The SEC's order also claims that KPMG violated Rule 2-01 of Regulation S-X when it hired an individual who had recently retired from a senior position at an affiliate of an audit client and then loaned that individual back to that affiliate to do the same work he had done as an employee of that affiliate, resulting in the individual acting as a manager, employee, and advocate for the audit client.
In connection with its investigation, the SEC also considered whether KPMG’s independence was impaired by loaning non-manager tax professionals to assist audit clients on-site with tax compliance work performed under the direction and supervision of the clients’ management. The SEC did not bring an enforcement action on this basis, but its report of investigation cautioned that these “loaned staff arrangements” appear inconsistent with Rule 2-01 of Regulation S-X (which prohibits auditors from acting as employees of their audit clients). The report serves as a reminder to both accounting firms and to public companies regarding the use of auditor staff in ways that results in such staff acting as company employees in function or appearance even on a temporary basis, regardless of whether the accountant also acts as an officer or director, or performs any decision-making, supervisory, or ongoing monitoring functions, for the audit client.
The SEC encourages auditors and audit committees to consult the SEC’s Office of the Chief Accountant with questions about auditor independence, including the permissibility of a contemplated service.