On April 5, the Public Company Accounting Oversight Board levied a $100,000 fine against Scott Marcello, the former Vice Chair of Audit at KPMG.  The penalty is noteworthy for two reasons: (1) it’s the largest monetary penalty ever levied by the PCAOB in a case settled with an individual; and (2) it’s the first matter in which the PCAOB has sanctioned someone for failure to reasonably supervise, despite being authorized to impose sanctions on this basis under the Sarbanes-Oxley Act of 2002 (SOX).  See Section 105(c) of the Sarbanes-Oxley Act of 2002 (SOX).

What happened: In March 2016, while he was head of KPMG’s audit practice, Marcello learned that KPMG auditors had received confidential information about PCAOB inspections.  Between 2015 and 2017, KPMG personnel used the improperly obtained information to examine audit work papers for seven banking clients, hoping to improve KPMG’s inspection results with the PCAOB.  Initially, Marcello did nothing in response upon learning of these misdeeds despite being a “supervisory person” under SOX § 105(c)(6).  In 2017, he was again informed of the receipt of confidential PCAOB information and again did nothing.  He only reported the issue to KPMG’s in-house counsel after other KPMG personnel informed him that if he did not elevate the issue, they would do so.  KPMG then conducted an internal investigation and terminated Marcello in April 2017.

The end result was that six KPMG auditors had their careers tainted with federal wire fraud and related charges, as well as bars from appearing or practicing before the SEC.  In addition to the financial sanction, Marcello was censured under SOX § 105(c) and PCAOB Rule 5300(a)(5) for his failure to supervise.  But he was not prohibited from being affiliated with a PCAOB-registered firm.

The takeaway: The egregiousness of the KPMG scandal was noteworthy and it is certainly possible that the PCAOB’s use of the failure-to-supervise provision was primarily due to the gravity of Marcello’s nondisclosure.  But if this matter is any indication, the PCAOB may well intend to aggressively pursue audit-firm officers who fail to reasonably supervise audit personnel and appropriately report any violations.  Whether this action proves to be unique or the start of a larger enforcement trend remains to be seen.

The PCAOB’s press release and a link to the order imposing sanctions are available here: PCAOB Sanctions Former KPMG Vice Chair of Audit for Failure Reasonably to Supervise, Imposing Largest Individual Penalty Ever in a Settled Proceeding | PCAOB (pcaobus.org)