The U.S. Securities and Exchange Commission has suspended two former KPMG accountants for mishandling a 2015 audit of the now defunct College of New Rochelle.
Christopher L. Stanley, 44, of Tarrytown, a KPMG partner, was suspended for three years. Jennifer M. Stewart, 34, of North Hempstead, a senior manager, was suspended for one year. They agreed to the suspensions, according to the SEC, but neither admitted nor denied the findings.
Stanley resigned from KPMG and Stewart”™s employment “ended” in March 2020, according to the SEC.
Stanley and Stewart issued an opinion on the 2015 audit despite many unanswered questions and lack of documentation, according to the SEC, and overstated the college”™s net assets by $33.8 million.
The College of New Rochelle was New York”™s first Catholic college for women when it was founded in 1904. It closed in 2019, three years after financial irregularities were revealed.
The college began experiencing financial difficulties in 2013, as enrollment and tuition revenue declined. Keith Borge, the college”™s controller, began using endowment funds to bridge the gap between revenues and expenses, according to the SEC, resulting in a rapid decrease in net assets.
He also overstated assets and understated liabilities, withheld federal and state payroll taxes, and created false ledger entries.
Stanley was the KPMG partner with overall responsibility for the 2015 audit. Stewart supervised the audit team and was responsible for the day-to-day work.
Almost immediately, according to the SEC, Borge failed to provide information or give accurate information.
He “just makes up numbers from his head,” a team member said in an email to Stewart.
On Nov. 30, 2015, Borge messaged Stewart by email and college President Judith Huntington left a phone message for Stanley. Both said that the college”™s bank needed the audit report that day.
The SEC findings do not identify Huntington by name or mention that she had been a senior manager at KPMG before she was named the college president in 2001.
The audit team had not verified assets and liabilities. About one-third of the work papers had not been reviewed. Evidence to support an audit opinion was insufficient.
Stanley and Stewart quickly reviewed open issues and unanswered questions. They concluded that there was nothing to prevent them from issuing the audit report, according to the SEC.
The report was issued by mid-afternoon with a clean audit opinion, indicating that the financial statements complied with accounting standards.
KPMG continued working on the audit to the end of January 2016. One team member spent two-and-a-half days trying, unsuccessfully, to find missing work papers. A new senior associate assigned to clean up the audit file also could not find work papers or address questions.
Four days before the audit file had to be closed, 39 items were still open and 81 work papers still had to be reviewed. Stewart marked the work papers as reviewed and closed the file on the last day.
“We encountered no significant difficulties in dealing with management in performing our audit,” Stanley stated in a letter to the college audit committee.
The financial statements were posted online, where investors in the college”™s 1999 municipal bond issue could monitor the finances.
A few months later, a KPMG senior associate working on another audit messaged Stewart: “at least they are close to truly done too, and not fake done like the ”¦ CNR audit.”
The Borge fraud was discovered in November 2016 and KPMG withdrew the 2015 audit opinion.
Borge was convicted of securities fraud and failure to pay payroll taxes. He was sentenced to three years in federal prison and is now at a Brooklyn halfway house.
The SEC found that Stanley had not supervised the audit properly or alerted college governance officials to problems.
Stanley and Stewart had failed to get sufficient audit evidence, according to the SEC. They did not prepare proper audit documentation. They did not examine journal entries for evidence of fraud or assess the risk of “material misstatement.” They did not exercise professional care and professional skepticism.
The SEC suspended Stanley and Stewart from appearing before the agency or practicing as accountants on SEC matters, such as publicly disclosed audits.
“The actions as described in the SEC orders do not live up to KPMG standards,” Katy Reddin, the accounting firm’s spokesperson, said in an email. “We are committed to executing quality audits, while continuing to foster a culture of integrity.”
“The possibility of a material misstatement due to fraud always exists,” the SEC says in its findings. “Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may include possible misstatement due to fraud or error, and a critical assessment of audit evidence.”
