Ex-KPMG Partner, Inspector Suspended by SEC

The SEC suspended a former KPMG audit partner and a former staffer of the PCAOB after a jury last year found them each guilty of wire fraud charges for interfering with the audit regulator’s oversight, Bloomberg reported.

David Middendorf, the former national MP for audit quality at KPMG, and Jeffrey Wada, who was an inspections leader for the PCAOB, may no longer appear or practice before the SEC, the agency announced.

Middendorf was accused of recruiting PCAOB staffers to provide the firm with information about which audits they would be examining. He was sentenced to a year and a day in prison and three years of supervised release. Manhattan U.S. Attorney Geoffrey Berman, during the sentencing, stated Middendorf was “at the top of a chain of corruption that threatened to corrupt KPMG and the PCAOB’s inspections process,” Compliance Week reported.

Wada was accused of funneling confidential information about the board’s surprise inspections to Cynthia Holder, another PCAOB staffer who had gone to work at KPMG. He was sentenced to nine months in prison.

In a related action, the SEC in November 2019 barred Holder from practicing as an accountant before the SEC. Holder was sentenced to eight months in prison and two years of supervised release for her role in the scandal.

KPMG agreed to pay a $50 million penalty to settle allegations that it altered past audit work after receiving that secret information.

Regulators Eye Accounting, Audit Changes for 2020

The PCAOB, SEC and the Federal Accounting Standards Board (FASB) all have changes in the works that could affect financial reporting and auditing.

The following description of the changes comes from CFO Dive, which provides finance news and analysis.

The SEC is considering an easing of the restrictions on consulting services provided by audit firms.

Firms now can’t provide non-audit services to their clients or their clients’ affiliates, but the SEC may limit the restriction to affiliates that are “material contributors” to the company.

If the auditor determines the affiliate isn’t a material contributor, the firm can provide it consulting services without that being considered a compromise of auditor independence.

The auditor would be able to decide if the affiliate is a material contributor, CFO Dive reported.

The current treatment of non-audit work has been a problem for the Big 4 audit firms expanding into consulting. Last year, PwC paid the SEC $7.9 million to settle charges that it compromised its independence by providing consulting services to more than a dozen affiliates of its audit clients.

Another change affecting public companies is under consideration by the standards-setter PCAOB. The regulator is considering aligning its quality control rules with a proposal by the International Auditing and Assurance Standards Board.

A company’s governance structure for the first time could be held accountable under those standards. That means PCAOB would look at whether the firm’s culture “promotes a commitment to quality, has leadership that’s held accountable for its strategic decisions, and recognizes responsibility for ensuring the firm is serving the public interest,” CFO Dive reports.

FASB this year plans to address how accountants will differentiate between equity and liabilities and how they treat goodwill.

FASB has proposed reducing confusion among accountants and investors over how to differentiate between equity and liabilities. Current guidance is considered “overly complex, internally inconsistent, and the source of frequent financial statement restatements,” FASB Chair Russell Golden said in a statement last year.

Golden, whose term ends in July, is making treatment of goodwill and equity and liabilities a priority.

Should all the changes go through — from the SEC, PCAOB and FASB – learning how to implement them will be a focus of staff and audit committees.

SEC Whistleblowers Lead to $2 Billion in Enforcement Actions

The Securities and Exchange Commission (SEC) has released the annual report from its Office of Enforcement that confirms that the whistleblower reward program is helping protect investors from fraud.

The report says the SEC whistleblower law:

  • Is very successful and that whistleblowers have made meaningful contributions to significant cases;
  • Has resulted in high-quality SEC enforcement actions and led to more than $2 billion in financial remedies;
  • The SEC has paid whistleblowers about $387 million in rewards.

“Without whistleblower-insiders, the vast majority of frauds would go undetected, and investors would lose billions of dollars to those given by criminal greed,” says Stephen Kohn, SEC whistleblower attorney, in a statement. Kohn has represented corporate whistleblowers for over 35 years and worked with Congress in drafting the Dodd-Frank Act whistleblower protections.

“The SEC has confirmed that a well-placed whistleblower is the ‘goose that lays the golden egg.’ The SEC program has been highly successful, and we hope that the new regulations under consideration by the Commission will build on this substantial progress,” Kohn says.

AICPA Offers Guidance on Working With New Clients in Cannabis Industry

The cannabis industry offers CPAs a bevvy of prospective new clients. But the nature of the industry also opens to door to several potential challenges and pitfalls, the AICPA says.

Several states have legalized marijuana use for recreational or medical reasons, creating a burgeoning industry of growers, distributors, and retailers such as Full Spectrum. Revenue from medical and recreation cannabis is estimated to reach $12 billion this year. Due to how big this industry is set to grow, many people are deciding to start their own careers to help them make as much money as possible. Recreational marijuana has always been popular but in recent years, its popularity has grown considerably. People can smoke the marijuana via glass pipes or like a cigarette, or it can even be put into foods. Marijuana has become very versatile and individuals can do a lot with it. These days it is as simple as making and distributing this cannabis from home through using the rosin press piece of equipment. This will make it considerably easier for people to earn money quicker in this industry. It’s important that you receive all of the information that you think you may need first before making any further decisions about your career choice. The accounting profession, similar to the legal profession, can offer its expertise to clients in the cannabis industry, such as auditing and taxation services, as well as expert guidance for avoiding fraud or theft.

With these opportunities come serious downsides, as marijuana remains illegal at the federal level. As a result, few banks are willing to deal with players in the industry, leaving it largely a cash operation. CPAs providing business advisory or other accounting services to clients in the cannabis industry need to navigate the nuances of federal and state law and to avoid being charged criminally, potentially resulting in fines, jail time or the loss of their license.

The American Institute of CPAs details the risks and opportunities for CPAs working in the cannabis industry in the latest Eye on Fraud report. It offers a review of many of the State Boards of Accountancy positions on working in the cannabis industry and highlights some of the issues and challenges facing both the cannabis industry and CPAs supporting it.

More news from the AICPA

SEC Charges PwC for Improper Professional Conduct, Violating Auditor Independence

The Securities and Exchange Commission (SEC) has charged Big 4 firm PwC with improper professional conduct in 19 engagements and for conducting non-audit services for 15 audit clients, which is prohibited. PwC will pay over $7.9 million to settle the charges.

The SEC also charged PwC partner Brandon Sprankle with causing the firm’s independence violations. PwC and Sprankle consented to the SEC’s order without admitting or denying the findings.

Sprankle agreed to pay a $25,000 penalty and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after four years. PwC agreed to be censured and to pay disgorgement of $3.8 million, plus prejudgment interest of over $600,000 and a civil penalty of $3.5 million.

PwC also agreed to perform a detailed review of its quality controls for complying with auditor independence rules and for evaluating its non-audit services.

The SEC found that the non-audit services included engaging in management functions and designing and implementing software relating to an audit client’s financial reporting. Also, the firm failed to notify the PCAOB, which requires the firm to inform the audit committee of the scope of work, discuss the potential effects on independence, and document the substance of the independence discussion.

According to the order, PwC’s actions deprived numerous audit committees of information necessary to assess the firm’s independence.

“Auditors play a fundamental role in protecting the reliability and integrity of financial reporting and must ensure that non-audit services do not come at the cost of their independence on audits of public companies,” says Anita B. Bandy, associate director of the SEC’s enforcement division. “PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence on audit engagements and were properly disclosed to audit committees.”

PCAOB Sanctions Marcum LLP for Auditor Independence Violations

The PCAOB has settled disciplinary proceedings against New York-based Marcum LLP (FY18 net revenue of $549.7 million), Marcum Bernstein & Pinchuk and Alfonse Giugliano, the senior partner responsible for Marcum’s independence policies and procedures.

Marcum has a 50% ownership interest in Marcum Bernstein & Pinchuk, provider of SEC audit, accounting and consulting services to Chinese companies listed in the U.S. capital markets.

The violations involve the firms’ annual Microcap Conference and China Conference, which is designed to bring together investors and companies looking for investment. According to the PCAOB, “from 2012 through 2015, Marcum and two senior partners made public statements advocating the investment potential of the companies presenting at its annual Microcap Conference, 62 of which were the firm’s issuer audit clients.”

Also, in 2013 and 2014, Marcum Bernstein & Pinchuk advocated the investment potential of the companies participating in its China Conference, seven of which were the firm’s issuer audit clients. Giugliano approved Marcum LLP’s conference “without performing any substantial independence analysis,” PCAOB says.

This is the first time the board has sanctioned a CPA firm and its head of independence for publicly advocating its audit clients as investment opportunities. Another first is the PCAOB’s mandating of an independent consultant to evaluate auditor independence at the two firms.

The PCAOB orders say that success of the two conferences depended on companies perceiving them as good ways to connect with potential investors, and on potential investors perceiving them as a good opportunity to find high-quality investment opportunities. And yet, at the same time, the firms had issued audit reports on the financial statements of some of the presenters.

In the case of the MicroCap conference, the PCAOB says Giugliano approved the conference, and gave “limited advice” that Marcum should not be involved in company presentations or one-on-one meetings with investors. He also advised that Marcum should not make positive statements about individual presenting companies. PCAOB, however, says Giugliano failed to consider how an investor relations firm, brought in to market the conference, would tout the investment potential of the presenting companies as a group.

Marcum’s own public statements and marketing also included laudatory statements about the companies, as “some of the most promising emerging growth companies out there today,” in one example.

PCAOB alerted Marcum to possible independence issues with respect to the conference in 2015. The firm removed some positive language about the companies from promotional materials, added a disclaimer to its conference website and changed quality control policies. Marcum subsequently failed to evaluate the effectiveness of those measures, the PCAOB order says.

“As a result, Marcum failed to identify, evaluate or appropriately address a number of issues concerning the 2016 and 2017 conferences that, at the very least, raised questions about the firm’s independence.” PCAOB reported that Marcum sold one of its audit clients a “sponsoring” presenting company designation in 2016 and another client was sold a “premium” presenting company designation the next year without performing an independence review.

Additionally, Marcum provided press release templates to presenting companies, including the audit clients. “A number of Marcum’s issuer audit clients issued press releases that included Marcum’s suggested language, thereby using the conference’s reputation and association with their auditor to promote themselves to investors,” according to the PCAOB order.

Penalities are $450,000 for Marcum, $50,000 for Marcum Bernstein & Pinchuk and $25,000 for Giugliano. Marcum LLP and Marcum Bernstein & Pinchuk must additionally hire an independent consultant to review its policies, procedures, staffing and training related to auditor independence.

SEC Awards Overseas Whistleblower $500,000

An overseas whistleblower has been awarded $500,000 for helping the Securities and Exchange Commission (SEC) bring a successful enforcement action, the SEC reported.

“The commission’s whistleblower award program has reached an important milestone,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, says of the July 23 decision. “With recent actions, more than $2 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers. This represents the direct and important role that whistleblowers, like the overseas whistleblower being awarded today, have in enforcement actions and the protection of investors.”

The SEC says that it has awarded approximately $385 million to 65 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with “original, timely and credible” information that leads to a successful enforcement action. Awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers.

Deloitte, Partner Fined Over Serco Geografix Audit Failures

Deloitte and a senior partner in the U.K. have been fined and reprimanded for misconduct over the audit of Serco Geografix (SGL), an outsourcing firm, in a July 4 settlement, according to Reuters.

The settlement ended a six-year investigation into fraud and accounting errors. The Financial Reporting Council, the audit watchdog in the U.K., fined Deloitte 4.23 million pounds ($5.32 million) and audit engagement partner Helen George 97,000 pounds after they admitted misconduct for audits in 2011 and 2012.

A subsidiary of Serco (SGL) had been awarded government contracts for GPS satellite-tracking tags to enforce curfews on more than 100,000 offenders each year. A London judge said the company committed “deliberate fraud” between 2010 and 2013.

The judge approved a deferred prosecution agreement (DPA) between SGL and the UK Serious Fraud Office. The company will pay a fine of 19.2 million pounds and costs of 3.7 million pounds.

“SGL engaged in quite deliberate fraud against the Ministry of Justice in relation to the provision of services vital to the criminal justice system,” the judge said.

SGL’s parent Serco Group, one of Britain’s largest government contractors, has said the fraud and false accounting offenses related to how the company reported the profitability of its electronic monitoring contract.

The penalty on Deloitte, one of the Big 4 accounting firms, comes amid a backdrop of serious discussion among British government officials about whether the profession needs a shakeup after the failures of retailer BHS and construction company Carillion.

Deloitte, in a statement, says it regretted that its audit work on Serco Geografix had been below the expected standards.

“We have a program of continuous improvement for our audit quality processes … We have also specifically agreed with the FRC certain actions focused on learning lessons from the shortcomings in this audit work,” Deloitte’s statement says.

Both Deloitte and Helen George qualified for fine reductions after cooperating with the investigation.

More news from Deloitte

SEC Finalizes Change to Auditor Independence Rules

The Securities and Exchange Commission (SEC) has finalized its revision of auditor independence rules in response to concerns by investment managers that the rules were too restrictive, Compliance Week reported.

The move changes the threshold around lending relationships with clients. Fidelity, in particular, raised concerns about the rules, saying they were so far-reaching that the investment firm could not identify an audit firm qualified to audit its financial statements.

“The issue focuses on the ‘loan provision’ in the SEC’s auditor independence rules, which generally prohibits auditors from having lending relationships with shareholders of audit clients. More specifically, the SEC’s Rule 2-01 said auditors are not considered independent of their clients if the firm, any auditors on the engagement team and those in its line of command, or any of their immediate family members had a loan with the client, the client’s officers and directors, or any owners of more than 10% of the client’s equity securities,” according to Compliance Week.

The SEC determined that due to consolidation in the industry, it has become difficult for large entities, such as Fidelity, to find an independent audit firm under the rules. The SEC says, “In recent years, the commission has become aware that, in certain circumstances, the existing loan provision may not have been functioning as it was intended. The commission has become aware of circumstances where the existing rules capture relationships that otherwise do not bear on the impartiality or objectivity of the auditor.”

The new rule focuses the analysis solely on “beneficial owners,” or those who actually get benefits of ownership, who can be determined through “reasonable inquiry.” It also replaces a 10% shareholder ownership test with a more flexible “significant influence” standard.

The new rules become effective 90 days after they are published in the Federal Register.

Using Stolen PCAOB Data to Cost KPMG $50 Million

Big 4 accounting firm KPMG LLP will pay $50 million to settle SEC allegations that it altered past audit work after receiving stolen information from the PCAOB, which the SEC oversees, Bloomberg reported.

According to a June 17 statement, KMPG admitted wrongdoing and agreed to hire an independent consultant to review its internal controls. “KPMG’s ethical failures are simply unacceptable,” SEC Chairman Jay Clayton said in the statement. “The resolution the enforcement division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.”

The fine stems from what was called a “steal the exam” scheme, from 2015 to 2017, in which KPMG professionals and former PCAOB employees worked together to help the firm, which had suffered a high rate of deficiencies. In the end, six KPMG professionals were dismissed after an investigation found they tried to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual inspections. “With the data, the former employees oversaw a program to revise certain audits to reduce the likelihood government inspectors would find shortfalls,” Bloomberg reported.

The investigation resulted in January 2018 criminal charges against three former PCAOB officials, who went on to work for KPMG, of stealing information tied to PCAOB exams.

In an email statement, a company spokesperson said KPMG has learned important lessons and is a stronger firm because of steps taken to improve its culture, governance and compliance program. The SEC says its probe is continuing.

More news from KPMG