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US Auditor Scandal Intensifies Calls for Tougher Regulation

22 April 2013

The recent revelation that a partner in KPMG leaked insider information in exchange for cash and gifts may intensify calls for a shake-up in the regulation of auditors, especially in the US.

Scott London, of KPMG's Los Angeles office, passed on confidential and inside information in relation to two major clients, nutritional company Herbalife and footwear firm Skechers, to a friend, Bryan Shaw, on the golf course. On the back of the information received, Mr Shaw made trades amounting to more than $1.2 million. In return, Mr Shaw gave Mr London more than $50,000 in cash, gifts, dinners and concert tickets.

This case is not in the press for the high amounts involved given that the sums in question are relatively modest. Rather, what is noteworthy is that the breaches were not made by a junior member of staff. Mr London oversaw KPMG's audit practice for the Pacific Southwest and was responsible for over 50 other partners and 500 staff in total. Accordingly, this incident has caused KPMG to withdraw several years of audit reports for some clients, which is almost unheard of.

Whilst Mr London may pay a high personal price for his actions (he faces a fine of $250,000 and up to 5 years in prison if convicted), it will be interesting to see how his actions affect the auditing profession going forward. Some have called for regulations requiring the naming of auditors in the US and the regular rotation of auditing firms. However, neither of these so-called solutions would have prevented Mr London's breach of a basic auditing standard. Others have suggested that more transparency within auditing firms would go some way to addressing these issues and that any accounting firm that audits a traded company should be compelled to provide an annual report, including financial statements and details of their internal control systems. 

We will follow any developments and keep you updated via our blog.