-
SEC Levies Harsh Sanctions Against Former KPMG Auditors In ALJ Appeal
08/15/2016On Friday, August 5, 2016, the Securities and Exchange Commission (the “SEC” or “Commission”) issued an opinion barring John J. Aesoph and Darren M. Bennett (“Respondents”), both former CPAs for KPMG, from practicing or appearing before the SEC, with a right to apply for reinstatement in three and two years, respectively, on the grounds that they had negligently engaged in improper professional conduct within the meaning of SEC Rule 102(e). In re John J Aesoph and Darren M. Bennett, Admin Proc. File No. 3-15168 (August 5, 2016), In so doing, a divided Commission levied harsher sanctions than had been imposed by the Administrative Law Judge who presided over the matter or requested by the Division of Enforcement.
The SEC charged the Respondents on the heels of its investigation of former TierOne Bank executives, who the SEC had claimed were responsible for the bank hiding millions of dollars in loan losses during the 2008 financial crises. In March 2009, KPMG issued an audit report for TierOne Corporation, a holding company for the bank (“TierOne”) containing an unqualified opinion on the company’s consolidated financial statements and the effectiveness of its internal controls for the previous year. A month after KPMG issued its audit report, the Respondents allegedly discovered two new appraisals that TierOne received prior to KPMG issuing its report; however, the SEC claimed the Respondents did not perform any procedures to determine whether the new appraisals affected Tier One’s year-end 2008 financial statements.
An Administrate Law Judge found that as a result of this and other failures, the Respondents negligently violated PCAOB auditing standards under SEC Rule 102(e), and imposed a one year suspension on Aesoph and a six-month suspension on Bennett from appearing or practicing before the SEC as accountants. The Respondents appealed, requesting the Commission dismiss the charges and set aside the sanctions. The Division of Enforcement cross-appealed, requesting the Commission suspend Aesoph for three-years and Bennett for two.
On appeal, the Commission upheld the Administrative Law Judge’s findings of liability, but modified the imposed sanctions. The Commission found that “Respondents’ conduct was egregious, highly unreasonable and conclusively demonstrates that they lack competence to practice before us.” Additionally it noted that “Respondents have failed to acknowledge the wrongful nature of their conduct or provide assurances against future violations. Taken together, the facts lead us to conclude that there is a risk that respondents will commit further violations.” The Commission, accordingly, imposed even harsher sanctions than requested by the Division of Enforcement, barring the Respondents from practicing or appearing in front of the SEC with an opportunity to reapply, instead of just suspending them.
As noted by Commissioner Piwowar in a partial dissent, the decision to bar a person from practicing or appearing in front of the SEC is severe. While Respondents will have the right to apply for reinstatement after the set bar period is over, a permanent bar with rights to apply for reinstatement is far more punitive than a simple suspension. Once an individual’s period of suspension is finished, he is free to practice before the SEC again. The reinstatement process, on the other hand, requires that individuals petition to even be considered for reinstatement. This process can take years and individuals are not guaranteed that they will be able to successfully be reinstated. The opinion is thus a stark reminder of how strict an approach the current Commission is taking toward sanctions, and will likely make the Enforcement Division that much more reticent about recommending lenient settlements in future cases.
