I'm sure I visibly cringed when I read news accounts of criminal charges being brought against former U.S. Public Company Accounting Oversight Board (PCAOB) and KPMG employees, who are accused of using leaked PCAOB information to help the Big Four firm improve its audit results.
These charges are unproven in a court of law and all of those charged deserve the presumption of innocence at this point. However, the mere allegation that such a betrayal of ethics took place is painful, and it delivers a black eye on the accounting/auditing professions. Yet, it certainly is not without precedent. I've written many times that good people do bad things, and smart people do stupid things. It is part of the human condition — that imperfection that makes us who we are. However, what is alleged in this instance takes us a step beyond simple human error or irresponsibility. It actually raises more questions than it answers.
Details of the scandal came to light through federal criminal charges brought against three former PCAOB employees and three former KPMG employees. On his final day at work, one PCAOB employee is alleged to have copied a list of accounting firm audits scheduled to be inspected by the regulator in 2015. He then shared the list with employees of his new employer, KPMG. The two other PCAOB employees are accused of leaking PCAOB inspection plans through February 2017. KPMG hired the second PCAOB employee while the third allegedly courted the company by offering additional insider information.
If what is described is accurate, the extent of the ethical lapses exhibited by the accused is appalling. The KPMG employees, who include a national managing partner for audit quality, a partner-in-charge for inspections, and a banking and capital markets group co-leader, were allegedly willing to accept and use highly confidential information to avoid detection of audit deficiencies and the internal fallout (and public scrutiny) that comes with them. The alleged ethics violations by their PCAOB accomplices were, in my view, even more disturbing. One expects that regulatory employees have some personal commitment — if not genuine zeal — to make sure the rules they oversee are being followed. To actively work against the organization you represent for personal gain is despicable.
Despite the reputational damage to both organizations created by this evolving scandal, based on information disclosed thus far, there may be some encouraging lessons to be taken from it. KPMG's U.S. entity appears to have acted swiftly in notifying authorities when it discovered the issue last year. It hired outside legal counsel to investigate the incident and fired the employees involved. Having worked for and with Big Four firms for many years, this does not surprise me. I have personally seen their commitment at the most senior levels to promoting and supporting legal and ethical behavior. By the same token, the U.S. Securities and Exchange Commission has also brought charges against employees of the PCAOB, which resides under its jurisdiction. In other words, neither organization seems to be shrinking from responsibility at this point.
Overshadowing the encouraging lessons, however, the burgeoning scandal raises a number of troubling questions:
- Why would obviously gifted accountants who have risen to the pinnacle of their profession willingly risk it all to traffic in illicit information?
- Has the PCAOB inspection process become so onerous and unforgiving that the schedule of upcoming inspections would be worth such risks on the part of accounting professionals?
- Have the consequences of failed inspections become so dire that even national partners are willing to risk unthinkable consequences in order to mitigate the risks of failed inspections?
- Why would the value of an upcoming PCAOB inspection schedule be worth a potential job in a Big Four firm?
- Are the revolving doors between the PCAOB (and other federal regulators) too lax?
- Should there be an extended cooling off period between assignments at the regulators and the regulated?
- How does the accounting/auditing profession sustain public trust in the face of such serious allegations?
I would encourage officials at the firms and the regulators to address these questions even as the wheels of justice turn on the charges.
One of the reasons I cringed upon hearing about this scandal is that I know many extraordinary professionals at both KPMG and the PCAOB. I do not for one minute believe that their reputations should be tarnished by the alleged behavior of these six individuals. One of the lessons to be taken from this scandal is that professional ethics live and die at the personal level. In other words, the moral compass is ultimately steered by the individual. Just as the medical profession should not be judged by the unspeakable behavior of the recently sentenced U.S. gymnastics doctor, neither should the accounting/auditing profession be judged overall by the alleged behavior of a few.
As always, I look forward to your comments.