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US Audit Regulator Imposes Record Penalty on KPMG Netherlands for Exam Cheating by Hundreds of Professionals

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The US Public Company Accounting Oversight Board (PCAOB) on April 10, 2024, said it fined KPMG Netherlands a record $25 million for cheating on mandatory internal training exams by more than 500 of its professionals from at least October 2017 to December 2022. The audit regulatory board said the Big Four affiliate also repeatedly misrepresented to investigators about its knowledge of the widespread misconduct.

KPMG Netherlands violated PCAOB rules and quality control (QC) standards by failing to have proper processes for overseeing internal exams, including tests that are intended to help its audit professionals maintain their professional credentials, according to the order against the firm.

The firm’s former head of assurance, Marc Hogeboom, was fined $150,000 for his role that “directly and substantially” contributed to the violations of the PCAOB’s QC standards. He is also permanently barred from auditing companies that are listed publicly on US stock exchanges.

“The PCAOB will not tolerate cheating nor any other unethical behavior, period,” said PCAOB Chair Erica Williams. “Impaired ethics threaten the investor confidence our system relies on, and the PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity.”

In particular, the board said hundreds were involved in cheating through different methods, including by sending or receiving answers through electronic communications or taking tests together. The order notes that the vast majority of the professionals who were involved in improper answer sharing were in the firm’s assurance practice. A number of them were partners and some of its senior leaders, including Hogeboom.

The tests were on a variety of topics, including US accounting and auditing standards as well as professional ethics and independence.

The PCAOB faulted KPMG Netherlands for bad tone at the top and a failure by its leadership to promote an ethical culture.

Both KPMG Netherlands’ chief executive officer and a former head of compliance separately knew for at least six months during the PCAOB’s investigation that Hogeboom had previously been involved in improper answer sharing, but neither the CEO nor the former compliance head “disclosed this fact to anyone, including the PCAOB, until other evidence of Hogeboom’s misconduct came to light.”

Moreover, the PCAOB said that the firm’s leaders failed to act to the risk that the staff might be cheating because they were aware since June 2020 that personnel from KPMG in India that provide support for KPMG Netherlands’ audit work had cheated. Other foreign affiliates of KPMG were also previously sanctioned for cheating.

“KPMG Netherlands took virtually no steps to investigate potential answer sharing among its own personnel until July 2022, when it received a whistleblower report of answer sharing occurring within the Firm,” the PCAOB said in the order.

The firm’s alleged efforts to mislead PCAOB investigators occurred from March 2022 to June 2023 when it made and failed to correct multiple inaccurate representations. The board said that the firm denied having any knowledge of cheating in the first several months of the investigation.

Even after the July 2022 whistleblower report, the PCAOB said the firm continued to provide misstatements to the PCAOB, claiming that it did not know of any cheating before learning of the July report. This misrepresentation occurred until June 2023 when another whistleblower reported answer sharing by Hogeboom.

The gravity of the misconduct and the repeated misrepresentation culminated in the largest fine the PCAOB imposed on a firm, eclipsing the previous record in 2016 when Deloitte Brazil was fined $8 million for violation of QC standards and its interference with regulator’s investigations.

The PCAOB and the Dutch Authority for the Financial Markets conducted parallel investigations. And the firm is also under enhanced supervision by the Dutch authority.

In a statement, KPMG Netherlands CEO Stephanie Hottenhuis offered an apology, saying the “conclusions are damning, and the penalty is a reflection of that. I deeply regret that this misconduct happened in our firm.”

An attorney representing Hogeboom did not immediately respond to a request for comment.

The firm and Hogeboom did not admit or deny the findings in consenting to the orders.

In the meantime, several Big Four firms, including US and foreign affiliates, have been rocked by cheating scandals in recent years.

For example, the US SEC fined KPMG US $50 million in 2019 for having changed past audit work in connection with an elaborate scheme to pass the PCAOB’s annual audit inspection. The commission also found that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

In June 2022, the SEC fined Ernst & Young LLP $100 million for cheating on CPA ethics exams.

The PCAOB said since 2021, when Williams became chair, has sanctioned nine firms for cheating.

In separate actions, Deloitte Indonesia and Deloitte Philippines were also sanctioned on April 10 for exam cheating.


This article originally appeared in the April 11, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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