Dive Brief:
- David Middendorf, former national managing partner for audit quality at KPMG, one of the Big-4 audit firms, was sentenced for his role in a "steal-the-exam" scandal that's roiled the company for the last two years.
- The 30-year veteran KPMG executive was found guilty of illegally obtaining advanced information about which of KPMG’s audits the Public Company Accounting Oversight Board (PCAOB) would review in its annual inspections of the firm.
- Middendorf will serve a federal prison term of one year and one day, according to reports.
Dive Insight:
Knowing which audits PCAOB planned to review would help KPMG auditors prepare for the inspections, an action that “could have corrupted KPMG to its core,” prosecutors said in a filing this month with the U.S. District Court for the Southern District of New York. The Wall Street Journal reported the filing. "There were systemic problems at KPMG regarding the use of confidential [regulatory] information,” the prosecutors said.
Middendorf was convicted in March along with Jeffrey Wada, a former official of PCAOB, which regulates the auditing industry. KPMG was ordered to pay a $50 million fine as part of a settlement.
Middendorf said he didn't believe in his "wildest imagination" that his actions were criminal, and he said his experience since being arrested could serve as his sentence, because what happened to him — being led off in shackles, among other things — would deter any auditor from ever doing what he did in the future, according to the Journal. The case also damaged his professional reputation and made it impossible for him to work as a CPA again, Middendorf's attorney said at Wednesday's sentencing hearing, the Journal reported.
KPMG has wrestled with quality control problems for years and its audits, including those for General Electric and Wells Fargo — two companies that have been under fire for some of their practices — have not stood up well under scrutiny.
In addition to its fine, KPMG, as part of its settlement, agreed to take steps towards improving its processes, including conducting a cultural assessment, adding programs to improve audit quality, and adding independent directors to its board.
