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Former KPMG executive and PCAOB employees convicted of passing confidential inspection lists

KPMG US national managing partner for audit quality David Middendorf and Jeffrey Wada, a former employee of the Public Company Accounting Oversight Board (PCAOB) have been convicted of wire fraud charges in connection with their scheme to defraud the PCAOB by obtaining, disseminating, and using confidential lists of which KPMG audits the PCAOB would be reviewing.

According to evidence provided at the trial, between 2015 and 2017, Middendorf and others attempted to acquire confidential PCAOB information about which KPMG audits would be inspected in an effort to game the system in order to improve inspection results.

Former KPMG executive director – Cynthia Holder – had already pled guilty to fraud in relation to this scheme in October. Holder was a PCAOB’s inspection leader before joining KPMG.

Wada was also an inspections leader at the PCAOB, a position which saw him hold confidential information. In March 2016, he passed his former co-worker Holder confidential information on some of the PCAOB’s 2016 inspection selections.

Holder then passed this information to Brian Sweet, another former PCAOB member who had joined KPMG, who passed them on to Middendorf and Thomas Whittle – a former KPMG partner who pled guilty to these charges in November – who would then launch a stealth program to re-review the audits that had been selected.

The reason for these re-reviews were kept within a ‘circle of trust’, according to the US Attorney’s Office for the Southern District of New York, who note other KPMG partners were given a false explanations for them.

In January 2017, Wada was passed over for promotion at the PCAOB, and stole confidential information related to the PACOB’s 2017 inspections list, again passing it on to Holder. The US Attorney’s Office for the Southern District of New York said Wada referred to the information as a ’grocery list’. Wada also provided Holder with his C.V. and sought her assistance in helping him to acquire employment at KPMG. 

In 2017, a KPMG partner learned from Sweet that one of her audits was on the PCAOB inspection list, and she reported the matter to her supervisor.  The matter was then ultimately reported to KPMG’s Office of General Counsel.

Middendorf was convicted of one count of conspiracy to commit wire fraud and three counts of wire fraud. Wada was convicted of one count of conspiracy to commit wire fraud and two counts of wire fraud. The conspiracy to commit wire fraud and wire fraud charges each carry a maximum prison term of 20 years. Middendorf and Wada were each acquitted of one count of conspiracy to defraud the United States (Count One).   

U.S. attorney Geoffrey S. Berman said: “As this trial revealed, David Middendorf and Jeffrey Wada were two links in a chain of corruption, where confidential PCAOB inspection information was taken at the behest of high-level executives at KPMG so they could cheat on inspections. This confidential information was critical to the PCAOB and its core mission of ensuring audit quality. As a unanimous jury found, the actions of Middendorf and Wada defrauded the PCAOB.”

According to Law360, lawyers for Middendorf intend to appeal the decision.

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