KPMG, LLP v. Securities and Exchange Commission

KPMG (plaintiff) entered an arrangement letting KPMG Baymark use its name and providing loans to Baymark's principals in exchange for a cut of Baymark's net income. Despite an SEC warning not to provide audit services to Baymark's clients, a KPMG partner introduced Baymark to audit client PORTA, which then hired a Baymark principal as its chief operating officer under a compensation deal including a success fee tied to accounting practices and profits. After internal KPMG discussions about whether this arrangement violated auditor-independence rules, KPMG's head of professional practices and the SEC's chief accountant agreed on steps to fix the independence problem, but the SEC accountant was never told about the success fee, and a KPMG manager misrepresented the SEC's awareness of the situation so the PORTA audit could proceed. KPMG didn't follow the agreed steps and certified PORTA's 1995 financial statements anyway. The SEC issued a cease-and-desist order finding negligent violations of securities laws, and KPMG challenged the negligence standard as unconstitutionally vague.