SEC Charges Two Former KPMG Auditors for Improper Professional Conduct During Audit of Not-for-Profit College

The Securities and Exchange Commission today suspended two former KPMG auditors from practicing before the SEC in connection with settled charges against the two for improper professional conduct during an audit of the now defunct, not-for-profit College of New Rochelle.  The SEC previously charged the college’s former controller with fraud in connection with the college’s fiscal year 2015 financial statements. 

According to the SEC’s orders, former KPMG partner Christopher Stanley approved, and former KPMG senior manager Jennifer Stewart authorized, the issuance of an unmodified audit opinion on the college’s fiscal year 2015 financial statements, despite not having completed critical audit steps. As described in the orders, KPMG’s work on the audit had stalled because the college’s former controller had provided the audit team with inaccurate, incomplete, and contradictory information. On Nov. 30, 2015, the former controller and the college’s president informed Stanley and Stewart that the college needed KPMG to issue the audit report before the end of the day. That afternoon, despite the existence of numerous outstanding open items and unanswered questions, Stanley and Stewart decided to issue the audit report. 

The SEC’s orders find that Stanley and Stewart violated Generally Accepted Auditing Standards by, among other things, failing to obtain sufficient appropriate audit evidence, properly prepare audit documentation, properly examine journal entries, adequately assess audit risk, and exercise due professional care and professional skepticism.  The college’s fiscal year 2015 audited financial statements, which were submitted to the Municipal Securities Rulemaking Board pursuant to the college’s obligation to provide continuing disclosure to investors, fraudulently overstated the college’s net assets by $33.8 million. 

“Auditors of municipal issuers are key gatekeepers in upholding the reliability and integrity of financial information provided to investors in municipal bonds,” said Matthew S. Jacques, Chief Accountant of the SEC Enforcement Division.  “It is critical that they exercise professional care and skepticism.”

“Audited financial statements for municipal issuers are submitted to the MSRB pursuant to the continuing disclosure undertakings required by the Exchange Act,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “We will investigate auditors’ conduct in municipal audits and, where appropriate, hold them accountable when they act improperly.”

Without admitting or denying the findings, Stanley and Stewart each agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively.  Each also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until they are reinstated by the SEC.

This aspect of the SEC’s investigation was conducted by Creighton Papier and Mark Zehner of the Enforcement Division’s Public Finance Abuse Unit with assistance from Jon Daniels, Todd Brody, and Wendy Tepperman of the New York Regional Office.  The case was supervised by Ms. Gaunt and Lara S. Mehraban.