SEC Charges Three Former KPMG Auditors for Altering Audit Working Papers
FOR IMMEDIATE RELEASE
Washington, D.C., March 30, 2006 The Securities and Exchange Commission today announced settled administrative actions finding improper professional conduct by a former KPMG engagement partner and senior manager for failing properly to complete the audit of Tenet Healthcare Corporation's fiscal year 2002 financial statements and for making after-the-fact modifications to the audit working papers which created the false impression that the audit had been adequately performed. The KPMG manager on the Tenet audit was also charged for his role in the improper modifications to the audit working papers.
The Commission found that the improper modifications included adding substantive comments to the working papers, backdating documents, and creating audit documentation after the fact. The Commission further found that certain of the improper modifications occurred even after the issuance of a subpoena to KPMG by Commission investigators.
The Commission's orders charge Clete D. Madden, age 45, of Dallas, Texas, the KPMG partner in charge of the Tenet audit; David L. Huffman, age 40, of Apopka, Fla., the KPMG senior manager on the Tenet audit; and Aron R. Carr, age 30, of Dallas, Texas, a former KPMG manager. Without admitting or denying the Commission's findings, Madden, Huffman, and Carr settled the SEC's charges by agreeing to be denied the privilege of appearing or practicing before the Commission as accountants. The orders provide that Huffman may apply for reinstatement after four years while Carr may apply for reinstatement after three years.
"By failing to perform a proper audit and then altering documents, thereby concealing their audit failures, the KPMG auditors were derelict in their most basic gatekeeping functions," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "The KPMG auditors' repeated misconduct reflects a lack of competence to perform audits for public companies, and the orders in this case will ensure that they cannot do so without the Commission's approval."
Randall R. Lee, Director of the SEC's Pacific Regional Office, stated, "An auditor's working papers constitute the principal record of the work the auditor has done and the conclusions he or she has reached in rendering an opinion on a company's financial statements. The KPMG auditors' misconduct in this case undermined the very integrity of their audit and impeded our ability to determine whether a proper audit was conducted. We rely on audit working papers in our investigations and expect auditors to abide by their professional obligation to safeguard and protect them."
This matter arises from the KPMG auditors' conduct during and after Tenet's fiscal year 2002 audit. In August 2002, Madden released an audit report stating that KPMG had performed an audit in accordance with Generally Accepted Auditing Standards (also known as GAAS). When the audit report was released, however, Madden and Huffman knew, or should have known, that the audit team had not finished several procedures in critical audit areas. Many of the incomplete procedures concerned "outlier" payments, a component of Medicare revenue.
In October 2002, an industry analyst reported that Tenet had been exploiting the Medicare program through an aggressive pricing strategy designed to trigger an increase in outlier payments. The publication of these reports led to a 47% loss in Tenet's market capitalization, or more than $11 billion. Government investigators, including from the SEC, began inquiries into Tenet's pricing strategies.
In November 2002, the Tenet audit team, led by Madden and Huffman, began altering the 2002 audit working papers, principally as they related to outlier payments, creating the false impression that the audit was complete when the audit report was issued and that Madden had concluded that Tenet's outlier pricing strategy did not need to be disclosed. In all, the audit team spent over 500 hours altering more than 350 working papers. The audit team continued to alter the 2002 working papers even after receiving a Commission subpoena in July 2003. Carr not only participated in altering the 2002 working papers, but under the supervision of Huffman he also improperly created audit evidence, such as by taking a 2002 document, backdating it to 2001 by cutting and pasting over the title and date, copying it, and then placing it in the audit working papers for 2001.
The Commission's orders find that Madden, Huffman, and Carr engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. Specifically, by failing to complete the 2002 audit before the issuance of the audit report and by modifying working papers after the issuance of the audit report, Madden and Huffman engaged in repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission. Further, by modifying the working papers after learning about the government investigations into Tenet, all three former auditors engaged in highly unreasonable conduct in circumstances in which they knew, or should have known, that heightened scrutiny was warranted.
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For further information contact:
Briane Nelson Mitchell
Associate Regional Director
Pacific Regional Office
Michele Wein Layne
Associate Regional Director
Pacific Regional Office
Additional materials: Administrative Proceeding Nos. 53573 and 53574.