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1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
https://www.wsj.com/articles/former-kpmg-executives-charged-with-conspiracy-1516640050 1/6
At KPMG LLP, prosecutors say, the revolving door spun out of control.
Starting in 2015, the giant accounting firm wanted badly to improve its standing in the
eyes of its regulator. But when KPMG recruited employees from its overseer, a scandal
emerged over leaks of confidential information that resulted Monday in the
indictments of five people on fraud and conspiracy charges.
Authorities likened it to “stealing the exam”: Employees of the Public Company
Accounting Oversight Board, the main regulator of the audit industry, gave KPMG
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https://www.wsj.com/articles/formerkpmgexecutiveschargedwithconspiracy1516640050
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Former KPMG Executives Charged With Conspiracy Six accountants were accused of arranging to obtain and misuse con�idential information about regulator’s plans to inspect audits
Updated Jan. 22, 2018 8�10 p.m. ET
By Rebecca Davis O’Brien, Dave Michaels and Michael Rapoport
1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
https://www.wsj.com/articles/former-kpmg-executives-charged-with-conspiracy-1516640050 2/6
executives advance peeks at the secret lists of KPMG audits the PCAOB planned to review during annual inspections of the firm, prosecutors alleged in an indictment unsealed Monday.
That information would have enabled KPMG to better prepare for the inspections, an important report card of the firm’s performance. As the scheme unraveled, accountants deleted messages, and considered hiding their communications using prepaid “burner” phones and codes over Instagram, prosecutors said.
David Middendorf, a former KPMG national managing partner, and Thomas Whittle and David Britt, both former audit partners at KPMG, were charged with conspiracy and wire fraud, according to Monday’s indictment. So were Cynthia Holder, who inspected KPMG for the PCAOB before joining the firm in 2015, and Jeffrey Wada, a former PCAOB inspector.
A sixth person charged in the scheme, Brian Sweet —who also inspected KPMG for PCAOB before joining the firm—pleaded guilty earlier this month to conspiracy,
David Britt, left, leaves federal court after his arraignment in New York on Monday. PHOTO: MARK KAUZLARICH FOR THE WALL STREET JOURNAL
1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
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according to a document unsealed Monday.
According to court filings, Mr. Sweet took confidential
PCAOB documents with him when he went to work for KPMG in 2015, and continued to acquire—with the help of at least two other board employees—and share PCAOB information with KPMG executives through early 2017.
“In stepping up and cooperating with federal officials, Mr. Sweet has taken the first step toward redressing his mistakes,” said Richard Morvillo, a lawyer for Mr. Sweet.
An attorney for Mr. Middendorf said his client would defend himself against the charges. A lawyer for Mr. Britt said the former KPMG partner was innocent of any criminal charges.
Lawyers for the other defendants couldn’t be reached for comment.
Ms. Holder and Messrs. Sweet, Middendorf, Whittle and Britt were all “separated from” KPMG around March or April of 2017, according to the indictment. In addition, Scott Marcello, who headed KPMG’s audit practice and isn’t among the defendants, was also fired, the Journal reported last year. Mr. Marcello didn’t respond to requests for comment Monday.
RELATED COVERAGE
Government Cleans House at Audit Regulator (Dec. 12)
How Did KPMG Audit Chief Scott Marcello Fall From Grace? (April 16)
KPMG Fires Partners Over Leak of Audit Regulator’s Confidential Plan (April 11)
READ THE UNSEALED FEDERAL INDICTMENT
United States of America v. David Middendorf, Thomas Whittle, David Britt, Cynthia Holder, and Jeffrey Wada
United States of America v. Brian Sweet
1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
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Manuel Goncalves, a KPMG spokesman, said in a statement that the firm promptly notified the authorities when it learned of the leaking and has been fully cooperating with the investigation. The firm “took swift and decisive action,” he said, including firing the individuals involved, and has since “taken remedial action to assure that such conduct cannot happen again.”
According to the indictment, Mr. Sweet arrived at KPMG in May 2015 armed with inside information from the PCAOB, and KPMG executives wasted no time asking him for it. At a welcome lunch in Mr. Sweet’s first week of work, Mr. Middendorf asked Mr. Sweet about upcoming KPMG inspections.
Later that week, Mr. Middendorf told Mr. Sweet to remember where his paycheck came from, and urged him to be loyal to KPMG, according to the indictment. At around that time, Mr. Whittle allegedly asked Mr. Sweet for a copy of the PCAOB list of inspections.
KPMG executives urged Mr. Sweet to help recruit others from the PCAOB, including Ms. Holder, who according to the indictment lied to the board’s ethics
office about pursuing employment at the firm, allowing her to continue working on KPMG-related matters. At Mr. Sweet’s request, Ms. Holder provided him with an internal PCAOB report, among other confidential materials, according to the indictment. She began working at KPMG in August 2015, according to SEC records.
Prosecutors say Ms. Holder soon drew Mr. Wada into the alleged scheme. In November 2015, Mr. Wada gave Ms. Holder the date of a PCAOB inspection of a KPMG matter in Japan, according to the indictment. He also alerted her to a fraud risk in another matter, which allowed KPMG to prepare an answer for why the firm hadn’t seen it.
Mr. Wada, too, hoped to leave the PCAOB, prosecutors say. In January 2017, according to the indictment, he emailed Ms. Holder to lament that he hadn’t gotten a promotion. “God this place sucks,” Mr. Wada wrote. “Please let me know what else you need from me.”
1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
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He attached a copy of his résumé.
The PCAOB began investigating the leaks last year.
In February, as investigators began zeroing in, Ms. Holder and Messrs. Sweet and Wada took steps to cover their tracks, according to the indictment. Among other measures, Ms. Holder suggested she and Mr. Sweet obtain untraceable “burner” prepaid cellphones to communicate, the indictment says. The two also agreed that either one could signal that they wanted to communicate with the other by posting a photo on Instagram related to a specific college football team, after which they would dial in to a designated KPMG conference call number, according to the indictment.
William Duhnke, the PCAOB’s chairman, said in a statement that the board will conduct an review of its information technology and security controls as well as its compliance and ethics protocols.
The PCAOB inspects the biggest accounting firms each year, evaluating a sample of each firm’s most challenging audits to assess their performance and their compliance with auditing standards. The inspections are aimed at helping the firms improve their own audits and don’t lead to any penalties, but the results are widely viewed as a barometer of whether the quality of audits is getting better or worse.
The PCAOB’s 2016 report on the inspection of KPMG—one of the inspections for which the clients’ identities was allegedly leaked—hasn’t been released by the PCAOB, though the same year’s reports for the other three Big Four firms have been.
Messrs. Whittle and Britt appeared in magistrate court in Manhattan Monday and were released on bond. The others made initial appearances in other states, according to a spokesman for the Manhattan U.S. attorney’s office.
The Securities and Exchange Commission also announced civil charges Monday against the defendants. Mr. Sweet has already agreed to settle the SEC’s claims and
1/27/2018 Former KPMG Executives Charged With Conspiracy - WSJ
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was permanently barred from auditing the financial statements of public companies,
according to an SEC order.
Write to Rebecca Davis O’Brien at rebecca.obrien@wsj.com, Dave Michaels at dave.michaels@wsj.com and Michael Rapoport at Michael.Rapoport@wsj.com
Appeared in the January 23, 2018, print edition as 'Former KPMG Executives Charged.'
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