SEC Charges Accountants as Financial Crisis Perpetrators.  Public Says It Wants Accountable Wall Street Bankers - Not Accountants!

In this case, the SEC charges senior members of the KPMG audit team with, among other things, failing to conduct adequate audit procedures that, had they been done correctly, may have detected or prevented misrepresentations by several high ranking bank executives that effectively hid the worsening condition of the bank's loan portfolio

For further details on the SEC's case against the former bank executives, go to:   "Financial Crisis Violations Charged Against Former Bank Execs – SEC."

[ by Howard Haykin ]

In the SEC's latest attempt to bring to justice individuals who had a hand in causing the 2007-2008 financial crisis, two auditors with the KPMG firm have been charged for their roles in a failed audit of a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

SEC Findings and Allegations of Charges.   KPMG partner John Aesoph and senior manager Darren Bennett allegedly failed to appropriately scrutinize management’s estimates of the TierOne allowance for loan and lease losses - aka "ALLL".  Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit, yet Aesoph and Bennett failed to obtain sufficient evidence supporting management’s estimates of fair value of the collateral underlying the bank’s troubled loans.

According to the SEC, the auditors relied on stale information and management’s representations, and further failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the bank’s internal controls over its financial reporting. 

“Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans.  Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations.”  -  Robert Khuzami, SEC Enforcement Director.

The SEC found that the internal controls identified and tested by the auditing engagement team did not effectively test management’s use of stale and inadequate appraisals to value the collateral underlying the bank’s troubled loan portfolio.

• the auditors identified TierOne’s Asset Classification Committee as a key ALLL control.
• the audit workpapers had no reference to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment.
• The committee did not generate or review written documentation to support management’s assumptions.
• Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.

Going Forward.   A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and what, if any, remedial sanctions are appropriate pursuant to Rule 102(e). The administrative law judge will issue an initial decision no later than 300 days from the date of service of the order.

For further details, go to:   [ SEC PR 13-2, 1/9/13 ]      [ SEC Administrative Proceeding ]    [  SEC PR 12-198, 9/25/12 ].