The SEC has ordered KPMG’s member firm in Australia to pay over $2.7 million for audits and other services it did for two unspecified Australian financial companies in which there appear to be violations of independence rules.

In an accounting and auditing enforcement action issued on Monday, the SEC reported on the provision of non-audit services by KPMG Australia and certain other KPMG member firms for two audit clients of KPMG Australia, referred to as Companies A and  B, both of which provided financial services in Australia and other jurisdictions. The companies were audit clients of KPMG, and according to the SEC, the relationship violated the auditor independence requirements imposed under SEC rules and under generally accepted auditing standards, along with the standards of the Public Company Accounting Oversight Board in the case of one of the companies.

“The violative services were rendered during fiscal years 2001 and 2002 in the case of Company A, and during fiscal years 2001 through 2004 in the case of Company B,” said the SEC. “Several distinct categories of non-audit services were rendered that violated Rule 2-01 of Commission Regulation S-X and therefore impaired independence. First, KPMG Australia and at least one other KPMG member firm outside Australia seconded non-tax professional staff to work at each client’s premises, under the supervision and direction of each client, doing the same types of work that each client’s own employees or managers ordinarily would perform, in violation of the prohibition under Rule 2¬01(c)(4)(vi) against ‘[a]cting, temporarily or permanently, as a director, officer, or employee of an audit client, or performing any decision-making, supervisory, or ongoing monitoring function for the audit client.’ Second, KPMG Australia received trailing commissions from an acquired subsidiary of Company B in exchange for KPMG Australia’s earlier promotion of the subsidiary’s products prior to the subsidiary’s acquisition by Company B. These services violated the prohibition under Rule 2-01(c)(3) against direct business relationships with an audit client. Third, certain overseas subsidiaries of Company B retained a legal practice associated with another KPMG member firm to provide litigation services in violation of the prohibition under Rule 2-01 against acting as an advocate for an audit client.

“The provision of these prohibited services came about in substantial part as a result of failures by KPMG Australia to take adequate steps both to educate its professional personnel and also to monitor compliance by such personnel with respect to the auditor independence requirements imposed by the Commission’s rules and by U.S. GAAS or, with respect to the audit report on Company B’s financial statements for its 2004 fiscal year, by PCAOB standards,” the SEC added. “As a result of these failures, on multiple occasions KPMG Australia failed to respond appropriately to problematic information concerning certain non-audit services to Company A and Company B that should have affected the independence determination.

“Despite providing these prohibited services, KPMG Australia stated that it was ‘independent’ in contemporaneous audit reports it issued on Company A’s and Company B’s financial statements, each of which was included, or incorporated by reference, in their respective public filings with the Commission throughout the relevant time period,” the SEC noted. “By doing so, KPMG Australia violated Rule 2-02(b) of Commission Regulation S-X and caused its audit clients Company A and Company B to file periodic reports with the Commission that failed to include independently audited financial statements as required by Exchange Act Section 13(a), Exchange Act Rule 13a-1, and Regulation S-X.”

The SEC ordered KPMG Australia to pay disgorgement of $1,982,000 and prejudgment interest of $760,000 to the U.S. Treasury. The Commission also issued cease and desist orders and told KPMG Australia to hire an independent consultant to review and evaluate KPMG Australia’s internal controls.

The long arm of the SEC can sometimes reach very far indeed, especially for international accounting firm networks whose home bases are located in the U.S.