S.E.C. Faults KPMG’s Conduct in an Audit
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The Securities and Exchange Commission issued a cease-and-desist order yesterday against KPMG, the large accounting firm, after concluding that the firm had violated securities laws that required it to be independent from companies it audited. The S.E.C. action overturned a decision reached a year ago by an administrative law judge, who concluded that while KPMG’s conduct had violated the standards for auditor independence, it had made a good-faith effort to comply with them and should not be penalized. In its order, the S.E.C. said that ”we consider independence to be a keystone of our disclosure system” and that senior officials of KPMG ”failed to undertake any reasonable inquiry that necessarily would have led them to discover clear impairments of independence.” ”Under these circumstances, we believe that cease-and-desist relief is fully warranted,” the order stated. The commission action, approved on a 3-to-0 vote, with one commissioner not participating, has little practical effect on KPMG, because it was not fined and the commission decided not to impose additional reporting requirements on KPMG that had been sought by the commission’s enforcement division. But it nonetheless stands as a rebuke to one of the Big Five accounting firms that audit most public companies. The case concerned a 1996 audit of Porta Systems, a Long Island company that was then being run by KPMG Baymark, a company affiliated with KPMG that specialized in corporate turnarounds. The president of Porta had a $100,000 loan outstanding from KPMG, and KPMG stood to receive a fee based on the profits of the company whose books it was auditing. Both arrangements are clearly barred by well-understood auditor independence rules, the S.E.C. said. KPMG argued that it had discussed the arrangements with S.E.C. staff members, and came away with the understanding that it could proceed. The S.E.C. staff disagreed, and the administrative law judge concluded that ”the worst that can be said is that there was a misunderstanding.” But the commission concluded that important facts had not been disclosed in those talks, and failure to disclose those facts was crucial. Last night, George Ledwith, a spokesman for KPMG, said that while the firm had not had time to study the commission’s order, ”We find it extremely unfortunate that the commission chose to disregard the findings of its own administrative law judge.” More : query.nytimes.com |