KPMG fined after allowing oil firm overvalue assets by 100 times

KPMG has been fined more than $6.2 million by the US Securities and Exchanges Commission after it signed off the audit of an oil and gas company that had overvalued certain assets by more than 100 times.

The SEC said yesterday that shortcomings in KPMG's audit of Miller Energy Resources, a Tennessee-based oil and gas company, meant investors were "misinformed about the energy company's value".

KPMG was hired as an external auditor for Miller Energy in 2011 and gave a positive “unqualified” report – despite the fact the company had “grossly overstated” how much some of its oil and gas assets were worth, the SEC said.

The announcement follows an SEC investigation of Miller Energy that found the company had valued at $480 million (€409m) its Alaskan oil wells purchased for less than $5 million. The estimate, which the SEC deemed fraudulent, helped transform a penny stock into a company listed on the New York Stock Exchange.

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The SEC last year settled accounting fraud charges with the chief executive of Miller Energy Resources’ Alaskan subsidiary, the company’s chief financial officer and its external accountant.

The KPMG case is part of an international push to improve the quality of external audits. The "big four" accountancy firms – KPMG, EY, PwC and Deloitte – have all been hit by accounting scandals in the past 12 months.

According to the SEC, KPMG did not fully assess the risks of taking on Miller Energy as a client and did not adequately staff the audit. Their audit failed to take into account the overvaluation of the Alaskan wells and to detect that certain fixed assets were counted twice in the company’s valuation, it said.

"Auditing firms must fully comprehend the industries of their clients," said Walter E Jospin, director of the SEC's Atlanta Regional Office. "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."

KPMG did not admit or deny the findings but agreed to be censured and pay a $1 million penalty as well as $4.7 million in all the audit fees it had received from Miller Energy plus interest costs. The auditor also agreed to improve its audit quality control. “This matter is related to audit work performed in 2011,” KPMG said, adding that the firm was “committed to the highest standards of professionalism, integrity and quality, and we have fully co-operated with our regulators to reach a resolution”.

John Riordan, the KPMG partner who was in charge of auditing Miller Energy, also agreed to settle charges against him, the SEC said.

- (Copyright The Financial Times Limited 2017)