The Hollinger International scandal may be the first test for the Public Company Accounting Oversight Board, the group created in the aftermath of accounting debacles like Enron.
If investigators discover that KPMG, Hollinger’s accountant, signed off on plans that funneled at least $32 million in improper fees to executives, the firm “potentially [has] enormous liabilities,” a source familiar with the matter said.
Though KPMG could find itself under investigation by the Securities and Exchange Commission, it is the newly created PCAOB that could take center stage.
“This could be the litmus test,” said Howard Meyers, a former attorney with the SEC. “I think the board should jump at the opportunity.”
The PCAOB recently began what will be annual reviews of the “big four” accounting firms, said Christi Harlan, the board’s director of public affairs.
Those reviews should be completed by mid-December.
Harlan said the board would “keep an eye” on the Hollinger issue, but added that the group was concentrating on large-scale issues in the accounting industry.
If the PCAOB does investigate KPMG and discover wrongdoing, it could suspend the firm’s activities and bar individual staffers from participating in audits, Meyers said.
The board also has the power to impose civil penalties of up to $750,000 against individuals and $15 million against firms.
But a provision of the board’s charter also says that accounting firms will be given a year to correct problems without the issue being made public – except when the case is “egregious.”
The Hollinger case would not be KPMG’s first brush with regulators. In January 2001, the firm was censured by U.S. regulators for violating independence rules, after it was discovered KPMG invested heavily in a fund it also audited.
Recently, Senate investigators accused KPMG of marketing an illegal tax shelter that generated more than $1 billion in unlawful benefits. KPMG officials did not return calls seeking comment on Hollinger.