United States Public Company Accounting Oversight Board Fines 3 KPMG Partners $150,000 for Violations of Standards in 2017 Audit of United States-Listed China Educational Service Provider Tarena International, Inflated Revenue & Improper Charges Against Accounts Receivable, 3 Partners of KPMG Huazhen Fined are Choi Chung Chuen, Ma Hong Chao & Dong Chang Ling, Choi Chung Chuen & Ma Hong Chao Banned, Limited Role for Dong Chang Ling for 1 Year
23rd March 2024 | Hong Kong
The United States Public Company Accounting Oversight Board (PCAOB) has fined 3 KPMG partners $150,000 for violations of standards in 2017 audit of United States-listed China educational service provider Tarena International, with the financial statements inflating revenue & improper charges against accounts receivable. The 3 partners of KPMG Huazhen fined are Choi Chung Chuen, Ma Hong Chao & Dong Chang Ling. Choi Chung Chuen & Ma Hong Chao have also been banned, and limited role for Dong Chang Ling for 1 year. PCAOB: “The PCAOB found that each of the Respondents violated PCAOB standards in connection with the Firm’s audit of the 2017 financial statements of Tarena International, Inc. (n/k/a TCTM Kids IT Education Inc.) (“Tarena”), a mainland China-based education service provider listed in the United States. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable. Specifically, the PCAOB found that Choi and Ma, the engagement partner and a second partner on the 2017 audit, respectively, failed to obtain sufficient appropriate audit evidence to support Tarena’s reported revenue. In evaluating Tarena’s revenue, Choi and Ma planned to rely on the company’s internal controls, including information technology-related controls (“IT Controls”). However, after learning of numerous unremediated deficiencies in Tarena’s IT Controls, Choi and Ma improperly continued to rely on those controls to support their audit conclusions as if those controls were effective. The PCAOB also found that Choi and Ma failed to exercise due care and professional skepticism and failed to obtain sufficient appropriate audit evidence to support Tarena’s net accounts receivable. Specifically, they did not appropriately evaluate the reasonableness of Tarena’s allowance for doubtful accounts. Choi and Ma did not obtain an adequate understanding of how management developed the estimate, did not appropriately evaluate its reasonableness, and did not adequately consider evidence indicating that the estimate might not be reasonable. Finally, the PCAOB found that Dong, the partner with overall responsibility for the involvement of the Firm’s IT professionals in the Tarena audit, failed to sufficiently supervise those IT professionals. As a result, Dong failed to identify several deficiencies in the IT audit procedures.” Earlier in March 2024, KPMG has been fined $1.9 million (GBP 1.46 million) for basic failure in audit & inflated revenue by $1.5 million (GBP 1.2 million) of advertising company M&C Saatchi in 2018. KPMG and audit partner Adrian Wilcox admitted to the breaches. Adrian Wilcox was fined $62,000 (GBP 48,750). In 2023 October, the UK Financial Reporting Council (FRC) fined KPMG (KPMG LLP, KPMG Audit) and 2 former audit partners (Peter Meehan, Darren Turner) a total of $32.3 million (£26.6 million) for audit failure in collapsed UK outsourcing firm Carillion with $8.4 billion of debts (£7 billion). More info below:
“ United States Public Company Accounting Oversight Board Fines 3 KPMG Partners $150,000 for Violations of Standards in 2017 Audit of United States-Listed China Educational Service Provider Tarena International, Inflated Revenue & Improper Charges Against Accounts Receivable, 3 Partners of KPMG Huazhen Fined are Choi Chung Chuen, Ma Hong Chao & Dong Chang Ling, Choi Chung Chuen & Ma Hong Chao Banned, Limited Role for Dong Chang Ling for 1 Year “
United States Public Company Accounting Oversight Board Fines 3 KPMG Partners $150,000 for Violations of Standards in 2017 Audit of United States-Listed China Educational Service Provider Tarena International, Inflated Revenue & Improper Charges Against Accounts Receivable, 3 Partners of KPMG Huazhen Fined are Choi Chung Chuen, Ma Hong Chao & Dong Chang Ling, Choi Chung Chuen & Ma Hong Chao Banned, Limited Role for Dong Chang Ling for 1 Year
20th March 2024 – The Public Company Accounting Oversight Board (PCAOB) today announced a settled disciplinary order (PDF)
sanctioning CHOI Chung Chuen (“Choi”), MA Hong Chao (“Ma”), and DONG Chang Ling (“Dong”) (collectively, “Respondents”), partners of mainland China-based KPMG Huazhen LLP (the “Firm”), for violations of PCAOB standards. The enforcement settlement announced today is the PCAOB’s fourth settled disciplinary order against China- or Hong Kong-based firms or individuals attributable to the historic access the PCAOB secured to inspect and investigate firms headquartered in China and Hong Kong in 2022.
“The PCAOB will take action to protect investors in U.S. markets and hold accountable anyone who violates PCAOB rules and standards, no matter where they are located,” said PCAOB Chair Erica Y. Williams.
- The PCAOB found that each of the Respondents violated PCAOB standards in connection with the Firm’s audit of the 2017 financial statements of Tarena International, Inc. (n/k/a TCTM Kids IT Education Inc.) (“Tarena”), a mainland China-based education service provider listed in the United States. In 2019, Tarena restated its 2017 financial statements for, among other things, intentional revenue inflation and improper charges against accounts receivable.
- Specifically, the PCAOB found that Choi and Ma, the engagement partner and a second partner on the 2017 audit, respectively, failed to obtain sufficient appropriate audit evidence to support Tarena’s reported revenue. In evaluating Tarena’s revenue, Choi and Ma planned to rely on the company’s internal controls, including information technology-related controls (“IT Controls”). However, after learning of numerous unremediated deficiencies in Tarena’s IT Controls, Choi and Ma improperly continued to rely on those controls to support their audit conclusions as if those controls were effective.
- The PCAOB also found that Choi and Ma failed to exercise due care and professional skepticism and failed to obtain sufficient appropriate audit evidence to support Tarena’s net accounts receivable. Specifically, they did not appropriately evaluate the reasonableness of Tarena’s allowance for doubtful accounts. Choi and Ma did not obtain an adequate understanding of how management developed the estimate, did not appropriately evaluate its reasonableness, and did not adequately consider evidence indicating that the estimate might not be reasonable.
- Finally, the PCAOB found that Dong, the partner with overall responsibility for the involvement of the Firm’s IT professionals in the Tarena audit, failed to sufficiently supervise those IT professionals. As a result, Dong failed to identify several deficiencies in the IT audit procedures.
“The failures uncovered by this investigation highlight how important the Board’s global reach over international firms and their associated persons is to fulfilling its investor protection mission,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations.
Without admitting or denying the findings, the Respondents consented to the PCAOB’s order, which:
- Censures the Respondents;
- Imposes civil money penalties in the amounts of $75,000 on Choi, $50,000 on Ma, and $25,000 on Dong;
- Bars Choi and Ma from being associated persons of a registered public accounting firm with a right to petition the Board for consent to associate with a registered public accounting firm after one year;
- Limits Dong from acting in certain roles on issuer audits for a one-year period;
- Requires that Choi and Ma each complete continuing professional education before filing any petition for Board consent to associate with a registered public accounting firm; and
- Requires that Dong complete additional continuing professional education over the next year.
PCAOB enforcement staff members Elliott Mogul, Tony Chen, R. Davis Taylor, and Sherry Tao conducted the investigation, supervised by William Ryan and John Abell. The PCAOB oversees auditors’ compliance with the Sarbanes-Oxley Act, provisions of the securities laws relating to auditing, professional standards, and PCAOB and SEC rules. Further information about the PCAOB Division of Enforcement and Investigations is available on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may visit the PCAOB Tips and Referrals page.
About the PCAOB
The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers registered with the Securities and Exchange Commission, including compliance reports filed pursuant to federal securities laws.
KPMG Fined $1.9 Million for Basic Failure in Audit & Inflated Revenue by $1.5 Million of Advertising Company M&C Saatchi in 2018, KPMG & Audit Partner Adrian Wilcox Admitted to Breaches, Adrian Wilcox Fined $62,000
9th March 2024 – KPMG has been fined $1.9 million (GBP 1.46 million) for basic failure in audit & inflated revenue by $1.5 million (GBP 1.2 million) of advertising company M&C Saatchi in 2018. KPMG and audit partner Adrian Wilcox admitted to the breaches. Adrian Wilcox was fined $62,000 (GBP 48,750). In 2023 October, the UK Financial Reporting Council (FRC) fined KPMG (KPMG LLP, KPMG Audit) and 2 former audit partners (Peter Meehan, Darren Turner) a total of $32.3 million (£26.6 million) for audit failure in collapsed UK outsourcing firm Carillion with $8.4 billion of debts (£7 billion). More info below:
UK Financial Reporting Council Fines KPMG & 2 Former Audit Partners $32.3 Million for Audit Failure in Collapsed UK Outsourcing Firm Carillion with $8.4 Billion of Debts, Negligent in Audit Work & Paid $17.3 Million to UK Authority for Forgery
14th October 2023 – The UK Financial Reporting Council (FRC) has fined KPMG (KPMG LLP, KPMG Audit) and 2 former audit partners (Peter Meehan, Darren Turner) a total of $32.3 million (£26.6 million) for audit failure in collapsed UK outsourcing firm Carillion with $8.4 billion of debts (£7 billion). Elizabeth Barrett, UK FRC Executive Counsel: “The credibility of reports and opinions issued by auditors in connection with financial statements depends upon beliefs concerning the integrity, objectivity and independence of auditors and the quality of the audit work performed. The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit. This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC. Many of the breaches involve failing to adhere to the most basic and fundamental audit concepts such as to act with professional scepticism and to obtain sufficient appropriate audit evidence. The breaches in relation to the 2016 audit even include failing to ensure that the audit process itself was properly managed and that the audit file was a reliable record. These requirements lie at the heart of proper auditing. The seriousness of the failings in the 2016 audit is compounded by the breaches of the Ethical Standards relating to the fundamental principles of objectivity, independence, and integrity. The non-financial sanctions imposed on KPMG LLP are focused on ensuring that failures on this scale will never be repeated.” More info below:
UK Financial Reporting Council Fines KPMG & 2 Former Audit Partners $32.3 Million for Audit Failure in Collapsed UK Outsourcing Firm Carillion with $8.4 Billion of Debts
12th October 2023 – The Executive Counsel of the Financial Reporting Council (“FRC”) has issued two Final Settlement Decision Notices under the Audit Enforcement Procedure and imposed sanctions against KPMG LLP, KPMG Audit Plc, and two former audit partners following the conclusion of her investigations into the audits of Carillion plc (“Carillion”). The first Decision Notice (“Decision 1”) relates to the investigation opened on 26 January 2018 into the statutory audit of the financial statements of Carillion for the financial years ended 31 December 2014, 2015, and 2016, and additional audit work in 2017. Under Decision 1 sanctions were imposed against KPMG LLP and Peter Meehan (“Mr Meehan”), a former partner of KPMG LLP and Audit Engagement Partner in all these years. The second Decision Notice (“Decision 2”) relates to the investigation opened on 12 February 2019 into the statutory audit of certain transactions relating to the financial statements of Carillion for the financial year ended 31 December 2013. Under Decision 2 sanctions were imposed against KPMG Audit Plc and Darren Turner (“Mr Turner”), a former partner of KPMG LLP and Audit Engagement Partner for the financial year ended 2013. The following sanctions were imposed:
Decision 1
KPMG LLP
- A total financial sanction of £26,500,000, reduced by 30% to £18,550,000 to reflect the firm’s co-operation and admissions;
- A published statement, in the form of a severe reprimand;
- A declaration that the relevant Audit reports signed on behalf of the firm did not satisfy the Relevant Requirements; and
- An order requiring KPMG LLP to take remedial action aimed at preventing recurrence of the breaches of Relevant Requirements including evaluating and reporting whether the measures taken by the firm since 2017 are sufficient in this regard.
Mr Meehan
- A financial sanction of £500,000, reduced by 30% to £350,000 to reflect Mr Meehan’s co-operation and admissions,
- A published statement, in the form of a severe reprimand; and
- Exclusion from membership of the ICAEW for 10 years. This will run concurrently with the period of exclusion already imposed in other proceedings.
Decision 2
KPMG Audit Plc
- A total financial sanction of £3,500,000, reduced by 30% to £2,450,000 to reflect the firm’s co-operation and admissions;
- A published statement, in the form of a severe reprimand; and
- A declaration that the Audit report signed on behalf of the firm did not satisfy the Relevant Requirements.
Mr Turner
- A financial sanction of £100,000 reduced by 30% to £70,000 to reflect Mr Turner’s co-operation and admissions; and
- A published statement in the form of a severe reprimand.
The extent of co-operation provided by KPMG LLP, KPMG Audit Plc, Mr Meehan, and Mr Turner, is reflected in the significant discounts applied to the financial sanctions imposed upon them. KPMG LLP will also pay Executive Counsel’s costs of both investigations which amount in total to £5,324,365.68 and are referred to in Decision 1.
Summary of Findings
The Final Settlement Decision Notices are not published at this stage, but the findings made are summarised below.
Decision 1
Prior to going into liquidation in January 2018, Carillion was a leading UK based multinational construction and facilities management services company. KPMG audited the financial statements of Carillion and its group companies for the financial years 2014, 2015, and 2016. In each of these years, KPMG provided an unqualified audit opinion that the financial statements gave a true and fair view of Carillion’s affairs. The audit opinion for the financial year 2016 was dated 1 March 2017. In July and September 2017 Carillion announced expected provisions totalling £1.045 billion, primarily arising from expected losses on a number of its contracts, and a goodwill impairment charge of £134 million. In conducting this investigation, the Executive Counsel has taken a proportionate and risk-focused approach to decide the areas to be considered across the relevant years. Despite this the investigation was exceptionally complex and required the analysis of a very substantial volume of information and documents. The resulting findings identify an unusually large number of breaches of Relevant Requirements.
The breaches described below all contributed to the outcome that this very large public company, which had multiple large contracts with public authorities, was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise. In particular, in 2016 KPMG and Mr Meehan’s work in respect of going concern and Carillion’s financial position generally was seriously deficient. KPMG and Mr Meehan failed to respond to numerous indicators that Carillion’s core operations were lossmaking and that it was reliant on short term and unsustainable measures to support its cash flows. In a wide range of areas, and in respect of a wide variety of items:
- KPMG failed to gather sufficient appropriate audit evidence to enable it to conclude that the financial statements were true and fair, and failed to consider (adequately or at all) the implications for the audit of evidence suggesting that Carillion’s accounting might have been incorrect or unreliable.
- KPMG failed to conduct its audit work with an adequate degree of professional scepticism. Instead of consistently challenging and scrutinising such audit evidence as it gathered, KPMG failed to subject Carillion’s management’s judgements and estimates to effective scrutiny, even where those judgements and estimates appeared unreasonable and/or appeared to be inconsistent with accounting standards and might suggest potential management bias.
Carillion was a very important client for both KPMG and key members of the audit team during the relevant years. This created a risk to their objectivity. In a number of instances Mr Meehan and other members of the audit team failed to adopt a rigorous and robust approach, accepting the presentation of financial information that suited Carillion’s management.
Additionally, in the 2016 audit Mr Meehan and KPMG failed in their duties to ensure that the audit engagement was properly managed and supervised. Audit procedures in a range of areas were not completed until more than six weeks after the date of the audit report was signed and records of the preparation and review of working papers were unreliable and, in some cases, misleading. Overall, no effective process was implemented to ensure that all the audit procedures underpinning the 2016 audit report had been completed, documented, and reviewed satisfactorily before the audit report was issued. In light of these deficiencies, Mr Meehan did not have a proper basis to be satisfied that the opinion given in the 2016 audit report was appropriate.
Significant and serious breaches were found in each audit investigated. Many of the breaches related to the audit work performed in respect of Carillion’s contracts, including the most financially significant UK and overseas construction and services contracts. These were the core of Carillion’s business, with UK contracts accounting for nearly three quarters of total group revenue. Other breaches related to audit work performed in respect of:
- Carillion’s reported debt and its status as a going concern in 2016, including consideration of Carillion’s use of a supply chain finance facility; and
- a number of other discrete accounting areas, including Carillion’s 2016 pension liabilities and the testing of goodwill for impairment.
The breaches found in Decision 1 were not dishonest and in the majority of cases were not intentional, deliberate or reckless. However, there is a finding of a lack of integrity in respect of Mr Meehan’s record of his review of the 2016 audit and four findings of a lack of objectivity. There is one finding of a failure to assess a threat to independence. These breaches are particularly serious because of their impact on the credibility of the opinions and reports issued by the auditor. Further details in respect of Decision 1
Decision 2
The investigation related to transactions entered into by Carillion in 2013 that involved changing its provider of outsourced IT and business process services. At the same time as entering into a contract for those services with the new provider, Carillion concluded other agreements, with the same counterparty, involving the assignment of certain IP rights for a significant sum, as well as receiving a further sum as a contribution to ‘exit fees’ payable to the former outsourcing provider. Each of these transactions was treated in Carillion’s financial statements as being independent of each other and this treatment resulted in a significant increase in Carillion’s reported profit for 2013.
A key failing by KPMG and Mr Turner was that they did not obtain sufficient, appropriate audit evidence to satisfy themselves that this treatment was appropriate. KPMG and Mr Turner failed to approach the audit of these transactions with an adequate degree of professional scepticism, failed to consider and respond to the risk of fraud, failed to obtain sufficient appropriate audit evidence regarding the accounting treatment adopted, and failed to identify that disclosures in the 2013 financial statements relating to these transactions might be misleading. The breaches found in Decision 2 were not intentional, dishonest, deliberate or reckless. Further details in respect of Decision 2
KPMG Reaches Private Settlement with Creditors of Collapsed UK Outsourcing Firm Carillion with $8.4 Billion of Debts, Alleged Negligent in Audit Work & Paid $17.3 Million to UK Authority for Forgery
18th February 2023 – KPMG has reached a private settlement (undisclosed) with creditors of collapsed UK outsourcing firm Carillion with $8.4 billion of debts (£7 billion), with KPMG alleged to be negligent in audit work and KPMG having paid $17.3 million (£14.4 billion) to UK authority for forgery in May 2022 (UK Financial Reporting Council, FRC). The UK outsourcing firm collapse of Carillion in 2018 led to thousands of job losses, and delay and collapsed of hundreds of projects, including hospitals, schools, roads, prisons and stadium of English Premier League football club Liverpool. Creditors of the collapsed UK outsourcing firm Carillion with $8.4 billion of debts (£7 billion) had paid out more than $250 million in dividends because they had relied on KPMG audits.
KPMG Reaches Private Settlement with Creditors of Collapsed UK Outsourcing Firm Carillion with $8.4 Billion of Debts, Alleged Negligent in Audit Work & Paid $17.3 Million to UK Authority for Forgery
Carillion plc was a British multinational construction and facilities management services company headquartered in Wolverhampton in the United Kingdom, prior to its liquidation in January 2018.
KPMG is a global organization of independent professional services firms providing Audit, Tax and Advisory services. KPMG is the brand under which the member firms of KPMG International Limited (“KPMG International”) operate and provide professional services. “KPMG” is used to refer to individual member firms within the KPMG organization or to one or more member firms collectively. KPMG firms operate in 143 countries and territories with more than 265,000 partners and employees working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. Each KPMG member firm is responsible for its own obligations and liabilities. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.
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