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Insider-trading scandal poses risks to KPMG's reputation

April 10, 2013|By Andrew Tangel
  • The Los Angeles offices of the accounting firm KPMG.
The Los Angeles offices of the accounting firm KPMG. (Patrick T. Fallon / Bloomberg )

NEW YORK -- A former senior KPMG auditor's leaks could threaten the reputation of one of the country's biggest accounting firms, industry experts said.

Auditors like Scott London, a former senior partner in KPMG's office in Los Angeles, are privy to client companies' financial secrets -- valuable data which he told the Los Angeles Times he shared with an unnamed friend who then traded stocks using the illicit tips.

The scandal is evidence that apparently none of corporate America's most trusted names is immune to the temptations of insider trading.

“It’s extremely rare, it’s extremely uncommon,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. Major accounting "firms have very strict policies that they enforce.”

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But KPMG's embarrassing episode could result in clients switching auditors, experts said.

“When that process starts, it snowballs,” said John Coffee, a securities law expert at Columbia University. “If you become a name that’s synonymous with scandal, you add nothing to the credibility of the company’s financial statements and they should get somebody else.”

After all, Coffee said, it was the Enron Corp. scandal that engulfed its auditor, Arthur Andersen, leading to its collapse. Arthur Andersen faced client departures even before the U.S. Justice Department indicted the firm, he said.

“Arthur Andersen really died because it was no longer capable of giving credibility to the audit process,” he said.

Full coverage: KPMG auditor accused of insider trading

There is no evidence so far suggesting London's insider-trading activities extended beyond the unnamed friend with whom he shared the lucrative information. KPMG fired London within 24 hours of learning of his illicit tips from the Justice Department last week, The Times reported.

“It could be the tip of the iceberg,” Joshua Ronen, a professor of accounting at New York University's business school, said Tuesday as details from the scandal were emerging. “But if it is just isolated events, then that by itself is just a glitch.”

A KPMG spokesman did not immediately respond to a request for comment Wednesday.

Turner, the former SEC chief accountant, did not expect the scandal to spark an exodus. Companies will see it’s a problem involving one individual, not the entire firm, Turner said. Turner said KPMG “did all the right things,” by firing the employee and resigning as auditor for nutritional supplement maker Herbalife and footwear company Skechers, the client companies whose information London compromised.

“Will there be some companies that … choose to go to one of the other firms? Yeah,” Turner said. “ But is there going to be wholesale defection? Absolutely not.”

KPMG’s clients may appreciate the firm’s swift and public response. The firm posted a statement on its website this week announcing the discovery of the insider-trading scheme and the departure of London, whom it did not name.

“They didn’t hide it,” said Tamar Frankel, a law professor at Boston University. “They didn’t tell half-lies. They didn’t sugar-coat it.”

The scandal may pose the most immediate risk to London, of course.

He told The Times on Tuesday that he received about $25,000 in cash, a Rolex watch and fancy dinners in exchange for the tips. And the Justice Department is still investigating, according to sources familiar with the matter.

Partners like London who engage in insider trading stand to lose their salaries, their pensions and stakes in their partnerships, Turner said.

“You’ll be ostracized,” Turner said. “No one will want to deal with you anymore. You can no longer be an auditor."


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