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Compliance Week: KPMG Fires Engagement Partner Fingered in Insider Trading Scandal

Tammy Whitehouse

Officials at KPMG and Skechers USA Inc. have fingered Scott London as the engagement audit partner at the center of an insider trading scandal that has put two companies in a scramble to find a new audit firm and has rocked the highest ranks of the audit profession.

Skechers and Herbalife Ltd. said KPMG resigned as their audit firm and withdrew several years’ financial statements after KPMG learned the head of its Los Angeles audit practice was accused of insider trading. KPMG said in a statement the partner “was separated immediately.” Skechers said it learned from KPMG that the audit partner is under federal investigation for providing information in exchange for money, although no investigative agency so far has verified its involvement.

David Weinberg, chief operating officer and chief financial officer for footwear company Skechers, said in a statement he believes there are no misstatements in the company’s previously published results, but the company is working to replace KPMG as quickly as possible as it prepares for its first quarter 2013 earnings release. He expects the company to issue positive results later in April, he said, but in the meantime the company needs to secure fresh audits for its 2011 and 2012 financial statements because KPMG’s independence is tainted by the allegations.

Herbalife also said it believes its financial statements are sound, but it too must secure new audits for its 2010, 2011, and 2012 financial statements. The timing couldn’t be worse for the nutrition products company as it fends off hedge fund allegations of accounting impropriety. The company said KPMG resigned “due solely to the impairment of KPMG’s independent resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.” Skechers included an identical statement it its announcement of KPMG’s resignation.

KPMG didn’t initially name London as the accused audit partner, but a spokesman later confirmed the identity. KPMG’s statement said the partner in charge of its Los Angles audit business was involved in “providing non-public client information” to a third party, who used it to trade in stocks involving “several West Coast companies.” A KPMG spokesman would not discuss whether London was involved in other audits beyond Skechers or Herbalife.

Robert Rostan, a former Deloitte auditor now an accounting instructor at education firm Training The Street, says it’s plausible London was involved in more than two audits. “It’s common for an engagement partner to be the engagement partner for two, three, even four accounts,” he says. Such a partner might also oversee audits for some number of private companies as well, he says.

Rostan believes criminal authorities are likely leading any investigation, but the Securities and Exchange Commission and the Public Company Accounting Oversight Board might well follow with civil or disciplinary actions involving the firm as well. Neither regulator has commented so far.