Five years after Scott Marcello, then-vice chair of audit with KPMG LLP, was fired for failing to supervise employees who engaged in a scheme to fraudulently improve the PCAOB’s audit inspection results, the board fined him $100,000. He was also sanctioned and censured for his supervisory failures.
The PCAOB seems to have been trying to send a message to the auditing profession about the importance of ethical conduct and accountability because the board said that this is the largest fine ever slapped on an individual in a settled case.
Moreover, this is the first time that the PCAOB has sanctioned an auditor for failing to reasonably supervise.
Section 105(c)(6) of the Sarbanes-Oxley Act gives the PCAOB the power to sanction individuals who have failed to supervise associated employees who flouted the board’s professional standards and rules as well as certain laws.
“Specifically, Marcello failed to take appropriate and immediate steps when he learned that KPMG had received confidential PCAOB inspection information in both 2016 and 2017. As a result, Marcello failed reasonably to supervise associated persons of KPMG under Section 105(c)(6) of the Act,” according to PCAOB Release No. 105-2022-004, published on April 5, 2022.
“This ‘first of its kind’ disciplinary action demonstrates that the PCAOB is committed to sanctioning top-level personnel at the largest firms when they fail to take sufficient supervisory steps aimed at preventing violations by their subordinates,” PCAOB Chair Erica Williams said in a statement. “Following the Department of Justice’s and the Securities and Exchange Commission’s actions against the perpetrators of the scheme, the Board believes it is important to hold Mr. Marcello accountable as their supervisor for contributing to a culture that led to this serious misconduct.”
Former KPMG partners along with former PCAOB officials who were directly involved in the illicit scheme were either fined or jailed. KPMG was also fined $50 million. (See KPMG Fined $50 Million for Illicit Use of PCAOB Data and Cheating on Training Exams in the June 18, 2019, edition of Accounting & Compliance Alert, Former Senior Inspections Staffer, Ex-KPMG Partner Found Guilty in Inspections Scheme in the March 13, 2019, edition of ACA, and Ex-Inspections Leader Sentenced in KPMG Audit Inspections Scheme in the August 13, 2019, edition of ACA.)
“Knowing that his subordinates may have been involved in unethical or illegal behavior, Mr. Marcello failed to take steps required of someone in his position,” Patrick Bryan, Director of the PCAOB’s Division of Enforcement and Investigations, said in a statement. “This action sends a strong message that firm leadership must take their supervisory responsibilities seriously.”
In particular, the PCAOB order said that even though Marcello knew that his subordinates had received advance notice of inspection selections, he did not report or escalate the matter. The board alleged that Marcello also did not instruct the subordinates to stop using the PCAOB’s confidential information.
“In failing to take action in response to learning about the receipt and intended use of confidential information in 2016, Marcello missed an opportunity to change the tone at the top of the Firm, which could have helped prevent further violations,” the board’s order states.
The PCAOB said that Marcello did ultimately report that the firm got confidential information, but he allegedly did so only after he found out about others’ negative perception and reaction.
Among other things, the board said that two partners who had learned about the problem informed Marcello of additional details concerning the illicit activities. The two partners said that they were troubled by the situation and told Marcello that they would report it if he himself did not. Marcello finally escalated the issue, but this was a week after learning that KPMG had the PCAOB’s confidential 2017 inspections list.
Marcello’s attorney could not be immediately be reached for comment.
“We are a stronger firm as a result of the actions taken since 2017 to strengthen our culture, our governance and our compliance program,” said Russ Grote, a KPMG spokesman. “Integrity and quality are paramount for KPMG, including operating with the utmost regard for the critical importance of the regulatory process to our profession.”
This article originally appeared in the April 6, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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