November 20, 2018

How Did Citigroup’s Internal Controls Cut the Mustard with KPMG?

Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methogage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

Actually, just kidding, he ran it by an expert:

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

What Vikram Pandit Knew, and When He Knew It [Jonathan Weil/Bloomberg]

Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methods for subprime mortgage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

Actually, just kidding, he ran it by an expert:

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

What Vikram Pandit Knew, and When He Knew It [Jonathan Weil/Bloomberg]

Related articles

Grant Thornton and the Antichrist

al pacino_devil.jpgIt’s rather mysterious that the New York office of Grant Thornton is located at 666 Third Ave. As I’m sure our more pious readers know, the significance of the 666 is commonly known as “The Number of the Beast“. We won’t get into any more specifics than that other than to mention that it is a pretty creepy-ass looking number.
Is G to the T run by a secret group of Al Pacino-esque figures that are working against the forces of good?
Maybe not but the otherwise boring-assness of that particular lobby is def working too hard to not be noticed…