"The legal consequence of an auditor lacking independence is that it violates, and causes its audit clients to violate, various provisions of the federal securities laws. As a result, independence determinations are important, not just for audit firms, but also for companies and audit committees. While KPMG will pay $8.2 million to settle the SEC's charges –pretty small potatoes for KPMG-the key issue for companies is that the independence violations cause the affected companies to violate the Exchange Act and call into question the audited financial statements these companies filed with their 10-Ks. The order further finds that KPMG engaged in improper professional conduct as defined by Section 4C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice." Finally, certain KPMG employees also owned stock in Company A and affiliates of Company B resulting in a further violation of the independence rules." According to the press release, the SEC found that KPMG "violated Rule 2-02(b) of Regulation S-X and Rule 10A-2 of the Exchange Act, and caused violations of Section 13(a) of the Exchange Act and Rule 13a-1. These non-audit services caused KPMG to violate the independence rules in relation to Company B and Company C. With regard to Company C, KPMG was its audit firm, but also provided prohibited non-audit services, including bookkeeping and payroll services, to affiliates of Company C. With regard to Company B, KPMG was its audit firm, but also provided various prohibited non-audit services, including restructuring, corporate finance, and expert services, to an affiliate of Company B. This engagement involved the loaned employee acting as a manager, employee and advocate for the affiliate, causing KPMG to violate Rule 2-01 of Regulation S-X of the Exchange Act. Despite these violations, "KPMG repeatedly represented in audit reports that it was ‘independent' despite providing services to three audit clients that impaired KPMG's independence." In addition, the SEC questioned KPMG's loaning of employees to its audit clients although no enforcement action was taken, the SEC issued a Section 21(a) Report of Investigation, to "address uncertainty" regarding the SEC's interpretation of "acting as an employee" under Rule 2-01.Īccording to the SEC Order in the enforcement action, at various time over a four-year period, "KPMG provided prohibited non-audit services to affiliates of three of its SEC audit clients ….With regard to Company A, KPMG hired an employee who had recently retired from a senior position at Company A's affiliate, and then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate. The investigation found that KPMG provided prohibited non-audit services, such as restructuring, corporate finance, bookkeeping, payroll and expert services to affiliates of companies whose financial statements they were auditing. The SEC has charged KPMG with violating the auditor independence rules. SEC Charges KPMG with Auditor Independence Violations
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