KPMG slapped with $6.

2m fine over oil company audit errors

Miller Energy Resources had overvalued certain assets by more than 100 times

© Bloomberg

August 15, 2017 6:23 pm by Hannah Murphy

KPMG has been slapped with a fine of more than $6.2m 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 on Tuesday 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
$480m its Alaskan oil wells purchased for less than $5m. The estimate, which the SEC deemed
fraudulent, helped transform a penny stock into a company listed on the New York Stock Exchange.

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 order, 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 $5m
were worth a half-billion dollars.”

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KPMG did not admit or deny the findings but agreed to be censured and pay a $1m penalty as well as
$4.7m in all the audit fees it had received from Miller Energy plus interest costs. The auditor also agreed
to improve its audit quality control, according to the SEC.

“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.

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