David Middendorf, the former national managing partner for audit quality at KPMG, was convicted of four of five counts of conspiracy and wire fraud. Mr. Middendorf’s strategy waster audit qualify was an interesting one: obtaining information from employees of the federal Public Company Accounting Oversight Board (PCAOB) as to which companies that KPMG audited would be on the agency’s list for governmental review of audits. KPMG would then pull out the big audit guns (although the Barometer is not sure what that metaphor means when it comes to auditing) when conducting its audits of those companies. Quality is much easier when you get a heads-up on where the regulators are headed.
Jeffrey Wada, also convicted of three of four counts of conspiracy and wired fraud, was the PCAOB employee who passed along the information to KPMG. KPMG fired all of its employees involved in the activities, and three of those four entered guilty pleas. Mr. Middendorf’s attorney indicated that he will appeal because “what happened was not are fraud.” What happened was wrong, however. Just because we cannot find a crime to fit the activity does not mean the activity was ethical. What a defense! I cheated on the exam, but it was not a crime. Oh, but it was, plainly, and simply, dumb. Funnily enough, when PCAOB went back and did a REALLY thorough check of KPMG’s audits, it found “serious deficiencies” in half. Looks like the audit quality title was a misnomer for Mr. Middendorf. Amazing how so many convicted executives allowed pressure (financial, for goals, for recognition) be the sole processing mechanisms for their decisions and actions, which then actually defeated the very purposes of their jobs and their companies.
