies” in certain IT controls for two significant systems at the company but relied too easily on a series of compensating controls, which were also defective, the PCAOB says in its disciplinary order.

The enforcement order bars Trainor, who left EY in 2016, from associating with a registered public accounting firm and fines him $25,000.

14) PwC Italy Accounting Scandal

There was a accounting scandal in early 2017 at the Italian unit of British phone company BT, in which nearly two dozen people at BT Global Services, including its CEO, CFO, and head of Europe, knew about inflated revenues, bogus contract renewals and invoices, and made up supplier transactions to “meet bonus targets and disguise the unit’s true financial performance,” according to Reuters.

The fraud led to a 513 million-pound ($661 million) write down at BT Global Services, which is now shedding assets and cutting thousands of jobs, Bloomberg reported.

Alleged Andrea Alessandri, who led the PwC team in charge of auditing BT Italia’s accounts, falsified the audit.

15) PwC Fined $7.9 Million By the SEC

PwC got busted today by the SEC for also doing non-audit work for audit clients, which pretty much reinforces how shady accounting firms really are.

PwC agreed to pay the SEC more than $7.9 million to settle charges of improper professional conduct and violating auditor independence rules, which were mostly due to failures in PwC’s independence-related quality controls.

In addition, PwC partner Brandon Sprankle agreed to pay a penalty of $25,000 to settle charges that he was the ringleader of the firm’s independence violations. As part of the settlement, Sprankle, who is based in San Jose, CA, was suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after four years.

16) PwC Mexico on Independence of Auditors

A auditor must maintain independence in both fact and appearance. Maybe PwC Mexico forgot this when it took over in fiscal year 2016 as the auditor of one of the largest financial services holding companies in Mexico.

It just so happened that at the time the engagement letter was signed, at least six of PwC Mexico’s partners had personal financial relationships with that bank, which Francine McKenna of Market Watch reported was Banco Santander Mexico. That’s a no-no under those pesky auditor independence rules, as the PCAOB found the partners’ ties to the bank as “inconsistent with a firm’s obligation to maintain independence from its audit client.”

So, the PCAOB fined PwC Mexico $100,000 on 1st August, 2019 for violating rules and standards related to PwCs independence, audit committee communications, and system of quality control.

17) Deloitte Japan fined $2 Million

Dozens of its employees at Deloitte Touche Tohmatsu in Japan had bank accounts at the subsidiary of a client for which Deloitte Japan issued audit reports, which is not allowed as Securities and Exchange Commission rules don’t allow accountants to have bank accounts with audit clients that have balances exceeding insured limits. The SEC found out, and you can guess what happened next.

The Securities and Exchange Commission in February 2019 announced that Deloitte Touche Tohmatsu LLC (Deloitte Japan) will pay $2 million to settle charges.

The Feb. 13 SEC press release also states that Futomichi Amano, Deloitte Japan’s former CEO, and Yuji Itagaki, the firm’s former director of independence, who were among the employees with bank accounts at the unnamed audit client’s subsidiary and who you would think would have a somewhat firm grasp of the SEC’s audit independence rules, settled related charges.

Final outcome:

  • Deloitte Japan agreed to pay $2 million in monetary sanctions and be censured.
  • Amano and Itagaki were suspended two years and one year, respectively, from appearing and practicing before the SEC as accountants. They can apply for reinstatement after their suspensions are over.

18) Deloitte U.K. Partner Fined Over Bad Serco Geografix Audits

Ross Howard has joined fellow Deloitte partner Helen George as having received a “severe” slap on the wrist from the U.K.’s Financial Reporting Council for his role in the shoddy auditing of Serco Geografix Ltd., a subsidiary of outsourcing firm Serco Group PLC.

Britain’s accounting regulator said it had fined Deloitte’s audit engagement partner Ross Howard for misconduct in the audit of Serco Geografix’s 2012 financial statements.

The Financial Reporting Council (FRC) said Howard had been severely reprimanded and will have to pay a discounted settlement of £78,000, ending the regulator’s investigation into Deloitte’s audit of Serco Georgrafix.

The FRC said Deloitte and audit engagement partner Helen George “failed to act in accordance with the fundamental principle of professional competence and due care.” George’s fine of £150,000, which was reduced to £97,500, only pertained to the 2011 audit of Serco Geografix.

In addition, Deloitte agreed to pay £300,000 toward the costs of the investigation and have all audit staff undergo training aimed at improving the conduct of the team.

19) Deloitte and Aequitas Investors Lawsuit

That’s because the $234.6 million settlement Deloitte, Eisner Amper, and five other companies reached with investors of the now-defunct Oregon investment company Aequitas last July was approved in Oregon federal court on Dec. 16.

Deloitte, Eisner Amper, law firm Sidley Austin, securities firm TD Ameritrade, and ratings agency Duff & Phelps will pay a combined $220 million. Law firm Tonkon Torp and Integrity Bank & Trust of Colorado had already agreed to pay $12.9 million and $1.7 million, respectively, in a separate agreement.

But there’s still no word on how much Deloitte and Eisner Amper will have to pay individually.

Aequitas investors filed a $350 million class-action lawsuit in April 2016, less than a month after the SEC charged Aequitas Management LLC and four affiliates, as well as three

executives—CEO Robert Jesenik, executive vice president Brian Oliver, and CFO and chief operating officer N. Scott Gillis—with hiding the deteriorating financial condition of Aequitas while raising more than $350 million from investors.

Oliver pleaded guilty to fraud and money laundering charges on April 20.

Deloitte was named in the lawsuit because the firm was Aequitas’ auditor for the years 2013 and 2014. Eisner Amper was the company’s auditor for the years 2011 and 2012.

20) Deloitte Malaysia Partner Fined, Guilty Plea In $1.2M Scam

Huang Khean Yeong, a partner at Deloitte PLT, was fined RM63, 000 by the Securities Commission Malaysia’s Audit Oversight Board on 26th December, 2019 for failing to comply with the international standards on auditing when performing an audit of a public interest entity (PIE).

Huang was disciplined for failing to design and perform audit procedures involving multi- location audit of the PIE and insufficient audit procedures including group consolidation, construction contracts, and goodwill.

21) Deloitte U.K. Screw-Up Results In £1 Million Fine From the ICAEW

The administrators to collapsed electricals retailer Comet Group have been handed a record UK insolvency fine of £1m for failures related to their independence.

Deloitte and two of its former partners, Neville Kahn and Christopher Farrington, who both left the Big Four accountancy firm during a five-year investigation, did not ensure that they were objective as administrators, according to the findings of the Institute of Chartered Accountants in England and Wales.

The ICAEW, a professional body, said adequate steps were not taken to make sure that Deloitte’s previous work advising Comet’s owners did not present a conflict of interest in its role as administrator to the lossmaking electricals retailer. Its 2012 collapse left taxpayers footing a £44m bill and resulted in more than 6,000 staff losing their jobs.

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