- The Public Company Accounting Oversight Board (PCAOB), acting soon after detailing audit committees’ concerns about auditors, fined a former KPMG vice chair, Scott Marcello, $100,000 for “supervisory failures” in connection with KPMG’s use of confidential PCAOB inspection information. The penalty is the largest ever imposed by the federal watchdog on auditors in a settled case.
- KPMG fired Marcello in 2017 for mishandling a plan by senior auditors to use confidential PCAOB information to improve the results of a PCAOB inspection. KPMG paid a $50 million settlement with the Securities and Exchange Commission in 2019.
- “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 Williams said in a statement. “The Board believes it is important to hold Mr. Marcello accountable as their supervisor for contributing to a culture that led to this serious misconduct.”
The PCAOB announced the fine soon after releasing a report describing concerns among audit committee chairs toward their external auditors over such issues as cost management, sub-optimal use of technology and “last-minute pileups” of workflows.
“Audit committees in the United States have a critical job mandated by law: oversight of the auditor and the audit process,” PCAOB said in its report based on interviews by inspection staff of 244 audit committee chairs in 2021.
“Engaged and informed audit committees can be a force for elevating audit quality to the benefit of investors and our capital markets broadly,” the board said.
Several audit committee chairs said they want their auditors to better manage costs, reduce turnover of their audit engagement teams, provide prompt notification of cost overruns, broaden use of technology and improve communication with internal audit staff, according to PCAOB.
Many audit committee chairs said “that they challenge their auditors continually to adjust workflows to avoid pileups, particularly at year-end,” PCAOB said.
The audit committee chairs voiced a worry that audit firms are vulnerable to cyberattacks, PCAOB said. “Cybersecurity concerns permeated our 2021 conversations with audit committee chairs.”
Also, audit committee chairs noted how automation increases efficiency but saw the need for quality control in the use of technology, according to PCAOB.
“As we heard repeatedly, low-grade information cannot be predictive,” the board said. “Automation can make people lazy, which is why checks and balances are essential as automation becomes more prevalent.”
More broadly, “reliance on technology may be just the opposite of a silver bullet, to the extent that it dulls auditors’ ability or inclination to incorporate their business insights into procedures,” PCAOB said, paraphrasing comments by an audit committee chair.
Seven out of 10 of respondents said that they are increasingly focusing on how to measure adherence to environmental, social and governance (ESG) best practices, PCAOB said.
“Matters related to ESG are either already at the top of many audit committee agendas or they are gaining such prominence,” the board said. “‘Huge issue,’ ‘hot topic,’ ‘pressure from investors’ were recurring phrases.”
Referring to the PCAOB fine, KPMG said, “We are a stronger firm as a result of the actions taken since 2017 to strengthen our culture, our governance and our compliance program.
“Integrity and quality are paramount for KPMG, including operating with the utmost regard for the critical importance of the regulatory process to our profession,” the firm said in a statement.