Elizabeth Warren KPMG

Elizabeth Warren berates KPMG

As you may recall Elizabeth Warren and Edward Markey have previously written to KPMG to figure out why they did not uncover the Wells Fargo fraud earlier. Well Elizabeth Warren and Ed Markey received that response in November and now they want the PCAOB to investigate what happened.

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KPMG response to Elizabeth Warren

This is most likely because Wells Fargo easily ratified KPMG as their independent auditor as part of their annual proxy process in 2017. Elizabeth Warren was hoping that Wells Fargo would fire KPMG similar to what they did to their CEO. Now that they have not fired KPMG she is out for her pound of flesh.

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The reason that Warren and others have questioned this is because Wells Fargo committed tons of fraud for years by setting up fake accounts for their clients.

What resulted is that the Consumer Financial Protection Bureau fined Wells Fargo $100 million for creating 1.5 million deposit accounts and over 500,000 credit card accounts. These accounts were not authorized by the customers.

What KPMG contends in their response is that they were aware of  matter, but that they were able to get comfortable that it did not materially impact the financial statements or the controls over those financial statements.

I’m not too sure how KPMG reached that conclusion because $100 million is a pretty significant financial impact to me. Additionally, there is no way that KPMG could have known that the amount would have only been $100 million.

KPMG has handled this whole thing poorly. There is no doubt that they should have done more when they figured this out. They should have also resigned just for branding purposes. This account is too high risk if you have executives involved in a scheme to defraud customers. How can you say that the controls over the financial statements are still there.

Lynne Doughtie who is the KPMG US is the one who repsonded to Elizabeth Warren on behalf of KPMG. I don’t blame Lynne for the way she responded because she is just in an accountant’s mindframe. Sometimes these big 4 accountants just get tunnel vision and only see the checklists and the templates for their audit programs. If you come away from everything that Wells Fargo did during this timeframe thinking that you are all good from a controls perspective, you are just living in another world.

This is exactly what Sarbanes Oxley was meant to prevent. It was meant to prevent misconduct by executives and prevent their big 4 auditors from just sitting on the sidelines. It is obvious to see that there is still a conflict of interest here. It is obvious that KPMG doesn’t want to lose the account because it is one of their biggest clients of the firm. It would be a material impact to their financial statements to lose Wells Fargo as a client.

KPMG has filed their response, and Elizabeth Warren is not satisfied. Now the PCAOB is on the clock. Let’s see what their responses are to Elizabeth Warren’s Letter. They have to answer the following questions.

  • Has the PCAOB  conducted  any review  of KPMG’ s conclusions  with regard  to its conclusions  about Wells  Fargo’s  financial  reporting  from 2011-2015?    If so, what were the findings of these reviews?
  • In response to the Wells Fargo crisis, has the PCAOB established any updated rules or guidance to help auditors determine whether actions undertaken by employees of public companies result in incorrect financial reporting or undermine the integrity of financial reporting?
  • In the case of Wells Fargo, KPMG indicated that the size of the fraudulent accounts or the fines imposed by the CFPB and other regulators for the fraudulent accounts was the sole factor affecting the integrity of financial reporting. KPMG ignored factors such as the impact of the fraud on the company’s stock price, the reputational harm to the firm, and the flawed corporate structure that the independent board members identified as a root cause of the scandal. Were these decisions by KPMG appropriate and consistent with PCAOB rules and guidance?
  • KPMG did not publicly report the widespread fraud, despite now acknowledging that its auditors were aware of it prior to the 2016 settlement. Do PCAOB rules or guidance indicate whether auditors have a responsibility to publicly report or otherwise act on their knowledge of illegal or inappropriate activity by their clients?