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KPMG scrambles to control damage of insider-trading scandal

The accounting firm, facing the possibilities of client defections and regulatory scrutiny, is trying to shore up its reputation.

April 12, 2013|By Andrew Tangel, Los Angeles Times
  • As a KPMG auditor, Scott London, left, leaked inside information on five public companies to a golfing buddy, according to the Justice Department. Above, London and attorney Harland W. Braun.
As a KPMG auditor, Scott London, left, leaked inside information on five… (Anne Cusack, Los Angeles…)

NEW YORK — Auditor Scott London isn't the only one dealing with a dented reputation.

His former employer, KPMG, is scrambling to do damage control after an insider-trading scandal swept through its Los Angeles office. It has put many of the Big Four accounting firm's clients on edge, wondering if there's more to come as the federal government continues its investigation.

The Department of Justice said London leaked inside information on five public companies, including Herbalife Ltd. and Skechers USA Inc., to a golfing buddy who then executed trades. The stock transactions banked some $1.2 million over a period of a few years.

FULL COVERAGE: KPMG auditor accused of insider trading

"It seems like a rogue employee," said Lester Aaron, chief financial officer of insurer Unico American Corp., which is a KPMG client. "That could happen to any firm, but if I find out that there's weaknesses at KPMG, then I need to get involved and so does our audit committee."

Aaron has been peppering KPMG executives with questions this week, to make sure London didn't have access to his company's financial statements. He's worried there might be more to come as the federal government continues its investigation.

His company, based in Woodland Hills, has been a client since 1996. It has no plans to switch auditing firms — so far, he said.

The prospect of client departures would only add to headaches for KPMG as it endures fallout from London's insider-trading scheme. The firm faces risks to its reputation, as well as potential regulatory scrutiny.

Executives at KPMG have been reaching out to clients this week to help assuage fears about the insider-trading scandal, though there have been no defections as of yet, according to a person familiar with the matter who was not authorized to speak about it publicly. They also met with employees at the Los Angeles office to discuss what happened with London, the person said.

London had a 29-year career with the accounting firm.

In many ways, the KPMG executives are trying to avoid the kind of negative publicity that hurt the firm in 2005.

That year, the company admitted to Justice Department charges that it marketed fraudulent tax shelters. KPMG agreed to pay $456 million as part of a deferred prosecution agreement.

"If you have a cloudy reputation with stains on it, you cannot enhance the reputation of the client," said John Coffee, a securities law expert at Columbia University. Client defection could ensue, and, Coffee added, "when that process starts, it snowballs."

The Public Company Accounting Oversight Board, the auditing industry's regulator, could examine the insider-trading matter as part of its routine inspection process. It might also initiate an enforcement inquiry, said Dan Goelzer, a former PCAOB board member.

The regulator could look into the firm's compliance and training programs, he said. The PCAOB declined to comment.

"This is a very difficult thing for a firm to police against," Goelzer said. "All you can really do is train your people and try and select people with high integrity."

KPMG has said little publicly since the scandal came to light this week. It issued a statement late Thursday from Chairman and Chief Executive John Veihmeyer saying he "was appalled" by the new details emerging in London's case.

"We unequivocally condemn his actions, and deeply regret the impact that his violations of trust and the law have had on our clients and our people," Veihmeyer said. "KPMG will be bringing legal actions against London in the near future."

London has "emphatically denied" to federal investigators that he disclosed confidential client information to anyone other than Bryan Shaw, an Encino jeweler who had been making the trades, according to court papers. The FBI enlisted Shaw to help catch London accepting bribes in exchange for illicit tips.

At KPMG, London supervised about 53 partners and 500 other KPMG employees, most of them accountants, according to a criminal complaint filed Thursday against London. London's attorney has said he acted alone at KPMG.

Although London passed along tips about five companies, he was the main auditor for just two of the companies: nutritional supplement maker Herbalife and shoe company Skechers. The arrangement gave London an intimate view of those firms' finances.

"There's nothing you don't know — everything crosses your desk," said Allan D. Koltin, CEO of the Koltin Consulting Group in Chicago. "There's nothing you're not in the loop on."

Herbalife and Skechers have declined to comment.

KPMG abruptly resigned as auditor for the two companies this week, saying its independence had been compromised.

Court papers also revealed London leaked information concerning Deckers Outdoor Corp., a Goleta, Calif., designer and marketer of footwear and accessories. London even mentioned to Shaw a conversation he had with Deckers' chief financial officer, according to court papers.

As an account executive for Deckers, London would have had total access to Deckers' financial information, Koltin said. Accounting experts said KPMG wouldn't necessarily need to resign as Deckers' auditor, given that no allegations of financial misstatements have surfaced.

But Koltin predicted Deckers would not be KPMG's client for much longer. Deckers' audit committee might move to fire KPMG to avoid any untoward perception, he said.

"The honorable thing is probably to resign first," Koltin said.

Deckers representatives did not respond to requests for comment.

Times staff writers Tiffany Hsu and Stuart Pfeifer contributed to this report.

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