KPMG questioned over Wells Fargo Audit

KPMG has been asked to answer for their audits of Wells Fargo. Wells Fargo has been plastered all over the news for their fraudulent sales practices, and now KPMG has to answer for them. Wells Fargo has been a KPMG client for over 85 years. 

They have been called by a group of senators to answer questions. The group of senators asking questions are:

Elizabeth Warren – Democrat Massachusetts (self-described nasty woman)
Bernie Sanders – Independent from Vermont
Mazie K. Hiron – Democrat from Hawaii
Edward J. Markey – Democrat from Massachusetts 

Self-described “Nasty Woman”, Elizabeth Warren, questions KPMG over Wells Fargo audit

The group of senators are especially interested in the audits from 2011 to 2015. From 2011-2015 Wells Fargo was unable to detect fraudulent sales practices by thousands of their employees. Wells Fargo also recently settled with regulators over the creation of millions of fraudulent bank accounts and credit cards. They settled to the tune of $185 million over this fraudulent activity. 

The senators also asked about the effectiveness of the Sarbanes Oxley act and the public company accounting oversight board (PCAOB).

The full list of questions asked by the senators are below. 

Questions for KPMG about Wells Fargo

1) Was KPMG aware of any of the illegal sales practices committed by Wells Fargo employees from 2011-2015 and addressed in the CFPB Settlement?

If yes:

A. DId KPMG communicate this knowledge with top executives at Wells Fargo? If so, please provide electronic or paper copies of any and all communications. 

B. Did KPMG have any internal discussions about Wells Fargo’s illegal sales practices and their potential impact on the company’s financial statements and on the outcome of the annual audits? If so, please provide all electronic or paper documents relating to these discussions.

If no:

A. Please provide a detailed explanation of why KPMG failed to contemporaneously identify or otherwise learn of Wells Fargo’s illegal activity during your audits.

B. Did you assess whether Wells Fargo had controls in place to prevent this illegal activity? What was your assessment about the quality of these controls and how well they were executed?

2) Did any employee of Wells Fargo mislead an employee of KPMG about the extent and impact of the unauthorized account creation addressed in the CFPB settlement during your audits? 

3) Has KPMG conducted any internal reviews, reexaminations or reassessments of its Wells Fargo audits in light of the information revealed in the settlement?

4) Has KPMG faced any disciplinary action or queries from the Public Company Accounting Oversight Board in relation to your audits of Wells Fargo? If so, please provide details on these actions or queries.

5) Based on your present knowledge of the creation of unauthorized accounts at Wells Fargo, does your firm stand by its conclusions from 2011-2015 that “Wells Fargo maintained, in all material respects, effective internal control over financial reporting?”

KPMG has until November 28, 2016, to provide answers to these questions. 

Conclusion

KPMG has a lot of questions to answer and will have to be careful about how they answer. They will want to be careful that they don’t send emails around that differ from the answers they give to congress. There is opportunity to perjure themselves.

They also have to be careful from an optics perspective. If they answer that they did not detect anything, then they will show that they were essentially clueless for the 4 years when this fraud was conducted. 

There has been a lot of scrutiny over the big 4 accounting firms lately. EY has caught a lot of heat from the SEC, and now you have KPMG getting grilled by Elizabeth Warren.

The big 4 accounting firms have to be more diligent in their audits. Even if it is not necessarily within their scope to detect this stuff, it is the public’s expectation that they do. They need to start factoring it into their scoping procedures as well as their fees. 

KPMG looks foolish in this situation which tarnishes their brand. The only way they should be willing to accept that going forward is to be compensated for it. 

Let us know your thoughts in the comments below.