US seeks to set aside convictions in KPMG audit scandal
August 3, 2023
Prosecutors concede wire fraud charge cannot stand against former managing partner and PCAOB employee
Two people found guilty in a corruption scandal involving KPMG and the US audit regulator are set to have their convictions dropped, after prosecutors conceded they had misinterpreted the law.
David Middendorf, a former KPMG managing partner for audit quality, and Jeffrey Wada, who worked at the Public Company Accounting Oversight Board, were convicted of fraud over claims that Wada passed confidential information to KPMG to help the firm prepare for PCAOB audit inspections, in the hope of being given a job at the Big Four firm.
The Department of Justice conceded this week in a court filing that its reading of wire fraud statutes was incorrect, in light of subsequent legal judgments in unrelated cases. It said it would ask for the jury verdict to be set aside and the charges dismissed.
Another KPMG audit quality partner, David Britt, who was deported to Australia after pleading guilty to a similar charge, is now planning to ask the court to allow him to reverse his plea so he can return to the US, his lawyer told the Financial Times.
Middendorf and Britt were among six partners and employees, including the head of the audit practice, who were fired by KPMG in 2017 after revelations it had hired multiple people from the PCAOB and used its contacts there to receive advance notice of which audits would be subject to inspection. The firm had been wrestling with persistently low audit quality scores from the inspection process.
KPMG later paid $50mn in a settlement with the Securities and Exchange Commission, which oversees the PCAOB, including charges related to the scandal. As part of the settlement it admitted using the advance notice to alter completed audits before inspectors arrived.
The DoJ secured criminal convictions from six people in all, three of whom admitted additional charges of conspiracy to defraud the SEC by interfering with the inspection process, as well as the wire fraud charges that have now been called into question.
The applicability of the wire fraud statutes turned on whether defendants were trying to steal “property” from the PCAOB or just affect the outcome of its inspections.
Recent judgments in unrelated cases, including a 2020 Supreme Court ruling, Kelly vs US, had clarified that wire fraud could not be brought against Middendorf and Wada, the DoJ said in a submission earlier this week to an appeals court considering appeals from Middendorf and Wada. The department asked for their case to be sent back to a lower court, where it said it would dismiss the charges.
Attorneys for Middendorf and Wada declined to comment.
Britt pleaded guilty in 2019 to a single count of conspiracy to commit wire fraud, admitting to obtaining confidential information on upcoming inspections and using it to improve results. Although he had been in the US for three decades, he had never become a US citizen and was deported as a result of the conviction.
Rob Stern, a lawyer for Britt, said he would try to have the guilty plea withdrawn.
“We fully expect now to go back, as I told the judge we would in these circumstances, to have the record expunged so that he can be reunited with the three college-age US children and wife who are still in the country,” Stern said.
[The Financial Times]
