Question

On August 15, 2017, the SEC completed an Administrative Hearing process Initiated by a PCAOB Investigation of KPMG, LLP and one of their audit partners John Riordan, CPA for conducting a materially deficient audit of Miller Energy Resources Inc. KPMG became the successor auditor of Miller for fiscal 2011. Miller was charged with accounting fraud in 2015. Among other things, the SEC found that KPMG and Riordan: • falled to properly assess the risks associated with accepting Miller Energy as a client and to properly staff the audit, failed to adequately address the audit team's lack of Industry experience resulting in a lack of planning, supervision, due care, and professional skepticism; failed to obtain sufficient competent evidence to assess the impact of the opening balance of the Alaska Assets on Miller Energy's current year financial statements; failed to adequately assess whether Miller Energy's valuation of the Alaska Assets conformed with GAAP (Miller inaccurately revalued an asset costing $4.5 million at $480 million); • did not obtain sufficient competent evidence regarding the assumptions on which Miller Energy's valuation of the Alaska Assets was based, and • failed to take reasonable steps to assess Miller Energy's recorded value of $110 million for certain fixed assets included in the Alaska acquisition In a class action lawsuit against one-half dozen former executives of Miller, the plaintiffs charged that Miller overlooked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year. According to the lawsuit. David M. Hall who served as chief operating officer, understated the cost to run the oil field. Also, it charged that the former CFO, Paul W. Boyd, and Hall provided expense projections that were, in many cases, significantly lower than expenses recorded by the previous owners of the field. For

Answer 1

PCAOB investigation of KPMG, LLP and one of their Audit partners John R for conducting a materially deficient audit of Miller energy Resource Inc. As per Question, We noticed that SEC identified that KPMG and Partner of Audit firm:

1. Failed to properly assess the risks associated with accepting Miller Energy
2. Lack of planning , supervision , due care and Professional scepticism , Audit team with lack of Industry knowledge
3. Failure to obtain sufficient competent Audit evidence to assess the impact of opening balance of the Alaska Assets
4. Failure to adequately assess Valuation of the Alaska assets . failure to collect relevant audit evidence to justify valuation of asset
5. Failed to take reasonable step to assess Miller Energy’s recorded Value $ 110 Mio for certain fixed assets including Alaska Acquisition .

After seen all the above point m it is quite clear that Auditor is failed to provide reasonable assurance about Alashka Acquisition as well as proper valuation of asset acquisition . Too many mismatch in Audited Financial record and number .

On the other hand ( from Audi tee point of view) , CEO of the company intentionally accounted Lower expenses to boost up bottom line . As per lawsuit claim that Actual cost to drill a new well was roughly $ 13 Million but CEO told to engineering firm to reports cost to drill disclose as $ 4.6 Million . So Looks like companies CEO and CFO both are involved in wring doing and not to present correct financial number .

KPMG on the other hand agreeing to pay $ 6.2 Mio in penalties to SEC . On further note, KPMG agreed to complete a :

1. Firm wide review and evaluation of Companies policies , procedures and Interim review .
2. Due to lack of expertise in this field , KPMG hire and bear the cost of having Independent consultant , who will review and understand the valuation process of the companies asset ( acquisition ) .
3. Independent consultant to review Internal control system as per Commission regulations and PCAOB standards.
4. KPMG finally certify that they have implemented the recommendation of the consultant and they can certify about the adequacy of internal control

Miler energy trying to bring Lawsuit against KPMG for Malpractices or negligence . I do not think it will be successful because initially KPMG Partner not able to deliver correct audit principle and landed with Error , Omission , misrepresentation of financial number . Auditors not perform his duty and completely mess up with New company asset valuation .

Later on , KPMG appointed Independent consultant to understand companies Internal control system. Review All polices and procedure and validate internal control system suggested by Independent consultant .

Defence by Audit Firm KPMG to counteract the Malpractices

Auditor perform targeted procedure designed to provide reasonable assurance to highlight that Client financial Statements are free from a material Misstatement , where caused by error or Fraud. Financial statement audit is not designed in a manner to completely remove all fraud , internal risk

In this scenario , Auditor must contend with the “ Audit Interference rule” . This rule will help Auditor to defend a malpractice case . In the above case , Auditor can highlight that due to very weak Internal Control system , Client was able to cook / misrepresent Financial number ( like accounted lower cost of raw material) . Due to lower Internal control , Auditor failed to perform his responsibility . As per this rule, both the Auditor and client have important and separate responsibility .