In context

Settlements in brief – focus on role of auditor and doing business in high-risk countries

September 14, 2017
In context

Enforcement actions by criminal and supervisory authorities are settled regularly. In light of these developments, companies are advised to take appropriate measures. This month we highlight recent settlements by KPMG, PWC and the US energy industry company Halliburton. The first two settlements show how auditors must pay close attention to possible irregularities when performing audits. They also indicate an increased regulatory focus on the role of auditors. The second settlement concerns the alleged misconduct of Halliburton in Angola, resulting in violations of the books and records and internal accounting controls provisions of US anti-corruption rules. This settlement demonstrates the difficulties and risks involved in doing business in high-risk jurisdictions.

KPMG settles for USD 6.2 million with SEC

KPMG reached a settlement in August 2017 with the Securities and Exchange Commission for allegedly failing to properly and professionally audit the financial statements of oil and gas company Miller Energy Resources. According to the SEC’s order, Miller Energy Resources hired KPMG in 2011 as an outside auditor. KPMG issued an unqualified audit report. However, according to the SEC, KPMG (along with its engagement partner) failed to perform an adequate risk assessment when accepting Miller Energy as a client, and incorrectly designated Miller Energy as a “low risk” client. In addition, KPMG also failed to address the audit team’s lack of industry experience. According to the SEC, neither the engagement partner nor the senior manager had any prior experience with oil and gas companies such as Miller Energy. Auditing firms are required to establish policies and procedures in line with the Public Company Accounting Oversight Board’s (PCAOB) standards, which provide that the company must have reasonable assurance that work is assigned to personnel with the required qualifications, technical training and proficiency. When a client’s business involves unique and complex accounting, the need for the engagement partner to understand the client’s industry is critical. KPMG failed to meet these standards. The alleged audit failures of KPMG eventually resulted, according to the SEC, in investors being misinformed about the worth of key assets and the value of Miller Energy.


KPMG agreed to pay a settlement amount of approximately USD 6.2 million. The fine consists of USD 4.7 million in disgorgement (due to all the audit fees incurred by Miller Energy), over USD 0.5 million in interest, and a USD 1 million penalty. In addition, KPMG’s engagement partner agreed to pay USD 25,000 in the civil claim against him, for his role in the misconduct. He has also been barred from working as an accountant before the SEC. The engagement partner may apply for reinstatement after two years.


In 2013, KPMG settled with the Dutch Public Prosecutor and three former KPMG accountants. That investigation focused on the role of the accountant in relation to potential misconduct on the part of an audit client (see also In context February 2014).


KPMG settles head office construction case

KPMG’s problems are not limited to auditing issues; the company settled with the Dutch Public Prosecutor in July 2017 in relation to the development and new-build construction of the KPMG head office in Amstelveen, the Netherlands. According to the Dutch Public Prosecutor, KPMG’s renewed compliance policy and cooperation with the investigation played an important and positive role when determining the EUR 8 million settlement.


PwC settles multiple issues in US and UK

PricewaterhouseCoopers was fined GBP 5.1 million by the UK Financial Reporting Counsel (FRC) in August 2017 for allegedly failing to obtain sufficient appropriate audit evidence and exercise sufficient professional scepticism. The alleged misconduct concerns several failures arising during the audit of professional services firm RSM Tenon Group plc. In addition, a senior audit partner agreed to pay a fine of GBP 150,000, reduced to GBP 114,750 after adjustment for mitigating factors and a discount for settlement. According to the FRC’s press release, both PwC and the senior partner received a “severe reprimand”.


PwC is also facing other issues. In May 2017, PwC and a retired audit partner received fines from the FRC (see FRC press release ) for alleged misconduct over their audit of Connaught plc. In the US, the PCAOB imposed a USD 1 million penalty against PwC for alleged violations in its examination and audit of Merrill Lynch’s compliance with the SEC’s Customer Protection Rule. According to the PCAOB, PwC wrongfully issued audit and examination reports of Merrill Lynch, stating Merrill Lynch complied with the Customer Protection Rule in fiscal year 2014. PwC did not, according to the PCAOB, have sufficient evidence for this claim, but allegedly issued the report anyway. In 2016, the SEC found that Merrill Lynch had violated the Customer Protection Rule for several years by holding tens of billions of dollars of its customers’ securities in accounts that were subject to liens by third parties.


The enforcement actions against alleged audit failures of KPMG and PwC highlight regulators’ current attention on the role of auditors. Following the various recent investigations and their resulting sanctions, auditors will need to take into account this increased regulatory attention.


Halliburton settles Africa FCPA offenses once again

Energy industry corporation Halliburton Company has agreed with the SEC to pay USD 29.2 million to settle charges of violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA). Halliburton’s former vice-president, who was involved in the alleged misconduct, has agreed to pay a USD 75,000 penalty. The settlement consists of a payment of USD 14 million in disgorgement, USD 1.2 million in interest, and a USD 14 million penalty. In addition, Halliburton must engage an independent consultant for 18 months to review its compliance programme, particularly in Africa.


According to Halliburton’s press release, in 2010 a whistleblower anonymously alerted the company to possible FCPA violations in Angola. The company immediately reported this to the SEC and DOJ and started an internal investigation. According to the SEC’s order, officials at Angola’s state oil company advised Halliburton to partner with local Angolan businesses, as required by Angolan law, to win bids in new projects. Halliburton’s former vice-president, tasked with leading this effort, succeeded in partnering with a local Angolan company. However, this local company was owned by a former Halliburton employee, who was a neighbour and friend of the Angolan government official who eventually approved seven contracts, worth almost USD 14 million. From April 2010 until April 2011, Halliburton paid the local Angolan company USD 3.705 million.


Despite the fact that Halliburton’s compliance programme was entirely revamped and monitored after the settlement between Haliburton and its former subsidiary KBR in 2009 (still ranked third on the top ten list of FCPA-related settlements), the company was found to have violated books and records, as well as the internal controls provisions of the FCPA. According to Antonia Chion, Associate Director in the SEC’s Enforcement Division, “Halliburton committed to using a particular supplier that posed significant FCPA risks, and a company vice-president circumvented important internal accounting controls to get the deal done quickly…Companies and their executives must comply with these internal accounting controls that help ensure the integrity of corporate transactions.”


This settlement shows the difficulties and risks of doing business in high-risk jurisdictions. Using agents or other third parties is almost unavoidable; in some cases, working with local partners may even be a legal requirement. However, companies should always be aware that they may also be held liable for the actions of their agents. If third parties are engaged, it is important to always confirm that they conduct their business honestly, and that they do not receive improper gifts, entertainment or other inducements to get things done quickly. Having the adequate anti-bribery/compliance measures in place is vital.

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