Thursday, March 30, 2006

Three KPMG Accountants Sanctioned for Fabricating Audit Workpapers

Three accountants on the KPMG audit team for Tenet Healthcare Corp. were sanctioned by the SEC for creating workpapers after the purported completion of the audit to make it appear that they had completed the work before issuing a clean opinion.  The SEC administrative orders (here and here) described the conduct:

These proceedings arise out of the failed audit of Tenet Healthcare Corporation’s ("Tenet") fiscal year ("FY") 2002 financial statements and the auditors’ after-the-fact modifications to the working papers creating the false impression that the audit had been adequately performed. Clete Madden, who was the KPMG partner in charge of the Tenet audit engagement, failed to complete the audit and then participated in and directed the after-the-fact modifications. David Huffman, the senior manager on the Tenet audit engagement, shares responsibility for the audit failure and also participated in and directed the after-the-fact modifications.

In August 2002, Madden released an audit report containing an unqualified opinion stating that KPMG had performed an audit in accordance with Generally Accepted Auditing Standards ("GAAS"). When the audit report was released, however, Madden and Huffman knew, or reasonably should have known, that several procedures in critical audit areas had not been completed. Tenet included the audit report in its FY 2002 Form 10-K, which failed to disclose that Tenet’s substantial earnings growth was driven by an aggressive pricing strategy designed to trigger an increase in outlier payments, a component of Medicare revenue. Many of the unfinished audit procedures concerned outlier revenue even though Madden had identified Tenet’s disclosure deficiency in this area.

The audit team, including [Aron] Carr, spent over 500 hours changing the working papers in November and December 2002. The audit team modified more than 350 working papers from the FY 2002 audit, including adding nine references to outlier payments. The audit team made these modifications months after Madden signed and authorized the release of the audit report on Tenet’s FY 2002 financial statements.

Huffman and Carr received four and three year bars from practicing before the Commission as accountants under Rule 102(e), while Madden, the highest ranking KPMG partner on the audit, received a lifetime bar with no right to reapply to appear before the Commission. (ph)

Civil Enforcement, Securities | Permalink

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When will all this fraud stop?

Posted by: Sean Goss | Jun 4, 2008 4:11:22 AM

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