• Big 4

    Elizabeth Warren Has Questions for KPMG Re: Wells Fargo

    By | October 27, 2016

    Last month we wondered aloud if KPMG would get dragged into this Wells Fargo kerfuffle. It took awhile, but it appears that Massachusetts Senator Elizabeth Warren has some fire leftover from her roasting of former Wells Fargo CEO John Stumpf for the bank's auditor, KPMG:

    Warren, along with fellow Democrats Sen. Bernie Sanders of Vermont, Sen. Mazie Hirono of Hawaii, and Sen. Edward Markey of Massachusetts, wrote KPMG CEO and Chairman Lynn Doughtie to raise questions about the firm’s failure to identify the millions of dollars in unauthorized bank, credit and debit card account openings that occurred while it audited the bank’s financial statements from between 2011 and 2015.

    Warren and et al. are curious as to why "none of KPMG’s audits identified any concerns with illegal behavior" and how WF "maintained … effective internal control over financial reporting" when they received a clean audit opinion. Oh, and they pile this on for good measure:

    [Y]our firm’s failure to identify the illegal behavior at Wells Fargo raises questions about the quality of your audits and the effectiveness of the implementation of these Sarbanes-Oxley requirements by the Public Company Accounting Oversight Board.

    KPMG has until November 28th to respond to the letter. After that? Who knows! Maybe a hearing. Gosh, that'd be fun.

    [MarketWatch, Letter]

    Image: Wikipedia/Official portrait

    • Reasonable Assurance

      showing she has no idea what auditing even is. Windbag.

      Does she even understand materiality? I’m assuming planning materiality in Wells is in the hundreds of millions, if not exceeding a billion.

      • dumpus

        One of the most basic internal control steps that a retail financial institution takes is to implement a system to provide assurance that all new accounts are “papered”, or substantiated by appropriate documentation. Failure to do so is a violation of a small handful of various Patriot Act, FINRA 3310, FDIC, SIPC, and SEC rules, depending on the nature of the account. In all likelihood, KPMG’s assumption of “Have all new customer accounts been authorized and supported by the appropriate documentation?” being answered with a “Yes” was as certain as the sun coming up the next morning, and they simply glossed over it because a “No” answer would have been fundamentally beyond comprehension.

        As for the question of materiality, this kinda strikes right at the heart of GAAP vs non-GAAP reporting. Does the CEO stepping up on a dias and announcing to the world that new customer account openings are up 35% year over year constitute a GAAP disclosure? No. Do investors generally care? No. An argument can be had that new account opening rates are perhaps one of the most publicly significant leading indicators of financial health and future earnings that a bank can disclose. Would any accounting firm be comfortable with a client disclosing that amount, knowing full well what impact that disclosure has on stock valuation, without being certain that the internal control structure governing that business activity isn’t functioning? My answer is no.

        My guess is that, from an internal control standpoint, KMPG thought that new account validity was a foregone conclusion and of low financial statement materiality. And I would agree in the abstract. But ultimately it wasn’t a foregone conclusion, and shareholders placed a much higher value on that metric than KPMG did. Best/worst of all, WF management knew it too, or else they wouldn’t have been pedaling that metric to the investors every opportunity they had.

        • McValue Meal Audit

          in relation to your last paragraph, add in the fact that the average age of the people doing the testing was probably around 25, doesn’t help!

        • Reasonable Assurance

          Does this non compliance with laws and regulations result in a material misstatement?

          If not, how is this KPMG’s fault?

          • FormerBig4

            At a minimum they recognized revenue improperly, and incurred some significant liabilities that were unrecognized. Remains to be seen the materiality of these amounts, but I can 100% guarantee you that KPMG would not have issued an unmodified opinion had they known about the fraud nor would they have been able to rely upon a representation letter signed by the CEO had they known.

            There are a hell of a lot more audit and financial reporting implications and your comment is very short sighted and indicative of a lot of the problems in the auditing profession (no offense).

            • Reasonable Assurance

              They didn’t detect it, and it’s immaterial, what are they suppose to do?

              The auditor is expressing an opinion with reasonable assurance not absolute as others have mentioned above. I fail to see how KPMG is liable. That’s a dangerous precedent.

            • FormerBig4

              I don’t know the amounts involved so I can’t say if its quantitatively material, but I’d wager a lot of money that it’s qualitatively material (materiality isn’t just a quantitative number).

              Would the knowledge of what Wells Fargo was doing have changed an investor’s decision? Would it have changed an action taken by their regulator? Would it have changed how their customers thought about doing business with them? If the answer is yes, then it’s potentially qualitatively material.

            • Bill Dickman

              Is it qualitatively material to an investor if an international company is found to have verbal side agreements with government officials in China, in violation of FCPA rules? Is it qualitatively material if the CEO is sending nudie text messages? Yes it is.

              Is it the responsibility of the auditor to give absolute assurance that they will find both of these things? No it is not. The assurance given is reasonable and it only relates to the financial statements and controls over FINANCIAL REPORTING not over bad operational or personal decisions.

              FormerBig4, you need to re-read the auditing standards and the standard PCAOB opinion.

            • FormerBig4

              You’re joking right? A violation of the FCPA is absolutely material. Hell SOX is based upon the foundations found in the FCPA.

              But in any event,
              how the hell someone doesn’t think controls over the establishment of new accounts isn’t relevant to an audit is beyond me. I guess since they didn’t look at it last year and staff just SALY, it must be reasonable.

            • Big4Veteran

              Also, the CEO was testifying about it on Capitol Hill. That usually doesn’t happen unless something gets royally (i.e. materially) fucked up.

            • Bill Dickman

              The CEO of the Epi-pen company has testified before Congress. Does that mean the auditor of his company fucked up?
              What about Samsung’s auditors? Did they fuck up because they failed to detect and report a design flaw in the Galaxy 7?
              Remember what the scope of an audit is, and what it is not. Everything that is material to investors is not within the scope of an audit. Perhaps in this particular case it was, but then again perhaps it was not. I don’t know and neither do you.

            • Bill Dickman

              If you read my post carefully instead of the way you want to interpret it, I refer to ‘verbal side agreements’. Can you think of an audit procedure that is guaranteed to find those? Of course you cannot. My point is that just because something is QUALITATIVELY material to investors doesn’t mean that it is covered by the scope of an audit. If you truly are former Big 4 and got past the associate level you would know that. Companies make bad business decisions all the time but that is not within the scope of an audit unless it affects the financial statements or the internal control over those financial statements.

              I know nothing of the details of this particular case, and neither do you. But your presumption that if something is material to investors, then the auditors should have caught it is pure ignorance.

            • FormerBig4

              I can’t think of an audit procedure that is 100% guaranteed to find anything, but that doesn’t mean you don’t design procedures to try to detect them. Searching for side agreements, whether written or verbal, is core audit procedure, especially when a company has foreign operations. Every audit I participated in had procedures to look for side agreements. We even found some every now and then (imagine that).

              You clearly don’t have a good understanding of audit theory, so keep believing what you want to believe and keep missing the forest for the trees.

            • Bill Dickman

              So you know for certain that KPMG didn’t perform procedures in this area? Please come forth with your evidence. And still waiting for you to tell me what procedure will uncover verbal side agreements. Key word ‘verbal’.

              You are missing the point here – just because something is material to investors does not mean it is covered by audit procedures. Such procedures are designed to have a reasonable possibility of catching material errors – key words ‘reasonable’ and ‘material’. To imply that KPMG did something wrong as you have implied is ignorant since you have no knowledge of the facts, including whether the numbers involved were material to the financial statements. Read the audit opinion – it includes the word material right there for all to read and for most to presumably understand.

            • Big4Veteran

              If it was immaterial, then why is there a big scandal?

            • Reasonable Assurance

              Because anytime there’s a fraud, it gets coverage… a lot of coverage. I’m not defending the fraud, merely the accountant, who wasn’t apart of it.

            • Adam Hill

              Your second favorite woman in politics wants to hang onto her 15 minutes a little longer.

            • Sammy K

              Tssk tssk tssk, there is no materiality for fraud….

            • cpanum31

              I agree that the presence of fraud throws the materiality defense out the window.
              I agree with those familiar of how the Committees of the U.S. Senate work, that this could turn into something very serious for PWC.
              But, I think the odds are 9 to 1 against it going any further.

          • Big4Veteran

            Fraud inquiries with upper management…

            KPMG Senior: “Are you aware of any non-compliance with laws and regulations?”

            WF Executive: “Nothing material.”

            KPMG Senior: “Cool.”

            • Reasonable Assurance

              Lol, did the CFO, CAO, Legal department know about this? If so, they rep to providing all information and accurately answering the auditors.

              If they misled the auditors, how is that the auditors fault? We aren’t providing absolute assurance.

            • Your mother

              Pretty sure those inquiries are required to be performed by a senior manager or above.

            • Adam Hill

              Oh, you mean a senior with a few more years experience?

            • Your mother

              No. I meant what I said. If you want to say that senior managers haven’t developed a skill set that would set them apart from seniors to be able to do those types of inquiries, you’re entitled to that opinion. But you sound like an immature, pissed off staff or a senior accountant in industry that doesn’t understand why other people’s experiences actually mean something. Dick.

            • Adam Hill

              You must be new here. Yes, I am a dick. A dick that tries to put things in perspective. I said a few more years b/c it only took me that long to get there from senior, champ. You will realize (well, maybe not) that there are two positions in public accounting. Partner and non-partner. Good luck trying to get to the former…………

              – Dick

            • Adam Hill

              Oh shit………I just saw that you started this game in 2001. Sorry dude.

      • Sammy K

        It’s very difficult for a Harvard law professor to understand materiality.

        hahaha, thanks for the laugh.

        • Reasonable Assurance

          First year? Intern?

          • AaronBalake

            Roasted. lol

          • Sammy K

            LOL. Seriously? It’s not me who is claiming some materiality threshold to fraud. Possibly you should study up on the CPA exam a bit more before you take your test.

      • FormerBig4

        I just looked at the November 10-Q filing for Wells Fargo and low and behold they have a pretty robust disclosure about this very item in the first footnote. Seems like if it wasn’t material or relevant to financial reporting, they wouldn’t have disclosed it.

      • cpanum31

        The Auditor’s concept of “materiality” is not relevant to the “case” she is arguing against the people she is against. So, as a lawyer it is not in the prosecutor sense and it to be ignored and any Accountant bringing it up is to be attacked in the manner a lawyer is apt to do.

        I always found lawyers to be more intelligent than us accountants (and later found it backed up by I.Q. tests) so early on I figured the guy across the table was trying to manipulate us. Politicians I found to be even worse.

        YMMV

      • Tad Taxation

        I’d love to be the person to tell Elizabeth Warren to put her Auditor hat on!

    • SFguy

      Reasonable, but NOT absolute assurance. Maybe she should have read the opinion first.

    • Corporate Liaison

      if its about KPMG and malfeasance Im all for it. Cry Havoc and let slip the dogs of war!

      • keepin_it_real

        Sterling Archer: Cry havoc and let slip the hogs of war.
        Lana Kane: Dogs… of war.
        Sterling Archer: Whatever farm animal of war, Lana! Shut up!

    • IFRS Experts

      Customer accounts are not only limited to profitability, they impact capital adequacy and liquidity. Issuing credit lines has an impact on risk weighted assets. How does that satisfy reasonable assurance of material misstatement when investor metrics on profitability, capital adequacy and liquidity are being impacted?

      • Big4Veteran

        I could give you a better answer if you tell me KPMG’s audit fees.

        • IFRS Experts

          I am sure you could. Arent audit fees supposed to be disclosed in the Proxy statement which is typically filed with the SEC and publicly available?

        • Basis Adjustment

          presumably low? isn’t that KPMG’s forte?

        • Shockwave1111

          2015

          Audit Fees (1) $39,136,000
          Audit-Related Fees (2) 4,627,000
          Tax Fees (3) 4,538,000
          All Other Fees (4) 999,000
          Total $49,300,000

          Give us the better answer!

    • Big4Veteran

      I agree with Warren. The PCAOB is a disaster.

      • cpanum31

        Possibly.
        As with all of these things, it was a compromise.
        But the alternatives that some of the people in government wanted are much worse.

    • SouthernCPA

      I’m not an auditor, thank god.

      Should the new account process have been tested in a financial statement audit? Seems like if it was, this would have been found.

      However, i don’t know if that should be part of the financial statement audit. Seems to me this is more of an operational audit / internal audit issue.

    • Chase

      Sounds like a witch hunt. It’s no secret that Elizabeth “Fauxcahontas” Warren hates banks. She is looking to drag accounting firms into this scandal so she can justify enacting more regulations regarding banking and the auditing of financial institutions.