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PCAOB

U.S. Audit Regulator Sanctions Three Foreign KPMG Affiliates

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

The U.S. Public Company Accounting Oversight Board (PCAOB) on Dec. 6, 2022, said that three firms and four individuals affiliated with KPMG International Limited were fined a combined total of $7.7 million for violating the board’s auditing and quality control standards.

The penalty amounts are broken down as follows:

  • KPMG S.A.S. in Bogota, Colombia: $4 million on the firm and reduced penalty of $25,000 on an individual; two other individuals were also sanctioned, but fines were waived considering their financial resources.
  • KPMG UK: $2.6 million in two disciplinary orders.
  • KPMG India: $1 million on the firm and $75,000 on an individual.

“These actions should send the message to KPMG and all other registered firms that the PCAOB is committed to rooting out misconduct wherever it occurs and will employ all sanctions at its disposal to protect investors and improve audit quality,” PCAOB Chair Erica Williams said in a statement.

The disciplinary actions come as the U.S. audit regulatory board has stepped up its enforcement activities as part of its five-year strategic plan under the leadership of Williams, who took the helm in January this year.

“The breadth of the misconduct uncovered in these matters and the aggregate size of the sanctions imposed demonstrate the global reach of the PCAOB’s oversight and the Board’s heightened vigilance in enforcement,” PCAOB Acting Director of Enforcement Mark Adler said in a statement.

In an emailed statement, Larry Bradley, global head of audit, KPMG, acknowledged the PCAOB’s findings.

“KPMG remains committed globally to the highest standards of quality and integrity,” he said. “We are driving a relentless focus on quality and consistency throughout our global organization.”

KPMG Colombia

The PCAOB said that KPMG Colombia and José Daniel Meléndez Giménez (Meléndez), Edgar Mauricio Ramírez Rueda (Ramírez) and Marco Alexander Rodríguez Ramírez (Rodríguez) violated its rules and standards during the board’s 2016 inspection. The board also charged the firm with violating quality control standards on audit documentation and internal training program.

In particular, the PCAOB found that in 2016 KPMG Colombia improperly altered audit documentation for two audits before a PCAOB inspection. The board faulted the violations were partly a result of deficiencies in the firm’s system of quality control because it failed to provide reasonable assurance that audit documentation was protected against improper modifications.

Moreover, the board faulted the firm for not maintaining appropriate control over administrative passwords that were used to backdate changes to work papers.

Further, the PCAOB said that KPMG Colombia violate the board’s quality control standards related to integrity and personnel management from at least 2016 to 2020.

“Those quality control failures prevented the firm from identifying extensive, improper answer-sharing among firm personnel in connection with tests on internal training exams covering topics that were relevant to compliance with PCAOB rules and standards,” the board stated.

In addition to the $4 million penalty, KPMG Colombia must fix its quality control system. It will also be required to complete a further investigation by an independent consultant to determine the extent of exam cheating and recommend remedial actions. The firm admitted that it failed to cooperate with a PCAOB inspection.

Meléndez, Ramírez and Rodríguez were barred from being associated with a registered public accounting firm. They can petition the board to reassociate with a registered firm after three years for Meléndez, two years for Ramírez and one year for Rodríguez. Melendez will also pay $25,000.

“KPMG Colombia… is committed to delivering high quality service to clients and continues to take actions to strengthen its culture, governance, and compliance programs,” said a KPMG Colombia spokesperson.

KPMG UK

As for KPMG LLP in London, the PCAOB issued two disciplinary orders.

In the first order, the board said KPMG UK violated PCAOB quality control standards related to integrity and personnel management. The board faulted the firm for failing to detect or prevent cheating on tests for mandatory internal training courses by hundreds of individuals from 2018 until March 2021. The courses covered topics included auditing, accounting and professional independence.

All of the professionals who cheated performed work for KPMG UK’s assurance practice. The firm did not admit or deny the findings but agreed to pay $2 million in fines. It must also review and improve its quality control policies and procedures.

In the second order, the PCAOB fined KPMG UK $600,000 for failing to reasonably supervise an unregistered audit firm in four consecutive audits of a public company client. KPMG UK used Romanian audit firm KPMG Audit SRL to play a substantial role, working up to 74 percent of the total audit hours.

Moreover, in three of the four audits, KPMG UK mistakenly reported that PCAOB-registered firm KPMG Romania SRL, not KPMG Audit SRL, participated in the audits.

The firm did not admit or deny the findings on this order either.

“I am disappointed that this took place. This kind of behaviour is unacceptable at KPMG and will not be tolerated,” Jon Holt, chief executive officer of KPMG UK, said of quality control standards. “We took the appropriate disciplinary action with all those involved and have since put additional monitoring measures in place. We are building a culture that is based on our values and I am determined that we work to the highest ethical standards for our clients and the communities we serve.”

As for unregistered audit firm, Cath Burnet, UK head of audit at KPMG, said: “We fully accept and have taken swift action to address the PCAOB’s findings. We’ve reviewed the way we work with other firms in our network, putting in place enhanced controls and providing additional training to our people.”

KPMG India

The PCAOB said that KPMG Assurance and Consulting Services LLP in Mumbai and engagement partner Sagar Pravin Lakhani were sanctioned for quality control failures. The U.S. board said Lakhani was fined because of failures to supervise and document. He and other members of the KPMG India engagement team signed off on blank placeholder work papers during a 2017 audit of a public company.

The board said that the blank work papers were replaced with completed work papers in many instances after the audit report was issued. But the signoff dates were not updated.

“As a result of this practice, the work papers did not appropriately reflect the dates on which the audit work was actually completed and reviewed,” the PCAOB said. “KPMG India was aware that its audit software allowed personnel to modify or update audit documentation without modifying the sign off date.”

In addition to paying $1 million, KPMG India must review and improve its quality control system.

The PCAOB imposed a $75,000 civil money penalty on Lakhani. He was suspended from associating with a registered public accounting firm for one year.

They did not admit or deny the PCAOB’s findings.

“As a firm we are focused on delivering high quality audits and the conclusion of this matter, along with the enhancements we have made to our quality control systems, enables us to move forward,” KPMG India said. “We remain committed to a culture built on quality and integrity in line with KPMG’s Values, building public trust and delivering high quality professional services to fulfil our important role in the capital markets.”

In the meantime, the year 2022 has not been a good one for KPMG when it comes to the PCAOB’s enforcement actions.

In April, the audit firm regulator fined Scott Marcello, former vice chair of audit for KPMG LLP in the U.S., $100,000 for failing to supervise audit personnel in connection with a scheme to cheat on the PCAOB’s inspections.

In August, the PCAOB sanctioned KPMG Korea for violating quality control standards.

 

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