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Tuesday
Aug152017

SEC charges KPMG and partner with blown oil and gas company audit

KPMG agreed Tuesday to pay more than $6.2 million to settle charges that it failed to properly audit the financial statements of an oil and gas company that was itself charged with accounting fraud for inflating the value of Alaska assets by more than $400 million.

KPMG’s engagement partner on the audit, John Riordan, also settled civil charges against him.

Riordan agreed, without admitting or denying the SEC findings, to pay a $25,000 penalty and be suspended from appearing or practicing before the SEC as an accountant. That also bars him from participating in the financial reporting or audits of public companies. 

The SEC’s order permits Riordan to apply for reinstatement after two years.

The SEC resolved the case with an internal administrative order (pdf) and didn't go to court.

According to the SEC’s order, KPMG was outside auditor for Miller Energy Resources in 2011. The firm issued an unqualified audit report despite "grossly overstated values for key oil and gas assets." 

Knoxville-based Miller Energy filed for bankruptcy in October 2016.

The resulting reorganization split the company into 11 subsidiaries and voided its stock, according to the Knoxville News Sentinel.

The SEC charged Miller Energy with accounting fraud in August 2015. The company paid the SEC $5 million to settle the allegations.

The NYSE delisted Miller Energy in September 2015.

The SEC said Tuesday,

KPMG and the engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not properly staff the audit, which overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year. 

Among other audit failures, according to the SEC, KPMG and Riordan didn't adequately consider and address "facts known to them that should have raised serious doubts about the company’s valuation, and they failed to detect that certain fixed assets were double-counted in the company’s valuation."

The SEC's Walter Jospin said Tuesday: “Auditing firms must fully comprehend the industries of their clients." 

"KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars,” Jospin said.

The SEC said KPMG and Riordan "engaged in improper professional conduct."

Their lapses caused Miller Energy’s violation of the securities laws, the SEC said.

Without admitting or denying the findings, KPMG agreed to be censured and pay about $4.6 million in disgorgement (all the audit fees received from Miller Energy), plus about $558,00 in interest and a $1 million penalty. 

KPMG also agreed to "significant undertakings" designed to improve its system of quality control.

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Richard L. Cassin is the publisher and editor of the FCPA Blog.