Accounting and Auditing Enforcement release, No. 3834

Accounting and Auditing Enforcement release, No. 3834, summarizes KPMG’s violation Rule 2-06 of Regulation S-X, requiring auditors to preserve audit workpapers “for seven years after concluding an audit or review of an issuer’s financial statements” (SEC No.3834).

​Accordingly, the SEC as per the SEC Act of 1934, issued a cease and desist order from committing or causing any violations of Rule 2-06. Given that KPMG was found in violation, the Commission took other consideration to quantify the penalty in which KPMG was liable. Considerations that the Commission took where KPMGs enhancement of its policies and procedures that govern the “retention of audit paper works”.
 
KPMG undertook their investigation. They concluded that the original paperwork contained:

• Summary memorandum describing KPMG’s audit procedures of the recoverability of its investment in residential Real Estate (SEC No.3834).
• Client prepared schedules bearing KPMG audit work testing (SEC No.3834).

Consequentially, they concluded that the relevant documents/paperwork were not included in the 2008 Workpapers when it was collected, and then effectively lost. Ultimately, they could produce and electronic company of what was “believed to be” a final summary, but the facts of the matter stays as “missing client prepared schedules”.
 
Conclusion of The Analysis: KPMG was found liable to pay a civil money penalty of $230,000, set to be transferred to the US treasury. The findings do not explicitly state that the considerations or steps of the following KPMG actions (after the fact of the violation) reduced the penalty, but it is my opinion that the documents implicitly reference that the considerations may have implicated a smaller penalty fee (please note the following two points “1 and 2” are direct statements from the Auditing Enforcement Release):

• Retention of electronic workpapers in a central filing system from which they can subsequently be accessed but neither altered nor removed, and;
• KPMG’s electronic workpapers being further preserved via back-up storage.

 
Other Considerations Involved In The Research Process

• KPMG LLP served as an independent auditor for the St. Joe Company (SEC No.3834).
• They have served as the independent auditor as of 1999 for St. Joe’s Company (SEC No.3834).
• As per the SEC statement, “June 16, 2011, the staff opened a formal investigation into possible misstatements in the annual and other periodic reports filed by St. Joe with the Commission, among other issues (SEC No.3834).
• On June 23, 2011, the staff issued an investigative subpoena to KPMG that called to produce all KPMG workpapers concerning its audits and interim reviews of St. Joe’s financial statements
• Communication the Results – This step is prescriptive when it details that the researcher must avoid excessive discussion, excessive citations, appearance of avoiding a conclusion, and irrelevant information (Weirich 14).
• Develop a Conclusion – This step is self-explanatory. The implications here are traced back in the earlier stages of the process. The more focus and refined the problem statement is, the better the conclusion will be.

Sources

• SEC. " Accounting and Auditing Release No. 3834." Securities and Exchange Commission, December 6, 2016.
• Weirich, Thomas R., Thomas Pearson, Natalie Churyk. Accounting and Auditing Research: Tools and Strategies, 9th Edition. Wiley, 2017-08-23. VitalBook file.