KPMG has agreed to pay more than $6,2 million to settle charges for failing to properly assess the risks associated with accepting Miller Energy Resources, an oil and gas company based in Knoxville, Tennessee, as a client as well as failing to properly audit the financial statements.
According to the Securities and Exchange Commission (SEC), KPMG failed to detect that some fixed assets were double-counted in the company’s valuation and didn’t properly staff the audit. Miller was charged with accounting fraud in 2015 and settled the charges in January 2016. The KPMG engagement partner who was in charge of auditing Miller Energy, John Riordan, also agreed to settle charges against him, according to the SEC.
Miller Energy hired KPMG as its outside auditing firm in 2011 and issued an unqualified audit report, even though the company had overstated the values by more than $400 million of some oil and gas assets it had bought in Alaska in late 2009. The Alaska assets included leases covering 602,000 acres of mostly unproven exploratory oil and gas prospects, along with five operating oil and gas wells on two of the fields, two major facilities, and an offshore platform. The company originally estimated the Alaska assets at $4,5 million, but later reported them to be $480 million in its fiscal year 2010 financial statements. The inflated valuation boosted Miller’s net income and total assets and turned a penny-stock company into one that eventually traded on the New York Stock Exchange, where its stock zoomed to nearly $9 per share in 2013.
According to the SEC, KPMG and Riordan didn’t sufficiently consider and address some of the known facts that should have raised serious doubts about the company’s valuation of the Alaska assets.
“Auditing firms must fully comprehend the industries of their clients,” said Walter E. Jospin, director of the SEC’s Atlanta Regional Office, in a statement. “KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars.”
The firm said it has resolved the issue. “This matter is related to audit work performed in 2011,” said KPMG spokesman Manuel Goncalves in an email to Accounting Today. “KPMG is committed to the highest standards of professionalism, integrity and quality, and we have fully cooperated with our regulators to reach a resolution.”
Without admitting or denying the findings, KPMG agreed to be censured by the SEC and to pay $4,675,680 in disgorgement of all the audit fees it received from Miller Energy, along with $558,319 in interest and a $1 million penalty. KPMG also agreed to improve its quality control system.
Riordan also didn’t admit or deny the SEC’s findings, but he agreed to pay a $25,000 penalty and be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.