Sometimes a song catches the zeitgeist and takes over the airwaves. One of those in my mind is the I Fought the Law. Today we celebrate a different but equally powerful version of this song’s release. It was by The Clash in 1979 and it was their first single released in the US. Rather amazingly, according to Paul Sexton, writing in the Life of a Song column in the Financial Times (FT), the song was written a member of The Crickets, Sonny Curtis, who joined the band after Holly’s death (the day the music died). The song informs the KPMG indictments.
The song did not make the charts until it became a rebel yell for The Bubby Fuller Four when it hit the charts, going up to Number 9 in 1965. The sound became an anthem for Southerners in the 60s. But it went punk in the late 1970s, when “in the summer of 1978, Joe Strummer and Mick Jones of The Clash were in San Francisco, recording overdubs for the band’s second album Give ’Em Enough Rope. Hanging out at the Automatt studio, and pumping the house jukebox with quarters, they played Fuller’s single repeatedly. Such was its impact that they were moved to cut the song with The Clash for the band’s 1979 EP “The Cost of Living”. It remains one of their best-loved and most-aired tracks.”
I thought about that song when I read about the absolutely stunning indictment of five former partners or employees of KPMG and one former employee at the Public Company Oversight Accounting Board (PCAOB). Francine McKenna, writing in MarketWatch, laid out the basic facts. She wrote that from 2015 until 2017, KPMG partners “David Middendorf, KPMG’s then-national managing partner for audit quality and professional practice, Thomas Whittle, KPMG’s then-national partner-in-charge for inspections and David Britt, KPMG’s banking and capital markets group” lured the following former professionals from the PCAOB to come to work at KPMG; Brian Sweet and Cynthia Holder, both certified public accountants, with promises of jobs at the accounting firm in exchange for stolen information. The PCAOB professional who fed them information after they went to KPMG, Jeffrey Wada, was not hired by KPMG and left the PCAOB in March 2017.
The confidential information stolen from the PCAOB and given to KPMG was the timing of PCAOB reviews of KPMG audits, which had come under fire from several clients and under scrutiny by the PCAOB. Apparently these three were offered jobs if they provided KPMG with information on the PCAOB’s planned reviews of certain KMPG audits of specific public companies. The six were charged with conspiracy and wire fraud, alleging they repeatedly used stolen confidential regulator information to subvert KPMG’s regulatory inspection process. The six used the confidential information to not only prepare for the PCAOB reviews but also change prior audits and work papers which would be reviewed by the government as a part of their audit review process.
Perhaps even more troubling is McKenna’s report that Middendorf, Whittle and Britt pressured Holder and Wada to continue providing the information or their jobs were in jeopardy. This was amplified by L. M. Sixel, writing in the Houston Chronicle who wrote, Holder and Sweet after being hired were pressured to “use their connections to obtain advance warning of the board’s inspections. The scheme also involved developing a code to pass along confidential information about upcoming inspections in texts, emails and conference calls, using phrases such as “Okay, I have the grocery list… All the things you’ll need for the year,” according to the indictment.” Middendorf alleged told Sweet to “remember where his paycheck came from.” Nothing like being extorted to commit illegal acts by your boss.
The scheme ended in early 2017 when an un-named KPMG Partner (Partner 5 in the indictments) internally reported to KPMG management and the company’s legal department the facts. At that point KPMG notified federal authorities and terminated the five employees in the spring of 2017.
There are many, many questions to be answered from this matter. The groups include at least KPMG, the PCAOB and the Securities and Exchange Commission (SEC). If you are an investor can KPMG audits be trusted going forward? Can any company which has used KPMG be assured of its audit results. McKenna quoted a statement from SEC chair Jay Clayton, “Based on discussions with the SEC staff. I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.” Yet one must only wonder at this point.
What type of culture existed that allowed this type of behavior to occur and continue for over two years before it was internally reported? Sixel reported, “KPMG said it exerted no undue pressure on its employees” but when you have three national practices leaders involved with, if not leading, the criminal conduct, the values and culture were certainly suboptimal. Moreover, who else at KPMG knew or should have known about this conduct?
Turning to the PCAOB, does it have a revolving door problem? Should it prevent its professionals from going to auditors? How does it assure such confidential information does not walk out the door? Sixel reported that the PCAOB will conduct an ongoing review of its information technology and security controls, as well as its compliance and ethics protocols, to assess their effectiveness. The PCAOB also said in a prepared statement “Immediately upon learning of the alleged misconduct last year, the PCAOB Board and staff reviewed and reinforced the PCAOB’s safeguards against the improper disclosure of confidential information.”
For the SEC, what is the appropriate sanction against KPMG given the senior partner involvement? If KPMG is forced to admit its guilt through a court filing will its lose its license to conduct public company audits. This is what led to the demise of Arthur Anderson and at this point, can the US afford to lose one-quarter of the Big Four auditing firms? What would that do for all the oversight required of auditors going forward? Finally, is the SEC investigating other audit firms? SEC’s co-director of enforcement Steve Peikin told reporters in a Monday press conference that he could not comment on any other investigations because the SEC has not said anything publicly about investigations at other organizations.
I fought the law, indeed. But check it out for yourself.
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© Thomas R. Fox, 2018