SEC Charges KPMG Auditors in Ahold Scandal

An engagement partner and a senior manager at the Big Four firm allegedly missed or failed to act upon "red flags" of improper income-recognition at U.S. Foodservice.

The Securities and Exchange Commission has accused a senior manager and an engagement partner at KPMG of “improper professional conduct” in their audit of U.S. Foodservice Inc. USF’s Dutch parent company, Royal Ahold NV, settled fraud and other charges with the SEC in October 2004.

The SEC charges that Kevin Hall, an engagement partner, and Rosemary Meyer, a senior manager, found many cases during their audit for 1999 and their interim review for the second quarter of 2000 in which USF was recognizing income when it shouldn’t have. But the two allegedly failed to recognize or refused to act upon such “red flags.”

Hall and Meyer found that USF had recognized hefty unearned “prepayments” of income and listed them as “audit exceptions” in their working papers, the commission charged. Such findings “directly and explicitly contradicted USF management’s repeated representations that USF did not obtain vendor prepayments,” the SEC added.

Hall and Meyer also allegedly got and reviewed audit evidence that “directly contradicted” USF’s accounting for payments used to improperly cut aging accounts-receivable balances.

The SEC also contends that Hall and Meyer produced a flawed audit design that enabled third-party confirmations to go to people with no apparent knowledge about the underlying facts being confirmed. That, the commission charges, is a violation of generally accepted auditing standards.

A hearing will be scheduled before an administrative law judge to determine whether the allegations are true, to give Hall and Meyer a chance to defend themselves, and to find out whether they should be censured by the commission or temporarily or permanently barred from appearing or practicing before the SEC.

“Our partners look forward to presenting the facts in support of the work that was performed under the circumstances at U.S. Foodservice in 1999,” said KPMG spokesman George Ledwith, according to The Washington Post.

Scott Friestad, associate director of the SEC’s division of enforcement, asserted that Hall and Meyer “had evidence in their hands that could have stopped the fraud in its tracks,” according to Bloomberg. “Instead, because they failed to exercise appropriate professional skepticism, the fraud was allowed to continue.”

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