A former PCAOB inspections leader who then joined the Big Four firm, she had pleaded guilty in October last year to passing on information about inspections while she was still working for the audit watchdog, and to handling stolen data which a disaffected PCAOB staff member passed on to her when she moved across to the firm.
Commenting on her sentence, Manhattan US attorney Geoffrey Berman said, “As a former employee of the PCAOB, Cynthia Holder understood the importance of the organisation’s work: to protect investors and the public by overseeing the audits of public companies. But she undermined the board’s and the SEC’s (Securities and Exchange Commission) regulatory missions when she stole confidential inspection information and provided it to KPMG, her new employer.
“KPMG, in turn, used this confidential information to cheat on PCAOB inspections. Holder’s sentence should be an example to others that stealing confidential information and corrupting regulatory processes are crimes that this office takes very seriously.”
The identity of the audits the PCAOB selects for review as part of its annual inspection of the country's largest firms are a closely held secret until just before the inspectors arrive. This is because the board wants to prevent auditors performing additional work or modifying the working papers in anticipation of the inspection.
In the run-up to the cheating scandal, KPMG had received more negative comments about the quality of its audits than its competitors. This was particularly so in 2014.
In 2015, it had upped its efforts to improve its performance and, among other measures, recruited two former PCAOB staffers, Holder and her colleague Brian Sweet.
According to the indictment filed against Holder, she conspired with three senior KPMG partners – David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, Thomas Whittle, KPMG’s former national partner in charge for inspections, and David Britt, KPMG’s former banking and capital markets group co-leader – as well as Sweet and Jeffrey Wada, a PCAOB staffer, to illegally acquire valuable confidential PCAOB information that would help to improve their inspection results.
For instance, while she was still employed by the PCAOB but seeking to join KPMG, she passed on information about certain future inspections to Sweet who was already employed by the firm. She also continued to work on KPMG inspections.
When she was offered a job at KPMG, she stole more information before she left the PCAOB which she gave to Sweet, her new boss.
Once she was installed at KPMG, she continued to handle stolen PCAOB information supplied by Wada, who had been passed over for promotion at the regulator. The data included the PCAOB’s 2016 confidential list of inspection selections.
When the list reached Middendorf, Whittle and Britt, they decided to launch a stealth programme to “re-review” the targeted audits. “The stealth review programme allowed KPMG to double-check its audit work, strengthen its working papers, and, in some cases, identify deficiencies or perform new audit work that had not been done during the live audit,” the indictment says.
In January 2017, Wada provided KPMG with a provisional list of 2017 inspection selections. Whittle then asked Sweet to confirm when they would get the final list. A month later, Wada texted Holder to say, “I have the grocery list… All the things you’ll need for this year”. He then spoke to her and gave her the confirmed list.
Middendorf, Whittle and Sweet decided to let the relevant engagement partners in on the scheme “so that extra attention could be paid to these audits in light of the forthcoming PCAOB inspections”. However, one of the engagement partners reported the matter and KPMG launched an internal investigation. Holder and Sweet then set about destroying evidence in an effort to cover their tracks.
Although Holder was not fined by the court alongside her prison sentence, she will face restitution proceedings at a later stage.
The PCAOB has assessed its losses over the leaks at $829,863 (£687,316) in employee time, a claim that the judge in Holder’s case accepted.
Holder is the first of the group to be sentenced. Three of her co-defendants – including Middendorf – are waiting to be sentenced and a fourth goes to trial later in the year.
Originally published in Economia on 12 August 2019.