Did KPMG Monitor the Internal Control Systems It Had In Place?

(Please refer to the blog KPMG Responds to Insider Trading by its Partner)

Below is a statement by Mr. Scott London (former partner at KPMG) acknowledging his role in the insider trading of information he acquired as the auditor. This statement reflects the challenges companies have in ensuring the internal control systems in place are working as intended. As the KPMG chairman said:

"As part of KPMG’s comprehensive Ethics and Compliance Program, we have a rigorous system in place to prevent insider trading, including policies, processes, training, monitoring, and enforcement. This individual violated our policies, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for our long-standing culture of professionalism and integrity that guides the actions of all of our people." 

The problem is determining if KPMG did actually try to monitor and enforce its policies. In the past, they have been censured for not properly monitoring the activities of its partners. Here are three examples:

1.     In April of 2005 KPMG paid $22 million to settle SEC litigation relating to audits of Xerox. The SEC complaint alleges that KPMG and its partners permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public.

"KPMG caused and willfully aided and abetted Xerox's violations of the anti-fraud, reporting, recordkeeping and internal controls provisions of the federal securities laws. The Order also finds that KPMG violated its obligations to disclose to Xerox illegal acts that came to its attention during the Xerox audits. The Order censures KPMG and orders it to cease and desist from committing or causing these violations. KPMG consented to the entry of the Order without admitting or denying the SEC's findings."

2.     In October of 2004, the Securities and Exchange Commission sanctioned KPMG and two former KPMG partners, and a current partner and senior manager for engaging in improper professional conduct as auditors for Gemstar-TV Guide International, Inc. KPMG and the auditors agreed to settle the action without admitting or denying the SEC's findings. As part of the settlement, KPMG was censured and agreed to pay $10 million to harmed Gemstar shareholders.

3.     In January 2002, the Securities and Exchange Commission censured KPMG for engaging in improper professional conduct because it purported to serve as an independent accounting firm for an audit client (Short-Term Investments Trust, a money market fund within the AIM family of funds) at the same time that it had made substantial financial investments in the client. The SEC found that KPMG violated the auditor independence rules by engaging in such conduct. KPMG consented to the SEC's order without admitting or denying the SEC's findings.

Scott London's April 9, 2013 Statement 

Let me first say that I regret my actions in leaking non-public data to a third party regarding the clients I served for KPMG. Most importantly, and I cannot emphasize this enough, is that KPMG had nothing to do with what I did. The Firm bears no responsibility in this matter. These actions were by my choice and mine only. These leaks started a few years back in an effort to help out someone whose business was struggling. From time to time over the last couple of years, this third party would ask me how these clients were doing. On a few occasions over the past few years, this individual would ask if he should buy or sell a stock and I gave him my thoughts indicating whether the stock was a good buy or not. Never once did I pass any documents to him, but rather we spoke on the phone and the information I provided was in the form of a suggestion. He traded on the information, but to this day I am not aware of how much he profited from the information. Regardless, what I have done was wrong and against everything that had believed in. I spent nearly 30 years at KPMG and I dedicated my entire life to that Firm. This is the main reason why this is so difficult for me to go through.. Knowing that I have caused harm and embarrassment to those that I respected and admired in the Finn has caused me tremendous grief. 

I have embarrassed myself, my family, my friends, KPMG and those that worked with and for me while I was at KPMG. I want to express my deepest apologies for any harm that results to KPMG and the terrific employees and partners that I worked with. No one in the Firm knew what I did. Moreover, nothing of what I did impacted how I conducted the audits of Skechers and Herbalife. With regard to Herbalife, there was no information leaked during 2012, accordingly, none of what I did had anything to do with Herbalife's continuing battles with investors over the Company's business practices. 

The auditing profession’s challenges continue to affect the public and the companies audited. In this case, Herbalife has shelved its plans for a large stock buyback after KPMG resigned as its auditor.