The Securities and Exchange Commission has suspended two former KPMG auditors from practicing before the SEC in connection with settled charges against the two for improper professional conduct during an audit of the , not-for-profit College of New Rochelle. The SEC previously charged the college’s former controller with fraud in connection with the college’s fiscal year 2015 financial statements. On March 28, 2019, the SEC charged the controller of the College of New Rochelle with defrauding municipal securities investors by fraudulently concealing the college’s deteriorating finances. According to the SEC’s complaint, in recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college’s deteriorating financial condition from investors, the college’s former controller, Keith Borge, created false financial records, didn’t file payroll tax submissions, and didn’t assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations. Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Borge also falsely certified the accuracy of the college’s financial statements. The financial statements were published by Borge to an online repository in connection with the College’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds.
The SEC’s complaint, filed in federal district court in Manhattan, charges Borge with violating, and aiding and abetting violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Borge agreed to a partial settlement that would permanently enjoin him from future misconduct, with potential monetary sanctions to be determined at a later date. The partial settlement is subject to court approval.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Borge. Borge has pleaded guilty to those charges.
The SEC did not charge the College of New Rochelle after considering the institution’s extensive cooperation and remediation. After discovering Borge’s actions and conducting a preliminary review, the college publicly reported the financial issues, promptly engaged outside expertise to conduct a full internal investigation, and issued restated financial results. The college also promptly and extensively cooperated with the SEC in its investigation and proactively undertook wide-reaching remedial measures to enhance its internal controls and governance.
According to the SEC’s orders, former KPMG partner Christopher Stanley approved, and former KPMG senior manager Jennifer Stewart authorized, the issuance of an unmodified audit opinion on the college’s fiscal year 2015 financial statements, despite not having completed critical audit steps. As described in the orders, KPMG’s work on the audit had stalled because the college’s former controller had provided the audit team with inaccurate, incomplete, and contradictory information. On Nov. 30, 2015, the former controller and the college’s president informed Stanley and Stewart that the college needed KPMG to issue the audit report before the end of the day. That afternoon, despite the existence of numerous outstanding open items and unanswered questions, Stanley and Stewart decided to issue the audit report.
The SEC’s orders find that Stanley and Stewart violated Generally Accepted Auditing Standards by, among other things, failing to obtain sufficient appropriate audit evidence, properly prepare audit documentation, properly examine journal entries, adequately assess audit risk, and exercise due professional care and professional skepticism. The college’s fiscal year 2015 audited financial statements, which were submitted to the Municipal Securities Rulemaking Board pursuant to the college’s obligation to provide continuing disclosure to investors, fraudulently overstated the college’s net assets by $33.8 million.
“Auditors of municipal issuers are key gatekeepers in upholding the reliability and integrity of financial information provided to investors in municipal bonds,” said Matthew S. Jacques, Chief Accountant of the SEC Enforcement Division. “It is critical that they exercise professional care and skepticism.”
“Audited financial statements for municipal issuers are submitted to the MSRB pursuant to the continuing disclosure undertakings required by the Exchange Act,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “We will investigate auditors’ conduct in municipal audits and, where appropriate, hold them accountable when they act improperly.”
Without admitting or denying the findings, Stanley and Stewart each agreed to be suspended from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years and one year, respectively. Each also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the MSRB’s Electronic Municipal Market Access system until they are reinstated by the SEC.
This aspect of the SEC’s investigation was conducted by Creighton Papier and Mark Zehner of the Enforcement Division’s Public Finance Abuse Unit with assistance from Jon Daniels, Todd Brody, and Wendy Tepperman of the New York Regional Office. The case was supervised by Ms. Gaunt and Lara S. Mehraban.
JEFFREY NEWMAN REPRESENTS WHISTLEBLOWERS NATIONWIDE INCLUDING MANY SEC WHISTLEBLOWERS INVOLVING MAJOR CASES. HE CAN BE REACHED AT JEFFREY.NEWMAN1@GMAIL.COM OR AT 978-880-4758