[14364]
January 16, 2002
TO: ACCOUNTING/TREASURERS COMMITTEE No. 4-02
SEC RULES COMMITTEE No. 5-02
RE: SEC CENSURES AUDITOR FOR INDEPENDENCE VIOLATION
The SEC recently censured KPMG LLP for engaging in improper professional conduct
because it purported to serve as an independent accounting firm for an audit client at the same
time it had made substantial financial investments in the client.1 The SEC found that from May
through December 2000, KPMG held a substantial investment in a money market mutual fund.
According to the SEC’s order, KPMG opened the money market account with an initial deposit
of $25 million and at one point the account balance constituted 15% of the fund’s net assets. The
SEC found that KPMG audited the financial statements of the money market fund at a time
when the firm’s independence was impaired, and that the fund included KPMG’s audit report
in various filings it made with the SEC.
The SEC’s order indicates that KPMG’s investment in the money market fund was
discovered by an employee of the fund complex. The employee, recognizing KPMG as the
fund’s auditor, notified fund management, which in turn notified the KPMG audit team. No
member of the KPMG audit team had any prior knowledge that KPMG had an investment in
the fund. KPMG immediately liquidated its investment in the fund and resigned from the audit
engagement. The fund retained another accounting firm to reaudit the financial statements.
KPMG reimbursed the fund for the cost of the reaudit and related expenses.
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 concluded that KPMG’s lack of adequate
policies and procedures constituted an extreme departure from the standards of ordinary care,
and resulted in a violation of the Commission’s auditor independence rules and Generally
Accepted Auditing Standards.
1 See SEC Release No. IC-25360 (January 14, 2002). A copy of the SEC’s order is attached.
2
The SEC censured KPMG and ordered it 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. KPMG consented to the entry of the SEC’s order
without admitting or denying the facts, findings, or conclusions in the order.
Gregory M. Smith
Director – Operations/
Compliance & Fund Accounting
Attachment
Attachment (in .pdf format)