The U.S. regulator overseeing auditors was rocked by criminalcharges as federal prosecutors accused three former employees ofleaking inside information to KPMG so it could improve its auditresults.

The allegations are a major embarrassment for the Public CompanyAccounting Oversight Board, a regulator that was meant to restorepublic confidence in the audit industry after accounting scandalsat Enron and WorldCom cost investors billions of dollars. Claimsthat employees shared confidential information with a top auditfirm raise doubt about whether the PCAOB is up to the job.

They're also another black eye for KPMG, one of the Big Fouraccounting firms. The company paid $456 million in 2006 to avoidcriminal charges that it helped wealthy clients dodge $2.5 billionin taxes. The firm is accused of poaching PCAOB officials and usingtheir contacts to get warnings about pending inspections.

Three former employees of PCAOB, who went on to work for KPMG orwere seeking employment there, stole the information tied to futureexams, the Justice Department and the Securities and ExchangeCommission said Monday. The ex-PCAOB employees—Brian Sweet, 40, ofFresno, Calif.; Cynthia Holder, 51, of Houston; and Jeffrey Wada,42, of Tustin, Calif.—made unauthorized disclosures of PCAOB plansfor inspections of KPMG audits from 2015 until February 2017,according to the government.

“These accountants engaged in shocking misconduct—literallystealing the exam—in an effort to interfere with the PCAOB'sability to detect audit deficiencies,” said Steven Peikin, co-headof the SEC's enforcement division.

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KPMG Employees

Also charged were three KPMG employees: David Middendorf, 53, ofMarietta, Ga., then the national managing partner for auditquality; Thomas Whittle, 54, of Gladstone, N.J., partner-in-chargefor inspections; and David Britt, 54, of New Canaan, Conn., thebanking and capital markets group co-leader.

Middendorf made a court appearance in Atlanta and was releasedon bail, said his attorney, Nelson Boxer.

“Dave is an experienced accounting professional,” Boxer said.“We are reading it for the first time and we expect him to defendhis good name.”

Britt and Whittle pleaded not guilty during an appearance beforeU.S. Magistrate Judge Andrew J. Peck in Manhattan on Monday andwere released on a $200,000 personal recognizance bond.

“This is an example of government overreach,” said Robert Stern,an attorney for Britt. “The conduct at issue is simply not a crime,and Mr. Britt looks forward to proving his innocence in court.”

Norman Bloch, an attorney for Holder, who was scheduled toappear in a Houston court, didn't immediately respond to atelephone message seeking comment.

James Glasser, an attorney for Whittle, declined to comment.

KPMG was trying to improve on the poor grades it receivedfrom the PCAOB in 2013 and 2014, the U.S. said. In 2014, forexample, KPMG got about 28 comments in connection with 51 auditsinspected by the PCAOB. That was about twice as many comments asthe average of its competitors, the government said. Inspectionresults are an important metric in attracting new clients, the U.S.said.

The accounting firm made hiring Sweet a “top priority” since heworked on a team that inspected its work. On his last day, Sweetcopied confidential information, including a list of accountingfirm audits the PCAOB would inspect in 2015, to a personal harddrive, according to the government. Sweet has pleaded guilty toconspiracy and is cooperating with prosecutors, his lawyer, RichardMorvillo, said in an interview.

“In stepping up and cooperating with the government, Mr. Sweetis taking the first steps to redress his mistakes,” Morvillosaid.

The government described the scheme in a court filing inManhattan federal court.

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New Job

On his first day on the job, Sweet had lunch with his new boss,Whittle, and other colleagues, where he disclosed that a particularclient audit would be examined by the PCAOB, according to thefiling. Several days later, Sweet emailed the list of KPMG auditclients that would be reviewed to Whittle, who then forwarded on tohis boss Middendorf, writing: “The complete list. Obviously, verysensitive. We will not be broadcasting this.”

Sweet was asked whom else KPMG should hire and he recommendedHolder, who joined a few months later in 2015.

Wada, the third PCAOB employee, was also looking to join. Afterbeing passed over for a promotion in March 2016, Wada, who said hewas “screwed” by the episode, started divulging confidentialdetails to Holder. Wada was also looking to work for KPMG, sendinghis resume to Holder, writing “I am now trying to sell myself toKPMG” in January 2017.

The next month, he texted Holder that he had the full list ofaudits the PCAOB would examine, “Okay, I have the grocery list”adding later “All the things you'll need for the year.”

KPMG promptly notified authorities when it first discovered theissue early last year and has been fully cooperating with thegovernment, spokesman Manuel Goncalves said in a statement.

“KPMG took swift and decisive action, including the engagementof outside legal counsel to conduct a detailed investigation andthe separation of involved individuals from the firm,” Goncalvessaid. “Since then, KPMG has taken remedial actions to assure thatsuch conduct cannot happen again.”

The PCAOB said it also cooperated with the investigators, andwhen it learned of the alleged misconduct, its board and staffreviewed and reinforced the safeguards against improper disclosureof confidential information.

“The new PCAOB Board will conduct an ongoing review of theorganization's information technology and security controls, aswell as its compliance and ethics protocols, to assess theireffectiveness,” PCAOB Chairman William Duhnke said in astatement.

Congress created the PCAOB under the 2002 Sarbanes-Oxley Act.Its inspections, which are central to this case, are at the heartof its mission, as they are the main check on whether accountingfirms are doing quality audits of public companies.

The cases are U.S. v Sweet, 18-cr-008, and U.S. v Middendorf,18-cr-036, U.S. District Court, Southern District of New York(Manhattan).

From: Bloomberg

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