The U.S. Securities & Exchange Commission has settled with the Canadian arm of KPMG LLP (KPMG Canada) and two of the firm’s partners for acting as an issuer’s auditor without sufficient independence, by both preparing a firm’s books and then auditing its own work.

The SEC found that KPMG Canada, and partners Gary Bentham and John Gordon, lacked independence when they audited the financial statements of Southwestern Water Exploration Co., a now-bankrupt Colorado corporation, between 1999 and 2002.

KPMG Canada provided bookkeeping services to Southwestern and then audited its own work. Bentham was the audit engagement partner, and Gordon, the concurring and SEC reviewing partner.

Specifically, after KPMG Canada prepared certain of Southwestern’s basic accounting records and financial statements, it issued purportedly independent audit reports on those financial statements. KPMG Canada’s audit reports were included in Southwestern’s annual reports that were filed with the commission.

The SEC found that KPMG Canada, Bentham and Gordon engaged in “improper professional conduct” by virtue of their violations of the auditor independence requirements imposed by the commission’s rules and guidance and by generally accepted auditing standards in the U.S.

The SEC’s order censures KPMG Canada. The firm agreed to a number of remedial undertakings, including adopting and implementing new auditor independence policies and procedures; and disgorging the fees it earned in the case ($73,682 which represents its fees from the audit and bookkeeping services plus prejudgment interest).

KPMG Canada consented to the order, without admitting or denying the commission’s findings. In determining to accept KPMG Canada’s offer of settlement, the SEC says it considered the fact that the firm took prompt remedial acts, it cooperated with the SEC staff, and made certain other undertakings.

In a statement, KPMG Canada notes that it cooperated with the SEC in this matter and has accepted responsibility for its breach of SEC auditor independence requirements. KPMG Canada said the undertakings concerning its independence monitoring procedures, “are completely consistent with the firm’s commitment to the continuing improvement of audit quality”.

Commenting on the Southwestern Water issue, Bill MacKinnon, CEO of KPMG LLP (Canada) stated “This situation underlines the critical importance of focusing on quality, which is the top priority of everyone in KPMG.”

Bentham and Gordon also agreed to settle the case, again without admitting or denying the commission’s findings. The order bans Bentham from practicing before the commission as an accountant, with a right to apply to resume appearing or practicing before the Commission in two years. It denies Gordon the privilege of appearing or practicing before the commission as an accountant for nine months.