Over the past three years small group of investors have been collecting KPMG auditing failures from around the world. They have been looking for court cases which are similar to the Leaderguard auditing debacle which has occurred in Mauritius and where investors have sued KPMG for audit negligence or ineptitude.
Two (landmark) parallel cases come from the USA.
The New Jersey Supreme Court: Shareholders in the Physician Computer Network v KPMG USA.
In June 2006 the New Jersey Supreme Court ruled that shareholders (investors) in a company that had been bankrupted by fraud on the part of its executives or Directors could sue the company auditors (KPMG) on the grounds that they had failed to detect executive or director fraud.
In an earlier hearing KPMG had sought the dismissal of the case on the grounds of “the imputation doctrine” which in essence means that auditors are dependent upon information or knowledge provided by company Directors. Unfortunately for KPMG the state Supreme Court held that “this doctrine” did not prohibit company share holders (ignorant of the fraud) to obtain damages from an auditor who had failed to reveal or uncover the fraud perpetuated by the company Directors.
This ruling has implications for Mauritian justice, should KPMG attempt to reapply this doctrine.
The United States Securities and Exchange Commission on behalf of Gemstar shareholders v KPMG
In October 2004 KPMG agreed to pay “a record USD 10,000,000” to settle charges brought by the Security and Exchange Commission for “improper professional conduct”. Evidently (four) KPMG auditors overlooked Gemstar’s improper inclusion of “licensing and advertising revenues in its public findings” Over the years 1999-2002 such inclusion did not comply with generally accepted accounting principles.
A regional Director of the Securities and Exchange Commission claimed that
“This case illustrates the dangers of auditors who rely excessively on the honesty of management. KPMG auditors repeatedly relied on Gemstar’s management representations even where those representations were contradicted by their audit work. ”
“The auditors thus failed to abide by one of the core principles of public accounting-to exercise professional skepticism and care.”
Our Forensic Accountants have to date amassed some 30 KPMG case histories which are indicative of poor auditing and weak advisory services. Most of these cases led to court awards while others were settled “in order to avoid further costly litigation.
Two (landmark) parallel cases come from the USA.
The New Jersey Supreme Court: Shareholders in the Physician Computer Network v KPMG USA.
In June 2006 the New Jersey Supreme Court ruled that shareholders (investors) in a company that had been bankrupted by fraud on the part of its executives or Directors could sue the company auditors (KPMG) on the grounds that they had failed to detect executive or director fraud.
In an earlier hearing KPMG had sought the dismissal of the case on the grounds of “the imputation doctrine” which in essence means that auditors are dependent upon information or knowledge provided by company Directors. Unfortunately for KPMG the state Supreme Court held that “this doctrine” did not prohibit company share holders (ignorant of the fraud) to obtain damages from an auditor who had failed to reveal or uncover the fraud perpetuated by the company Directors.
This ruling has implications for Mauritian justice, should KPMG attempt to reapply this doctrine.
The United States Securities and Exchange Commission on behalf of Gemstar shareholders v KPMG
In October 2004 KPMG agreed to pay “a record USD 10,000,000” to settle charges brought by the Security and Exchange Commission for “improper professional conduct”. Evidently (four) KPMG auditors overlooked Gemstar’s improper inclusion of “licensing and advertising revenues in its public findings” Over the years 1999-2002 such inclusion did not comply with generally accepted accounting principles.
A regional Director of the Securities and Exchange Commission claimed that
“This case illustrates the dangers of auditors who rely excessively on the honesty of management. KPMG auditors repeatedly relied on Gemstar’s management representations even where those representations were contradicted by their audit work. ”
“The auditors thus failed to abide by one of the core principles of public accounting-to exercise professional skepticism and care.”
Our Forensic Accountants have to date amassed some 30 KPMG case histories which are indicative of poor auditing and weak advisory services. Most of these cases led to court awards while others were settled “in order to avoid further costly litigation.
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