Dive Brief:

• The Public Company Accounting Oversight Board imposed a $25 million fine and sanctioned KPMG Netherlands and its former Head of Assurance Marc Hogeboom in connection with alleged violations of quality control standards related to cheating and sharing of answers on the firm’s internal training exams during a five-year period. 
• The PCAOB sanctions on KPMG — as well as a $150,000 civil money penalty to be paid by Hogeboom — stem from the firm’s enabling of “widespread improper answer sharing” from 2017 to 2022 in a practice that involved hundreds of professionals, the board said Wednesday. 
• In prepared remarks from a virtual press conference, Board Chair Erica Y. Williams said the board has sanctioned nine registered firms for exam cheating since 2021. “This case did not take place in a vacuum,” she said of KPMG. “I want to be very clear. The PCAOB will not tolerate exam cheating nor any other unethical behavior, period.” 

Dive Insight:

The KPMG penalty is the largest fine of any type imposed by the auditor watchdog since it was created in 2002 following the Enron accounting scandal, according to the PCAOB. It tops the previous record set in 2016 involving an $8 million civil penalty that Brazil-based Deloitte Touche Tohmatsu Auditores Independentes agreed to pay to settle charges that it issued materially false audit reports and sought to cover up violations by altering documents. 

Its size also overshadowed separate fines of $1 million against both Deloitte Indonesia and Deloitte Philippines related to exam cheating cases that were also announced Wednesday. It comes as the PCAOB has toughened enforcement since Securities and Exchange Commission Chair Gary Gensler has called on it to strengthen oversight of the accounting firms that audit publicly listed companies.

In a release Stephanie Hottenhuis, CEO of KPMG Netherlands, apologized for the conduct. “The conclusions are damning, and the penalty is a reflection of that. I deeply regret that this misconduct happened in our firm," she stated, noting that all levels of seniority “who participated in the answer sharing” had been sanctioned and that the KPMG unit has taken several "remedial measures" to improve policies and procedures. 

Separately a spokesperson for Deloitte in an emailed statement said answer sharing was unacceptable, noting that Deloitte Philippines and Deloitte Indonesia self-reported these matters to the PCAOB and have implemented comprehensive corrective actions.

In a Wednesday order detailing the KPMG Netherlands case, PCAOB described how, since 2017, the firm has used online platforms to offer internal training to help employees meet some continuing professional education standards, such as some personnel in the company’s assurance practice that took required training regarding auditing U.S. issuers. 

The misconduct “occurred primarily through emails attaching documents or images containing the contents of the tests and/or answers to test questions. KPMG Netherlands personnel also jointly took tests that were intended to assess individual knowledge,” the order states. The practice occurred around tests for trainings concerning professional independence, PCAOB audit requirements, SEC regulations, U.S. GAAP and generally accepted auditing standards, and professional integrity, according to the order. 

The KPMG Netherlands did not evaluate its procedures even after learning of a 2019 case involving exam cheating involving KPMG LLP, the PCAOB asserts. In that matter, KPMG LLC agreed to pay a $50 million penalty to settle SEC charges that it altered past audit work after receiving stolen information about inspections of the firm and of cheating on internal training exams by improperly sharing answers and manipulating test results. 

The size of the fine was surprising to Nicole Wright, associate professor of accounting at James Madison University School of Accounting in Harrisonburg, Virginia. “From my standpoint there shouldn’t be any cheating. If you’re supposed to be completing it on your own, you should be,” Wright said. “But it seems like a very large fine.” 

Omar Roubi, an instructor of accounting at the University of Colorado Denver, noted that the pressures stemming from the current accounting talent shortage may play a role in the exam cheating scandals.  

“You have professionals that are tasked with doing the work of at least 1.5 employees, plus the pressure to pass their CPA examinations from their employer,” Roubi said in an email. “This has created a less than ideal environment where there can be less enforcement of ethical practices, almost encouraging it.”

Continued instances of cheating and unethical practices from leading businesses like Big Four firms damage the reputation of the industry, he said.    

“As a prospective student that is interested in accounting I find out that the starting salary isn't great, I need to complete 150 hours (in the U.S.) of schooling to be eligible for the designation and now I'm second guessing the credibility of the profession?  What student would choose accounting?”  he said.