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U.S. Securities and Exchange Commission

SEC Censures KPMG for Auditor Independence Violation


Washington, D.C., January 14, 2002 — The Securities and Exchange Commission today censured KPMG LLP, a big-five accounting firm based in New York City, for engaging in improper professional conduct because it purported to serve as an independent accounting firm for an audit client at the same time that it had made substantial financial investments in the client. The SEC found that KPMG violated the auditor independence rules by engaging in such conduct. KPMG consented to the SEC's order without admitting or denying the SEC's findings.

"The SEC's decision to censure KPMG reflects the seriousness with which the SEC treats violations of the auditor independence rules, even in the absence of demonstrated investor harm or deliberate misconduct," said Stephen M. Cutler, the SEC's Director of Enforcement.

In addition to censuring the firm, the SEC ordered KPMG to undertake certain remedies designed to prevent and detect future independence violations caused by financial relationships with, and investments in, the firm's audit clients.

"This case illustrates the dangers that flow from a failure to implement adequate policies and procedures designed to detect and prevent auditor independence violations," said Paul R. Berger, Associate Director of Enforcement.

The SEC found that, from May through December 2000, KPMG held a substantial investment in the Short-Term Investments Trust ("STIT"), a money market fund within the AIM family of funds. According to the SEC's order, KPMG opened the money market account with an initial deposit of $25 million on May 5, 2000, and at one point the account balance constituted approximately 15% of the fund's net assets. In the order, the SEC found that KPMG audited the financial statements of STIT at a time when the firm's independence was impaired, and that STIT included KPMG's audit report in 16 separate filings it made with the SEC on November 9, 2000. The SEC further found that KPMG repeatedly confirmed its putative independence from the AIM funds it audited, including STIT, during the period in which KPMG was invested in STIT.

Rule 102(e) of the SEC's Rules of Practice provided the basis for the SEC's finding in its administrative order that KPMG engaged in improper professional practice. According to the SEC, KPMG's independence violation occurred primarily because the firm lacked adequate policies or procedures to prevent or detect such violations, and because the steps which KPMG personnel usually took before initiating investments of the firm's surplus cash were not taken in this instance.

The SEC also found that KPMG:

  • had no procedures directing its treasury department personnel to check the firm's "restricted entity list" to confirm that a proposed investment was not restricted;
  • had no specific policies or procedures requiring any participation by a KPMG partner in the investigation and selection of money market investments; and
  • had no policies or procedures designed to put KPMG audit professionals on notice of where the firm's cash was invested, or requiring them to check a listing of the firm's investments, prior to accepting new audit engagements or confirming the firm's independence from audit clients.

As a result, the SEC found that there was no system KPMG audit engagement partners could have used to confirm the firm's independence from its audit clients.

The SEC concluded that KPMG's lack of adequate policies and procedures constituted an extreme departure from the standards of ordinary care, and resulted in violation of the auditor independence requirements imposed by the SEC's rules and by Generally Accepted Auditing Standards.

For further information, contact:
Paul R. Berger (202) 942-4560
Russell G. Ryan (202) 942-4660



Modified: 01/14/2002