KPMG and the Pain That Comes of Breached Trust Trust can be breached - even on the golf course. The disclosure by the global accounting firm KPMG that one of its partners, Scott I. London, revealed confidential information about its clients Herbalife and Skechers that was used by a friend to trade their shares shows how much we rely on trust to prevent violations - and how easily it can be violated. The case is noteworthy not so much for the amounts involved, which may turn out to be fairly modest. Rather, it is the apparent casualness with which Mr. London revealed important information to a golfing buddy. One can almost imagine them at the club trading lines from "Caddyshack" while sharing tidbits about corporate clients. As DealBook reported, the Securities and Exchange Commission and Justice Department are investigating trading based on information Mr. London provided to an unidentified associate. According to The Wall Street Journal, the friend provided Mr. London with a discount on a watch, a few dinners and occasional cash payments of $1,000 to $2,000 in return for the confidential information. Those trivial amounts will end an accounting career of nearly 30 years and could result in significant costs to KPMG. Mr. London said his heart sank when he realized his friend was trading on the information. He added: "We had discussions this wasn't right - I knew it was wrong - but it just happened." In what sounds like an attempt to mitigate his own culpability, Mr. London explained that he disclosed "no real significant information." No cases have been filed yet providing details about any profits from the trading. That will be the best indicator of the significance of the information in Mr. London's disclosures. But even if his revelations only played a small role in the investment decisions, they still violated federal securities laws. Illegal insider trading does not require proof of gains. The penalties that will be imposed on Mr. London will be far greater than any gifts he received from his friend. There is a good chance that criminal charges will be filed because of Mr. London's prominent position as KPMG's lead audit partner for Herbalife and Skechers. Prosecutors will want to send a message that any improper disclosure of client information will be punished. The potential sentence from a criminal prosecution will depend in large part on the amount of any gains or losses avoided by the friend. Mr. London's cooperation will certainly be helpful, and may allow him to avoid prison if the trading resulted in only small gains. But if the benefits were worth more than $200,000, then federal sentencing guidelines would recommend a prison term of about a year, and higher as the dollar figure grows. The S.E.C. can be expected to file civil charges, and the usual price for a settlement is a penalty equal to the benefits derived from the trading activity, plus disgorgement of any profits or benefits received. Even though Mr. London does not appear to have traded for his own benefit, under the law, he is responsible for any profits of his tippee and will have to pay the price. In addition, the S.E.C. will probably pursue an administrative action against Mr. London to bar him from acting as an auditor for any publicly traded company in the future. That would effectively prevent him from working as an accountant because no firm would dare hire him. KPMG can also expect to pay significant costs as a result of Mr. London's conduct, even though the firm withdrew its opinions on the financial statements of Herbalife and Skechers. The two companies will now have to retain new auditors, and they may ask KPMG to bear those costs because the firm breached its fiduciary obligation to maintain the secrecy of client information. It is unlikely that KPMG wants to get into a public fight with Herbalife and Skechers, which would only add to its present embarrassment, so the firm is likely to do whatever is necessary to put this incident behind it. The case could also prove to be especially problematic for Herbalife because of claims by the hedge fund investor William A. Ackman that the company was "inherently fraudulent." Its new auditor will want to tread carefully in reviewing the company's financial statements and internal controls, meaning that the costs for its audits could be significantly higher. KPMG may also face additional scrutiny from the S.E.C. and the Public Company Accounting Oversight Board, the primary regulator of accountants. While it appears that Mr. London acted on his own by divulging confidential client information, questions may be raised about the type of training and controls KPMG has in place to prevent this type of disclosure. It may well turn out that Mr. London's tipping was an aberration. One of the obligations of outside accountants is to assess a client's internal controls, including measures to prevent and detect misconduct by employees. As anyone who deals with corporate compliance will tell you, there is no perfect system and that it is ultimately a matter of trusting your people to comply with the rules. As the lead audit partner for public companies, Mr. London knew the requirements for maintaining confidential information as well as anyone, yet he appears to have simply decided to ignore the prohibition on insider trading. This was no momentary lapse in judgment either, but appears to have been systematic, notwithstanding his attempt to justify it as something that was not really wrong because the information was insignificant - at least in his mind. Mr. London is likely to become well-known in university accounting programs for what not to do as an auditor, a lesson in how anyone can commit a crime when they betray a trust.