Published April 6, 2022 – Law 360
Bob Cox was recently quoted by Law360 regarding “Audit Watchdog Sends Warning Shot In Fining Ex-KPMG Exec”
The Public Company Accounting Oversight Board sent a warning shot to the accounting industry this week when it announced a first-of-its-kind monetary fine for an ex-KPMG audit professional.
The move shows that the PCAOB’s new guard is moving in lockstep with the U.S. Securities and Exchange Commission’s pro-enforcement agenda.
In Tuesday’s announcement, the PCAOB said the $100,000 fine against Scott Marcello, former KPMG vice chair of audit, is both the largest money penalty ever imposed on an individual in a settled case, and the first imposed sanction for a failure “reasonably to supervise.”
“This ‘first of its kind’ disciplinary action demonstrates that the PCAOB is committed to sanctioning top-level personnel at the largest firms when they fail to take sufficient supervisory steps aimed at preventing violations by their subordinates,” PCAOB Chair Erica Y. Williams said in the announcement.
The penalty stems from a years-old scandal in which KPMG, one of the country’s “big four” accounting firms, admitted that Marcello and other KPMG officials had used information stolen from the PCAOB to illegally gain a leg up on annual inspections.
Marcello was among those fired by the firm in 2017, and KPMG ultimately paid a $50 million fine in 2019 to the SEC, which oversees the nonprofit audit watchdog.
“The board believes it is important to hold [Marcello] accountable as [a] supervisor for contributing to a culture that led to this serious misconduct,” Williams said Tuesday.
With a new chair in Williams, who was sworn in early this year, and with three additional members recently appointed under the SEC’s Democratic Chair Gary Gensler, some attorneys took Tuesday’s announcement as evidence that the PCAOB is now operating in lockstep with the agency’s more “pro-enforcement” agenda.
Along with that comes more of a focus on holding corporate America and its executives accountable, they said.
“They’re clearly sending a message with this record penalty that they will hold senior folks at accounting firms accountable when they fail to carry out their supervisory responsibilities over others,” said Robert Cox, a Briglia Hundley PC partner and former assistant director in the PCAOB’s division of enforcement and investigations.
Four of the PCAOB’s five members have been appointed by Gensler. Williams, a Democrat and a former Kirkland & Ellis LLP litigation partner, was previously a special assistant and associate counsel to President Barack Obama, and deputy chief of staff to three SEC chairs. Among the others is Kara M. Stein, also a Democrat and a former SEC commissioner.
“I think it’s fair to say that all of these new board members, including Chair Williams, probably have a more progressive, pro-enforcement bent,” Cox said. “I also think it’s a fair conclusion to say that the PCAOB is going to adopt a more aggressive posture in terms of enforcement going forward.”
According to Tuesday’s order, Marcello, who did not admit to or deny the findings, failed to reasonably supervise KPMG personnel and failed to take appropriate action when one of his subordinates told him that staff members had obtained highly confidential PCAOB information.
“I think the PCAOB felt like they had to do something to [Marcello] because he found out about the confidential information, and he just didn’t do anything about it,” said Toby Galloway, chair of Winstead PC’s securities litigation and enforcement group and a former SEC attorney. “When the head of your audit department knows about this kind of wrongdoing and doesn’t do anything about it, that’s pretty shocking.”
Galloway agreed that a pro-enforcement stance is likely trickling down from the SEC to its appointees at the PCAOB. He noted that Stein is “known for being very aggressive and pro-enforcement,” and that Williams brings a similar reputation.
“The PCAOB ultimately reports to the SEC, so I think it’s safe to say that they’re taking their cues to some degree from the SEC,” he said.
Tuesday’s fine marked the PCAOB’s largest ever against an individual in a settled case. The action “sends a strong message that firm leadership must take their supervisory responsibilities seriously,” Patrick Bryan, director of the PCAOB’s division of enforcement and investigations, said in Tuesday’s statement.
The largest previous fine levied against an individual in a PCAOB settlement was $75,000 in a 2009 case against an ex-Deloitte & Touche partner, Thomas J. Linden, who allegedly helped a client avert the re-reporting of financial results. And the organization in 2015 hit Hamid Kabani, president of accounting firm Kabani & Co., with a $100,000 fine in a litigated matter.
However, Marcello was not barred from the industry, while the penalties against Linden and Kabani included industry bars, attorneys noted. Linden was barred from being associated with a registered public accounting firm for at least two years, while Kabani was banned permanently.