Audit Gatekeeper Failures: When the Review Itself Is Rigged

Audit gatekeeper failures can compromise the workpapers, inspections and financial reports investors rely on. At KPMG, the Securities and Exchange Commission found that confidential inspection information helped audit personnel revise work after their reports had gone out. If you worked on an engagement, reviewed the files or saw instructions to change them, you may know what the final sign-off conceals.

This page follows KPMG’s inspection and training misconduct and National Student Marketing’s alleged use of false financial reports to seek investment and acquisitions. Our broader account of auditors and securities fraud gatekeepers examines the professional roles behind those assurances. Here, the question is what happened to the work, who knew, and what the documents show.

Who Oversees Auditors?

The Public Company Accounting Oversight Board inspects public-company audit work, under the Securities and Exchange Commission’s oversight. The Justice Department’s account of the KPMG inspection scheme explains why the selection of audits stays confidential until shortly before an inspection. Advance knowledge could let an auditor perform additional work or modify workpapers before the inspectors arrive.

Inside a public company, management prepares the financial reports, the external auditor supports its opinion with audit evidence, and the audit committee oversees the auditor. The records differ with the job: accounting entries and close records, audit workpapers and review notes, committee minutes and communications about complaints. An insider who saw a concern raised can connect it to the review that followed, or to the decision to sign despite it.

KPMG Used Inspection Targets to Revisit Completed Audits

KPMG admitted the facts in the Securities and Exchange Commission’s June 17, 2019 inspection-data and exam-cheating resolution. According to the agency, senior personnel sought confidential PCAOB lists identifying the audits inspectors planned to examine. The firm had experienced a high rate of deficiencies in earlier inspections, and improving that performance had become a priority.

The Securities and Exchange Commission described a program to review and revise selected workpapers after the audit reports had been issued. Its purpose was to reduce the chance that inspectors would find deficiencies. An engagement’s workpaper history therefore matters alongside its final file: when the work changed, what changed, and whether the change followed advance knowledge of an inspection.

The Justice Department’s announcement of a former KPMG audit executive’s guilty plea gives a closer account of the concealed reviews. Drawing on the indictment and related court proceedings, it described a program launched after confidential inspection selections arrived in March 2016. Engagement partners received a false explanation for the re-reviews, which let KPMG strengthen workpapers and sometimes perform audit work that had not been done during the live audit.

The same criminal-case account describes a PCAOB employee passing along preliminary inspection selections while seeking help obtaining a job at KPMG. When the final selections became available in February 2017, the employee sent a message:

We see an inspection turned into a rehearsal: the Justice Department described workpapers strengthened after the confidential selections arrived. The inspection came with a shopping list.

A Partner Reported the Advance Notice

In its account of the criminal case, the Justice Department described a KPMG partner who received early notice that her engagement appeared on the confidential inspection list. She reported the matter, and it ultimately reached the firm’s Office of General Counsel.

That contribution fits a finding in The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018. The study of occupational-fraud cases found whistleblowing was the most common detection method in its sample, and became more likely to be the detection method as more people participated in a scheme. For an audit employee, knowing who received information and what they did with it can connect conduct spread across several desks.

KPMG’s Training Exams Had Adjustable Passing Scores

The Securities and Exchange Commission also found that KPMG audit professionals shared answers to internal training exams and manipulated the scores needed to pass. The exams covered continuing professional education and training required by an earlier SEC order concerning audit failures. The required instruction became another place where the firm’s integrity controls failed.

Employees emailed images of their answers or handed colleagues printed copies. Lead audit engagement partners participated, including by soliciting answers from subordinates and sending answers to them. For someone inside the firm, the answer sheets and messages could show both the circulation of answers and the involvement of people responsible for supervising audit work.

Other audit professionals changed a number in a hyperlink to lower the passing score on the internal exam server. The SEC found that some passed while answering less than 25% of the questions correctly. We expect professional training to test what the auditor learned. Here, the auditor could move the passing line.

KPMG agreed to a $50 million civil penalty for compromising outside inspections and its own training exams. The Securities and Exchange Commission also required an independent consultant to review the firm’s ethics and integrity controls. We see an audit firm needing an outside check on its own checks.

The inspection lists and the exam answers exposed different failures. One led to changes in workpapers awaiting outside inspection, while the other corrupted the firm’s own test of its professionals. The common question for an insider is who controlled the check and who knew it had been compromised.

National Student Marketing’s Alleged Income From Missing Contracts

A criminal indictment charged that National Student Marketing’s financial reports recorded largely nonexistent income and assets from contracts in progress. The Securities and Exchange Commission’s 1974 annual report describes the charges against the company’s former president and other company officials in the Southern District of New York.

According to that criminal-case summary, the former president used false reports about sales, earnings and future prospects to induce financial institutions, private investors and shareholders of acquisition candidates to accept National Student Marketing stock. The stock was offered for money, property and securities. The alleged accounting fiction was part of how the company sought things of real value.

The indictment also charged a partner and a former employee of Peat, Marwick, Mitchell & Co., National Student Marketing’s outside auditor, with making false and misleading statements in a proxy statement filed with the Securities and Exchange Commission. The charges concerned the information given to shareholders, where an accountant’s work could help carry management’s numbers into an investment decision.

The report’s account of the indictment also describes allegedly undisclosed accounting adjustments that reduced previously reported sales and earnings. For someone working on financial statements or an acquisition review, the connection to test is between the underlying contracts, the adjustments and the version shareholders received.

How Do You Catch Accounting Fraud?

Catching accounting fraud requires connecting the reported number to the transaction and the decisions behind it. We compare the underlying contracts, entries and approvals with what appeared in the financial statements or audit file. For an audit gatekeeper matter, the sequence also matters: the work performed, the review recorded, the report issued and any later changes.

The Securities and Exchange Commission’s May 2024 settled order against BF Borgers alleged that staff copied earlier workpapers into new engagements and changed the dates. It described planning meetings that never took place and approvals copied forward to make reviews appear complete.

The order also alleged that BF Borgers failed to obtain an engagement quality review and approval for audits and reviews incorporated in at least 1,625 public filings and disclosures. Staff allegedly typed the engagement quality reviewer’s name onto signature lines and copied check marks from earlier workpapers. An employee who knows whether that reviewer actually participated can explain what a completed approval box conceals.

A forensic examination can bring accounting knowledge together with investigation of the systems that produced the records. Accounting Fraud: A Literature Review, published in Risk Governance and Control: Financial Markets & Institutions in 2019, describes that combination, including financial-statement analysis, computer and network knowledge, and understanding internal controls. Applied to KPMG’s conduct, the financial work and the handling of confidential lists or exam-server settings belong in the same inquiry.

An audit staff member may remember the review comment that disappeared or the instruction that explained why a file changed. A person involved in an acquisition may know which contract or accounting adjustment never reached the materials sent to shareholders. We work with that knowledge to establish who knew what and how the public representation departed from the underlying work.

What Is Whistleblowing in Accounting?

An accounting whistleblower can explain how a financial report or completed review departs from what happened inside the business. That might mean knowledge of an inspection list, answer-sharing messages or an adjustment omitted from shareholder materials. We connect that account to the evidence behind a potential securities fraud report.

For audit and compliance professionals, the role and information-source questions deserve individual attention. We work through those questions with you and securities fraud whistleblower lawyers who understand audit engagements. Under the SEC whistleblower law, eligible whistleblowers can share 10% to 30% of qualifying sanctions collected when the SEC action exceeds $1 million in monetary sanctions.

If your evidence also concerns false claims for government money, we assess that part separately. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What Happened Before the Sign-Off

If you saw an inspection list arrive early, workpapers rewritten or financial adjustments disappear from shareholder materials, speak with our whistleblower experts about what happened inside the review. We build your strongest securities fraud whistleblower case with you, bring in securities fraud whistleblower lawyers who know audit evidence, and stay beside you as the matter develops.