Former KPMG Executive Pleads Guilty To Fraudulent Scheme To Steal Confidential PCAOB Information And Use That Information To Fraudulently Improve KPMG Inspection Results
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that DAVID BRITT, a former KPMG partner who was the co-head of the Banking and Capital Markets Group within the audit group of KPMG’s Department of Professional Practice (“DPP”), pled guilty today to participating in a scheme to defraud the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing so that KPMG could improve its performance in PCAOB inspections. BRITT pled guilty to one count of conspiracy to commit wire fraud before the Honorable J. Paul Oetken.
Manhattan U.S. Attorney Geoffrey S. Berman said: “David Britt, a former KPMG partner, admitted today to obtaining confidential lists that contained the information on which KPMG audits would be reviewed by the PCAOB. Using the playbook he illicitly acquired, Britt used that information to improve the results his of firm’s audits. Independent reviews of accounting firm audits exist to ensure their integrity and accuracy. David Britt corrupted that process and now faces time in federal prison.”
According to the allegations contained in the Indictment filed against BRITT and statements made in related court proceedings, including the trial of co-defendants David Middendorf and Jeffrey Wada:
The PCAOB is a nonprofit corporation overseen by the SEC that inspects the audit work performed by registered accounting firms with respect to the financial statements of publicly traded companies. The PCAOB inspects the largest U.S. accounting firms on an annual basis. As part of the inspection process, the PCAOB chooses a selection of audits performed by the accounting firm for a closer review. Until shortly before an inspection occurs, the PCAOB does not disclose which audits are being inspected, or the focus areas for those inspections, because it wants to ensure that an auditor does not perform additional work or modify its work papers in anticipation of an inspection. Following the completion of an inspection, the PCAOB issues an Inspection Report containing any negative findings or “comments” with respect to both the specific audits reviewed and the accounting firm more generally.
KPMG is one of the largest accounting firms in the world. In recent years, KPMG fared poorly in PCAOB inspections, and in 2014 received approximately twice as many comments as its competitor firms. By at least in or about 2015, KPMG was engaged in efforts to improve its performance in PCAOB inspections, including but not limited to recruiting and hiring former PCAOB personnel, including Brian Sweet. At the time, BRITT was a partner in DPP, which was broadly responsible for the quality of KPMG’s audits and KPMG’s performance in PCAOB inspections.
KPMG’s efforts to improve inspection results, however, were not limited to legitimate means. Instead, between 2015 and 2017, BRITT, David Middendorf, Thomas Whittle, Cynthia Holder, Brian Sweet, and Jeffrey Wada worked to illicitly acquire valuable confidential PCAOB information concerning which KPMG audits would be inspected, in an effort to game the system and improve inspection results. For example, during Sweet’s first week of employment at KPMG in 2015, BRITT, Middendorf, and Whittle began asking Sweet for confidential PCAOB information about which KPMG audits would be inspected by the PCAOB that year.
In March 2016, Holder obtained the PCAOB’s confidential 2016 inspection selections for KPMG from Wada, who was still working at the PCAOB but who had recently been passed over for a promotion. Wada – who was not responsible for KPMG inspections at the PCAOB– accessed and stole valuable confidential information from the PCAOB and passed it on to Holder. Holder, in turn, provided the 2016 inspection selections to Sweet, who passed them to Middendorf, Whittle, and BRITT. Middendorf, Whittle, BRITT, and Sweet then agreed to launch a stealth program to “re-review” the audits that had been selected. In order to cover up their illicit conduct, BRITT gave other KPMG engagement partners a false explanation for the re-reviews. The stealth re-review program allowed KPMG to double-check its audit work, strengthen its work papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit.
In January 2017, Wada, who had again been passed over for promotion at the PCAOB, again stole valuable confidential PCAOB information, misappropriating a preliminary list of confidential 2017 inspection selections for KPMG audits and passing it on to Holder. At the same time, Wada provided Holder with his resume and sought her assistance in helping him to acquire employment at KPMG. Sweet shared the preliminary inspection selections provided by Wada with Whittle and BRITT, while noting that the information was only preliminary. Whittle’s response was to ask Sweet to confirm that they would get the final list as well.
In February 2017, Wada texted Holder saying “I have the grocery list. . . . All the things you’ll need for this year.” Wada then spoke to Holder and provided her with the full confidential 2017 final inspection selections. Holder again shared the stolen information with Sweet, who shared it with Middendorf, Whittle, and BRITT, so that it could be acted upon to improve the audits on the list.
In 2017, a KPMG partner who received early notice that her engagement was on the confidential 2017 inspection list reported the matter, and it was ultimately reported to KPMG’s Office of General Counsel.
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DAVID BRITT, 56, pled guilty to one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. Sentencing is scheduled for May 8, 2020 before the Honorable J. Paul Oetken.
The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentence for the defendant will be determined by the judge.
Mr. Berman praised the investigative work of the United States Postal Inspection Service and also thanked the Securities and Exchange Commission, which has brought an administrative proceeding against BRITT.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jordan Estes, Margaret Graham, Martin Bell, and Rebecca Mermelstein are in charge of the prosecution.