SEC Charges Firm With Violating Auditor Independence Rules (with Lofchie Comment)
The SEC charged a public accounting firm with violating rules that require auditors to remain independent from the public companies that they are auditing to ensure they maintain their objectivity and impartiality.The SEC's investigation found that KPMG had violated the independence rules with respect to three different audit clients. The violations resulted from a variety of sources: (i) in one case, a KPMG employee involved in accounting functions had been loaned back to the client; (ii) in two instances, KPMG was providing impermissible non-audit services to an affiliate of the client (an affiliation that had formed after both the audit and non-audit relationships had arisen); and (iii) in two instances, KPMG employees owned stock in the audited company or its affiliates.
Also, in the Section 21(a) investigation, the SEC considered the circumstances in which a loaned employee of the auditor could be deemed to be "acting as an employee" of the audited company.
Lofchie Comment: For all professional and financial services firms, this enforcement action points to the need for vigorous processes to monitor conflicts, and demonstrates the numerous ways in which such conflicts may arise. The action also demonstrates the risk that conflicts may arise as a result of events that occur with respect to a client after the start of an engagement. It is necessary, therefore, to monitor conflicts not only when an engagement is initiated but (to some extent) on an ongoing basis.