I suppose I could call this blog post “Beware of People Wearing Fancy Suits,” or “Why Every Accountant Needs Annual Ethical Tune-up,” but that would be unfair to tailors and accountants everywhere…and as a former CPA and now a business ethics speaker and author I don’t wish to be unfair.
Instead, I will focus on one company, KPMG and more specifically, their former Chief of Audit Practice (a Senior Audit Partner) in their southwestern office. It is necessary to also state that this is not an indictment of KPMG, but of one man who stretched ethical boundaries until they snapped in his face. This blog will detail the crime and in Part II, we will talk about the “why” of it all.
We must first think about the word “auditor.” According to the website Investopedia.com, “Auditors are used to ensure that organizations are maintaining accurate and honest financial records and statements.” That is pretty heady stuff – and it’s also pretty important stuff.
The auditor is the gatekeeper and the ethics-minder, if such a term exists. He or she is the one who must ultimately pass financial judgment on a company. The auditor in this case was the Chief of Audit Practice; an auditor’s auditor. This is the person who makes sure the other auditors are doing their jobs correctly. Indeed, he supervised 500 employees.
We will mention his name only twice in this blog: Scott London, 50 years of age. He is being publicly shamed and if convicted, he is looking at jail time and a huge fine.
Cutting through all of the legalize, the Chief of Audit Practice developed a close friendship with another fellow who conspired with the Chief of Audit Practice to feed him inside information about the health of several companies who were KPMG clients. The inside information was then used to play the stock market. The friend made very profitable trades that generated more than $1 million dollars.
The name of the friend can easily be found online, but the friend is the minor player in this drama. The friend may be a fool or he may be “slick,” but let us not dilute the story; he was not an auditor or a CPA or the ethics-minder. He was not the one entrusted by clients.
For nearly three years the men played a dangerous game of deceit, but much like all people of ill-will, the men conducted their business in the back alley; literally.
The friend, the stock market player, would meet the Chief of Audit Practice on a side street near KPMG and pay him “tributes” in the form of $10,000 and $5,000 cash bundles in $100 bills. In addition, there was the gift of a $12,000 Rolex and concert tickets.
The charges don’t detail how it came about that the FBI caught onto the “friend.” Nevertheless, the friend started to play along with the FBI because he probably didn’t have much of a choice. The FBI observed the Chief of Audit Practice accepting money and the FBI recorded conversations.
Let us not think the Chief of Audit Practice got in so deep that he had no choice but to keep playing. The FBI has recordings of the Chief of Audit Practice actively telling his friend that they stood to make money on upcoming announcements and press releases.
Who Gets Hurt?
It is easy for us to convince ourselves that this was a victimless crime. Indeed, there was no murder weapon and no body. It is also easy for some to view every person on “Wall Street” as a monster and that what the Chief of Audit Practice did is nothing more than what occurs every day of the week in plush offices filled with cigar smoke.
Neither image is fair or accurate.
As I repeatedly teach in my seminars, ethical violations are never victimless.
KPMG suffered – and KPMG is composed of employees trying to do the right thing (will any of them lose their jobs due to clients pulling out?); the publicly-traded companies suffered and investors around the world suffered. As an aside, if the auditor has family of any kind, they are being humiliated as well. We must also include the family and friends of the man who played the stock tips; his cooperation with law enforcement is not the same as exoneration.
“The public has every right to fully expect a level playing field in our financial markets,” said United States Attorney André Birotte Jr. “As alleged in the complaint, Mr. London chose to betray the trust placed in him as a financial auditor and to tip the trading scales for the benefit of insiders like himself.”
The only people who may have been delusional enough to believe this was a victimless crime are the two men being charged. In the case of the Chief of Audit Practice, the delusion took on immense proportions.
The lives of the two men will never be the same. Of the two, the biggest loss will come to the Chief of Audit Practice. He will never work in accounting again.
However, he is a human being. He needs, if possible, to redeem himself. The question now, is why would he throw away his career and life?
I think I can supply some of those answers in my next post.
The federal charge of conspiracy to commit securities fraud through insider trading carries a statutory maximum penalty of 5 years in prison, and a fine of $250,000 or twice the gross gain or loss from the offense.
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