Proposed US rule would have forced KPMG to name auditor sooner

WASHINGTON, April 9 Tue Apr 9, 2013 6:58pm EDT

WASHINGTON, April 9 (Reuters) - When audit firm KPMG said late on Monday it had parted ways with two corporate audit clients and a senior partner over information leaks used in alleged insider trading, the partner's identity was initially a mystery.

The name of Scott London, a KPMG veteran, emerged late on Tuesday, but would likely have been known sooner if the panel that regulates the U.S. audit industry had adopted a proposed rule to require disclosure of audit engagement partners.

The Public Company Accounting Oversight Board, aiming to shine more light on public company audits, proposed the rule in October 2011, but has not enacted it.

"We don't know how many other audits of public companies this person did," said Lynn Turner, former chief accountant for the U.S. Securities and Exchange Commission. "It is a shame the PCAOB has elected not to move forward with this significant proposal," he said.

Nutritional products group Herbalife and footwear maker Skechers revealed separately on Tuesday that KPMG had quit as their auditor in connection with alleged leaks of nonpublic information.

The FBI in Los Angeles is investigating, according to a source familiar with the situation.

KPMG, which at first did not name the partner who had resigned, later confirmed it was London.

London could not be reached for comment.

The U.S. Congress created the PCAOB under the 2002 Sarbanes-Oxley Act to police corporate auditors after accounting blow-ups at companies such as former energy giant Enron Corp.

The panel has been exploring the idea of requiring the identity of the so-called engagement partners, those who oversee the audits, since 2009.

Some investor advocates as well as PCAOB Chairman Jim Doty champion the idea. Last week, Doty said that identifying the audit engagement partner "may help the investing public identify and judge quality, leading to better auditing."

But the Big Four accounting firms, which includes KPMG, have opposed the idea, convinced it would be of little use to investors, could increase legal liability and deter auditors from tackling high-risk audit jobs.

"We believe that disclosing the name of the engagement partner ... may create a misunderstanding of the role and responsibility of the firm in issuing the audit report," KPMG wrote in a January 5, 2012 comment letter to the PCAOB.

A KPMG spokesman did not respond to a request for comment.

A PCAOB spokeswoman declined to comment on the KPMG matter, but said the transparency proposal is expected to be either adopted or re-proposed sometime between April and September.

If the PCAOB were to adopt the rule, it would still need final SEC approval. SEC Commissioner Luis Aguilar, a Democrat, said the PCAOB's proposal is "a common practice in other countries" and "worthy of serious consideration by the PCAOB."

Jason Flemmons, a former deputy chief accountant in the SEC's enforcement division, now a senior managing director at FTI Consulting, said he was unconvinced investors would change their behavior if they knew the identity of the auditor earlier.

The important thing, he said, would be that the SEC will easily be able to get the information it needs.

"I imagine they are all over this," he said of the SEC.

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