1

Faith L. Estrada October 17, 2019

Bachelor of Science in Accountancy, 5th year Acctg.160 Synthesis

A Synthesis Essay of Articles Relating Inherent Ethical Challenges

Ethical behavior means to behave according to the moral standards set by the
society which we live in. Ethical behavior in business practice has been developed
continuously. It has been looked as important aspect of the business success, with
that it has been a cause of concern nowadays. It tends to be good for business and
involves demonstrating respect for key moral principles that include honesty,
fairness, equality, dignity, diversity and individual rights.

No business is exempt from ethical behavior and practices. However, those

dealing with money and sensitive personal and company information must adhere to
strict ethics and integrity standards. Unlike other general business positions in a
company, accountants are bound both by the rules of their organization and by the
professional standards of the accounting industry. Accountants have ethical
responsibilities to many different parties, both internal and external to the company.
This is imperative to gain and retain the trust of clients, co-workers and business
partners.

This paper talks about the issue regarding the KPMG, a multinational
professional services network, and one of the Big Four accounting organizations.
 2

KPMG was formed in 1987 with the merger of Peat Marwick International
(PMI) and Klynveld Main Goerdeler (KMG) and their individual member firms.
Spanning three centuries, the organization's history can be traced through the
names of its principal founding members - whose initials form the name "KPMG",
Klynveld. Piet Klynveld; Peat. William Barclay Peat; Marwick. James Marwick;
Goerdeler. Dr. Reinhard Goerdele.

The Securities and Exchange Commission extracted what is believed to be its

largest-ever monetary penalty against an audit firm when KPMG agreed to a $50
million settlement. What happened was that they were given an improper heads-up
ahead of Public Company Accounting Oversight Board PCAOB inspection. The
inspections cheating scheme involved confidential documents from the Public
Company Accounting Oversight Board (PCAOB) that outlined its inspection plan for
the Big Four firm. These documents were leaked by staffers to KPMG in exchange
for jobs with the firm. This happened more than once, with the information each time
being passed on by a PCAOB staffer who then went on to work for KPMG. A group
of the firm's audit partners had known about this scheme, and indeed pressured the
former staffers for additional inside information. Two of the defendants, a KPMG
audit partner and a former PCOAB staffer, were convicted earlier this year
on conspiracy and fraud charges. Other defendants had already pleaded guilty by
then.
KPMG violated Sections 4C and 21C of the federal securities laws, which
means they did not possess “the requisite qualifications to represent others,” and
were “lacking in character or integrity, or to have engaged in unethical or improper
professional conduct” and “wilfully violated, or wilfully aided and abetted the violation
of, any provision of the securities laws or the rules and regulations.”

However, the KPMG cheating scandal was much more widespread than originally
thought. While the primary headline concerned KPMG paying a $50 million penalty to
settle Securities and Exchange Commission (SEC) charges that the firm used inside
information to cheat on firm inspections, the agency also found that auditors were
using inside information to cheat on internal training exams meant to reinforce
professional work standards. The SEC also uncovered the internal cheating scandal.
In addition to the regular CPE requirements that all auditors are required to
 3

complete, the firm also requires them to do training in excess of state requirements,
and to take an exam at its conclusion. KPMG administers this training through an
online program. Audit professionals are given three opportunities to pass each
examination. If one of KPMG’s audit professionals is unable to pass after two
attempts, that person's performance management leader is notified. If audit
professionals are unable to pass after three attempts, the consequences are more
significant: They are required to retake the training; they are prohibited from
conducting audit work until they pass the exam; and others at the firm may be
notified. Audit professionals also understood that failing to pass an exam could lead
to their compensation being reduced.

The SEC complaint said that "on numerous occasions" KPMG audit
professionals who had passed their training exams sent the answers to their
colleagues to help them pass too, primarily via email or printed answers. The SEC
noted that this practice took place at all levels of seniority, from nervous first-year
auditors to lead engagement partners who were responsible for compliance with
PCAOB standards in auditing their clients’ financial statements. The senior cheaters
not only sent exam answers to other partners, but even solicited answers from and
sent answers to their subordinates. Beyond that, the SEC said audit professionals
were also manipulating the scores of the training exam. They did so by looking at the
URL for the exams. Embedded in the link was an instruction to the server specifying
the minimum score needed to pass. By changing the number in the link, they were
able to then manipulate the score required to pass. Twenty-eight of these auditors
did this on four or more occasions. Certain audit professionals lowered the required
score to the point of passing exams while answering less than 25 percent of the
questions correctly. “The sanctions will protect our markets by promoting an ethical
culture at KPMG,” said Melissa Hodgman, associate drector of the SEC’s
Enforcement Division. “To that end, KPMG will take additional remedial steps to
address the misconduct and further strengthen its quality controls, all of which will be
reviewed and assessed by an independent consultant.”
 4

As a Certified public accountant you are held to a higher standard. You have
to maintain ethical standards in order to involve an investor’s confidence in what
auditors do and what certified public accountants do. That’s why certified public
accountants have to go to school for so long and have to take so many test it is to
prove that they have understand what their responsibilities are. The day you pass
the CPA board exam doesn’t mean that you throw away all the knowledge you
gained. Sometimes everything isn’t black and white, there are gray areas that you’ll
face in your career and you have to have the courage to stand up and say this isn’t
right and you have to report it otherwise you can ruin the firm’s image or you can ruin
the image of the CPA.

http://www.businessdictionary.com/definition/ethical-behavior.html

https://www.nysscpa.org/news/publications/the-trusted-professional/article/sec-
probe-finds-kpmg-auditors-cheating-on-training-exams-061819

https://smallbusiness.chron.com/accounting-ethics-integrity-standards-24246.html

https://smallbusiness.chron.com/six-guiding-principles-accountants-42457.html

https://smallbusiness.chron.com/ethical-responsibility-accounting-58071.html

https://smallbusiness.chron.com/ethics-accounting-profession-3738.html

https://www.complianceweek.com/accounting-and-auditing/kpmg-fallout-cheating-
allegations-raise-new-questions/27281.article

https://www.marketwatch.com/story/the-kpmg-cheating-scandal-was-much-more-
widespread-than-originally-thought-2019-06-18

https://home.kpmg/in/en/home/about/overview/history.html