Ex-KPMG partner gets a year and a day in prison over fraud scheme

A former KPMG LLP partner was sentenced to a year and a day in federal prison for his role in eliciting confidential information from the U.S. audit regulator to boost the firm’s annual inspection results.

David Middendorf, KPMG’s onetime national managing partner for audit quality and professional practice, and Jeffrey Wada, a former inspections leader at the Public Company Accounting Oversight Board, were convicted in March of multiple counts of fraud. Prosecutors said several former employees of the board, including Wada, helped funnel details about its inspection plans to leaders of KPMG, who used the information to change the audits.

Middendorf “was at the top of a chain of corruption that threatened to corrupt KPMG and the PCAOB’s inspections process,” Geoffrey Berman, the U.S. attorney in Manhattan, said in a statement Wednesday. “Today’s sentence recognizes the harm this fraudulent scheme caused to the PCAOB and the auditing profession more generally.”

KPMG logo on wall
The offices of KPMG in Chicago

Prosecutors had urged U.S. District Judge J. Paul Oetken to send Middendorf, 55, to prison, arguing that in his position he could have stopped the scheme in its tracks. Lawyers for Middendorf asked the judge for probation, noting that their client wasn’t accused of stealing money and that he testified on his own behalf. On the stand, Middendorf admitting authorizing the revisited audits but said he wanted the firm to double-check its work.

Middendorf, of Marietta, Georgia, told the judge he had worked for KPMG for more than 30 years, took his responsibility as a protector of capital markets seriously and had simply made a mistake.

“The consequences to me from this case are devastating,” Middendorf said.

While the sentence was well below the 57 months Middendorf faced under federal guidelines, Oetken said “meaningful punishment” was necessary to help prevent others from engaging in similar conduct. Middendorf was regarded as an “honest and respected professional” but knew what he was doing was wrong, the judge said.

“It is more subtle than stealing money,” Oetken said. “It involved corruption of a regulatory process.”

The judge gave Middendorf a year and a day because a sentence of more than 12 months allows a prisoner to get credit for good behavior.

KPMG, one of the Big Four accounting firms, agreed to pay $50 million in June to settle Securities and Exchange Commission allegations that it altered past audit work after receiving the information.

The Public Company Accounting Oversight Board, which is the main U.S. regulator of auditors and is overseen by the SEC, was created in the wake of the Enron and WorldCom scandals to build confidence in how public companies report their financial results.

Three other people charged in connection with the case have pleaded guilty, including Cynthia Holder, a former PCAOB employee who was sentenced last month to eight months in prison.

The case is U.S. v Middendorf, 18-cr-36, U.S. District Court, Southern District of New York (Manhattan).

— Chris Dolmetsch and Amanda Iacone, with assistance from John Herzfeld
Bloomberg News