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UPDATE 2-KPMG to pay $8.2 mln to settle charges over auditor independence
January 24, 2014 / 7:01 PM / 4 years ago

UPDATE 2-KPMG to pay $8.2 mln to settle charges over auditor independence

By Sarah N. Lynch

WASHINGTON, Jan 24 (Reuters) - Accounting firm KPMG will pay $8.2 million to settle civil charges that it violated independence rules by providing non-auditing services such as bookkeeping to three companies whose books it audited, U.S. regulators said on Friday.

In the second major enforcement action against a “Big Four” accounting firm this week, the Securities and Exchange Commission also alleged that eight KPMG partners, including two who worked on the audit of a client, owned stock in the firm.

The SEC’s independence rules prohibit firms from providing certain types of non-auditing services to audit clients, in an effort to ensure auditors are objective watchdogs for investors.

Concerns about auditor independence have risen recently among regulators as big accounting firms reassert themselves in the consulting business. This reverses a trend away from consulting that had begun with the 2002 Sarbanes-Oxley Act.

That law strengthened the independence rules in the wake of accounting scandals at Enron, WorldCom and other corporations.

In Friday’s case, KPMG settled with the SEC without admitting or denying the charges. In a statement, the firm said it is “fully committed to ensuring our independence with respect to all of our audit clients.”

“In the years since the events discussed in this SEC action, KPMG has implemented internal changes that are designed to ensure its ability to comply with restrictions on providing non-audit services to SEC audit clients and/or their affiliates,” a spokesman added.

The SEC’s case, filed as an administrative action, alleged that KPMG’s dealings with three of its public company audit clients from 2007 to 2011 led to rule violations. The SEC did not disclose the names of the companies, saying only that they are publicly traded on the New York Stock Exchange.

But the market regulator cited a variety of improper business relationships with the three companies, such as offering non-audit services that included bookkeeping, restructuring, corporate finance, and payroll services.

“Independence is the cornerstone of the auditing process, and the SEC order reminds firms not to push the envelope,” Jim Doty, chairman of the Public Company Accounting Oversight Board, said in a statement. The board, which polices auditors, helped with the SEC investigation.


The KPMG case came during a rough week for the world’s biggest accounting firms, known as the “Big Four”: KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young.

On Wednesday, an SEC administrative law judge ruled that the Chinese units of those firms should be suspended from practicing in the United States for six months for failing to turn over audit work papers of U.S.-listed Chinese companies. [ID: nL2N0KW227]

The judge’s ruling in the China matter is expected to be appealed and the issue could take years to be resolved.

In addition to the major enforcement news this week, the SEC on Friday released a report on auditor independence that highlights questionable practices that agency investigators flagged at KPMG.

A copy of the document is at:

Auditor independence rules generally bar accounting firms from offering consulting work to audit clients but leave the door open to tax services.


In its report, the SEC found that KPMG provided tax services to clients, but did so through hiring arrangements that could compromise independence and violate SEC rules barring auditors from acting as employees of an audit client.

These practices involved KPMG lending some of its tax professionals to certain audit clients. In that capacity, these professionals worked “under the direction and supervision” of company management, the SEC said.

The SEC opted not to bring charges against KPMG in connection with these issues.

However, the report and Friday’s case are likely to help spur more debate about the kinds of services that audit firms should be allowed to provide.

At a conference in December, the accounting oversight board’s Doty and SEC Chief Accountant Paul Beswick both said they had concerns about big accountants acquiring more consulting businesses in recent years. Doty told reporters at the time that he hoped to hold some public roundtables on the subject this year.

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