Accounting firm KPMG LLP and one of its Atlanta-based partners agreed to pay more than $6 million in penalties to settle allegations that a flawed audit allowed a Tennessee oil company to defraud investors.
The U.S. Securities and Exchange Commission’s Atlanta office, which investigated the case, said KPMG’s audit failed to catch assets that were over-valued by nearly a half-billion dollars.
KPMG and the partner in charge of the audit, John Riordan, did not admit or deny the allegations.
KPMG agreed to pay almost $4.7 million to disgorge audit fees it had received from Miller Energy, plus a $1 million fine and $558,319 in interest.
Riordan, 52, agreed to pay a $25,000 penalty and to be suspended for at least two years from any audits of publicly-traded companies.
“Auditing firms must fully comprehend the industries of their clients,” said Walter E. Jospin, director of the SEC’s Atlanta 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.”
This is the second recent case from Atlanta SEC office’s probe of alleged fraud against investors by companies involved in the oil and gas industry.
According to an earlier settlement of an SEC complaint against Miller Energy, that company bought oil and gas assets in Alaska during a bankruptcy court proceeding in 2009 for about $4.25 million in cash and assumed debt.
But later, Miller reported to investors that the assets were worth $480 million, allowing the company to report a $277 million “bargain purchase” gain.
The improper accounting allowed the company to artificially boost its reported profits to $272 million after the purchase, according to the SEC. For the seven years before that, Miller Energy reported losses, according to the SEC.
KPMG became Miller Energy’s auditor a year after it acquired the assets and issued a clean audit report on the company, known as an unqualified opinion.
But as the new auditor, KPMG failed to meet proper professional standards in checking the companies’ books and reported asset values, the SEC said.
The oversights included an instance where the company double-counted $110 million in assets, the SEC said, which also helped boost its reported profits.
Another oversight, the SEC said, included failing to catch the company’s improper use of asset value and expense figures in a petroleum engineer’s report.
Miller Energy’s stock soared more than 1,000 percent over the next three years after the Alaska purchase, but later collapsed. The company filed bankruptcy in 2015, according to the SEC.
Miller Energy later agreed to pay a $5 million penalty to settle civil fraud charges brought by the SEC in 2015.
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