Professional Ethics Elizabeth Z. Woodward CPA/CFF, CFE Director of - PowerPoint PPT Presentation

Professional Ethics Elizabeth Z. Woodward CPA/CFF, CFE Director of Forensic Accounting and Litigation Support

Objectives Consider personal code 1 Forensic look at KPMG/PCAOB indictments 2 AICPA code update 3 4 Kentucky State Board of Accountancy update Case studies 5 2

Sully with the “Human Factor” (2:53) Tom Hanks Oscar Worthy Acting in Sully (2016) - 'Human Factor' Scene 1080p https://www.youtube.com/watch?v=tsOWjB2X5K8 3

Sully scene “Can we get serious now?” (1:41) Sully scene "Can we get serious now?" Tom Hanks scene part 2 Metroplex89 - https://www.youtube.com/watch?v=2njlF0OOftQ 4

The Significance of Ethics and Ethics Education in Daily Life/Michael D. Burroghs/TEDxPSU (10:31) The Significance Of Ethics and Ethics Education in Daily Life | Michael D. Burroughs | TedxpsuTEDxTalks - https://www.youtube.com/watch?v=_8juebyo_Z4 5

KPMG/PCAOB – Six Criminal Indictments January 2018 6

KPMG indictment: broken down PCAOB inspects the six largest U.S. accounting firms pursuant to the Global Network Firm (“GNF”) Program 7

KPMG indictment: broken down PCAOB has a dedicated team of inspectors for each firm in the GNF Program 8

KPMG indictment: broken down “GNF Planning Spreadsheet” is maintained by PCAOB to track the factors considered in making inspection decisions 9

PCAOB written inspection reports Part I: Summarizes “comments” or findings on individual audits; public 30 days after issued Part II: Addresses systemic deficiencies in the accounting firm’s overall system of quality control; public only if not remedied in one year 10

SEC relies upon PCAOB inspections SEC approved PCAOB Ethics Code PCAOB Ethics Code 9: � Unless authorized by the Board, no Board member or staff shall disseminate or otherwise disclose any information obtained in the course and scope of his or her employment, and which has not been released, announced, or otherwise made available publicly. The provisions of this Section shall continue in effect after the termination of employment or Board membership. 11

2014 inspections: KPMG received 28 comments in connection with 51 audits Approximately two times as many as competitors Concentration of issues on banking clients 12

2015 KPMG reaction to improve results Recruit and hire former PCAOB personnel (including Cynthia Holder and Brian Sweet) Retained a data analytics firm to assist in predicting which KPMG engagements would be inspected by the PCAOB 13

2015 KPMG reaction to improve results Implemented financial incentive system to award bonuses to engagement teams that received no comments on inspections Implemented internal monitoring programs to oversee certain audit areas (that had findings) 14

Brian Sweet 2009-4/24/15: Employee of PCAOB (Associate Director) 2014: KPMG starts recruiting Sweet 5/4/15: Employee of KPMG (Audit partner in the DPP Inspections Group, focused on banking clients) 3/2017: Separated from KPMG 15

Cynthia Holder 12/2011-7/2015: Employee of PCAOB, expertise in banking (Inspections Leader) 8/1/15: Employee of KPMG (Executive Director in Risk and Regulatory) 4/2017: Separated from KPMG 16

Jeffrey Wada 2004-3/2017: PCAOB employee (Inspections Leader) 17

David Middendorf KPMG head of DPP and National Managing Partner for the Audit Quality and Professional Practice Group 4/2017: Separated from KPMG 18

Thomas Whittle KPMG Audit Partner in DPP and National Partner-in-Charge for Quality Measurement 4/2017: Separated from KPMG 19

David Britt KPMG Audit Partner in DPP, Banking and Capital Markets 4/2017: Separated from KPMG 20

The conspiracy Scheme: acquire confidential PCAOB information from current and former PCAOB employees, particularly concerning planned 2015, 2016, and 2017 inspections 21

The conspiracy 7/2014: Middendorf and Whittle start recruiting Sweet 4/2015: Sweet travels to New York to interview with KPMG; offered direct-entry partner position 22

The conspiracy Late 4/2015: Sweet copies various confidential documents from PCAOB internal network to a personal hard drive; took confidential electronic and hard copy documents Sweet provides a list of other PCAOB personnel who could be recruited to KPMG 23

The conspiracy Confidential documents taken by Sweet included: � Internal PCAOB manuals and guidance � Comment forms issued on inspections Sweet had conducted � List of KPMG engagements to be inspected by PCAOB in 2015 � The 2015 GNF Planning Spreadsheet for KPMG 24

The conspiracy 5/4/2015: Welcome lunch with Middendorf and Britt to discuss: 1. Whether a specific client would be a target of PCAOB inspection 2. Which KPMG engagements would be inspected in 2015 25

The conspiracy 4/2015: KPMG retains Data Firm, $250,000 contract, contingent on success rate; goal: predict PCAOB inspection targets 6/2015: Middendorf ask Sweet to work with the Data Firm, share information 26

The conspiracy 6/29/2015: Sweet shares PCAOB planning document information with KPMG Partner 2 working with Data Firm 9/3/2015: Partner 2 requests “2015 random selections,” to help Data Firm. Sweet provides. 27

The conspiracy Sweet helps Holder obtain employment at KPMG � Sweet gives list of potential recruits to KPMG � Holder and Sweet email resumes and discussion about job � 5/25/15: Holder notified PCAOB Ethics Office that she had been contacted by KPMG recruiter, and that she had told them she wasn’t interested 28

Holder provides confidential PCAOB information to Sweet while pursuing employment at KPMG 5/2015: Holder sends internal, confidential PCAOB Part II deficiencies comment form to Sweet using personal email 5/2015: Holder advises Sweet that KPMG should do a pre-review of a particular audit 29

Holder provides confidential PCAOB information to Sweet while pursuing employment at KPMG 5/2015: Holder asks Sweet his opinion on a “technical issue,” as she is trying to decide whether she should write a comment 30

Holder provides confidential PCAOB information to Sweet while pursuing employment at KPMG May/June 2015: Holder notifies Sweet that she is trying to squash a PCAOB IT inspector’s comment. Sweet tells Whittle. 6/1/2015: Holder has first round of interview at KPMG 31

Holder provides confidential PCAOB information to Sweet while pursuing employment at KPMG Mid-6/2015: Holder tells Sweet that a specific inspection would be cancelled and not be replaced 6/29/2015: Holder receives email asking her to participate in a second round of KPMG interviews 32

Holder is hired by KPMG and takes confidential PCAOB information when she leaves the PCAOB 7/2015: Holder offered non-partner position; Executive Director in DPP Holder copied confidential PCAOB information to a thumb drive; later copied contents to her home computer 33

Holder is hired by KPMG and takes confidential PCAOB information when she leaves the PCAOB 6/2016: Sweet and Holder discuss a specific PCAOB inspector, Holder emails Sweet an internal PCAOB comment form written by that inspector 8/2015-3/2016: Wada (still employed at PCAOB) gives Holder confidential information 34

Wada frustrated with PCAOB Early 2016: Wada did not get a promotion 3/2016: Wada gives Holder a confidential list of 12 issuers that would be inspected 35

KPMG use of 2016 list “Re-reviewers”, including Sweet and Holder, looked at engagements Nature and extent of re-reviews kept secret Engagements generally within Documentation Period; allowed to improve documentation of audit work In several instances, additional audit work was performed and concealed 36

Wada provides information on 2017 inspections Wada reads Holder the 2017 Confidential Preliminary Inspection List The 2017 audits were live when KPMG obtained the list; engagement partners alerted and staffing changed 37

Wada provides information on 2017 inspections An internal KPMG inspection prediction list was altered to make staffing changes seem reasonable 38

Wada seeks employment at KPMG 1/2017: Wada learns he will again not be promoted at PCAOB Uses personal email and text to seek Holder’s assistance getting a KPMG job 2/2017: Wada shares the 2017 Final List and focus areas with Holder KPMG Defendants notify KPMG engagement partners of inspections 39

KPMG Partner 5: do the right thing Sweet notifies Partner 5 that his engagements would be inspected by the PCAOB 2/6/17: Partner 5 notifies his supervisor By 2/13/17: Reported to KPMG General Counsel 40

OGC investigation Holder and Sweet try to coordinate stories before interviews Sweet creates a copy of 2017 Final List that only includes issuers name, not focus areas (to be consistent with Holder’s interview) 41

OGC investigation Sweet deletes some, but not all, confidential information Holder deletes text messages from Wada after OGC requests her cell phone 42

OGC investigation Holder and Sweet discuss communication strategies � Burner telephones � Spouse’s cell phones � Post college football pictures on Instagram, clue to call a designated KPMG conference call number 43

AICPA Code Update 44