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June 20, 2018, 1:30 p.m. EDT · CORRECTED

The auditor of Citi, Credit Suisse and Deutsche Bank was tipped off before regulatory inspection

Court filings: KPMG employees would receive bonuses if their engagements received no comments from inspectors

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By Francine McKenna, MarketWatch

Fixes story to reflect that Air Products and Chemical /zigman2/quotes/201523430/composite APD +1.81%   was not one of the issuers involved.


Reuters
Former KPMG executives are on trial for obtaining confidential information about audit inspections.

The auditor of some of the world’s largest banks including Citigroup, Credit Suisse and Deutsche Bank was tipped off before a regulator inspected them.

It’s been previously reported that KPMG executives were able to extract from the regulator, the Public Company Accounting Oversight Board, confidential information ahead of inspections, and use that information to correct their work and at least in one instance, withdrawn an opinion. But MarketWatch now has court documents that, for the first time, names the audit clients caught up in the scandal.

The Justice Department in January brought criminal charges against five former KPMG executives and one former regulator for allegedly taking advantage of advance notice of regulator inspections. Court filings made June 8 by lawyers for two of the KPMG partner defendants spells out the audit clients caught up in the scandal. They’re mostly financial companies: Citigroup /zigman2/quotes/207741460/composite C 0.00%  , Credit Suisse /zigman2/quotes/202835784/composite CS +3.50%  , Deutsche Bank /zigman2/quotes/203042512/composite DB +2.41%  , Banc of California /zigman2/quotes/201417262/composite BANC +1.00%  , BBVA /zigman2/quotes/204078760/composite BBVA -0.32%  , Chemical Financial Corp. , Ambac /zigman2/quotes/204260791/composite AMBC -0.57%  , Phoenix Life, and NewStar Financial as well as C&J Energy Services.

Neither the Justice Department nor the Securities and Exchange Commission, who filed similar charges in a civil cases, have ever identified the KPMG clients.

It should be stressed that there’s no indication that any of these banks or companies were aware of the tip off, and typically, they would have little to no involvement in auditor inspections. None of the issuers have announced a restatement of financials since the Jan. 6. indictment. KPMG, the auditor, has not been accused of wrongdoing.

The SEC moreover said in January that the KPMG audits of these companies should continue to be relied upon.

After the charges were filed in January, SEC Chairman Jay Clayton issued a statement intended to assuage fears that KPMG audits may have to be withdrawn based on the illegal early warnings about inspections.

“Based on discussions with the SEC staff,” Clayton wrote on Jan. 22, “I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.”

A spokesman for KPMG provided the following statement to MarketWatch via email:

“It is important to note that the inexcusable actions of the individuals who were separated from KPMG over a year ago were designed to subvert the PCAOB’s inspection process, and had no effect whatsoever on any of the firm’s audit opinions or clients’ financial statements. Our commitment to audit quality and integrity remains unwavering. In addition, we have taken steps to reinforce our values and culture, and to enhance our governance.”

The firm has said it promptly notified authorities when it discovered the issue in 2017 and has been fully cooperating with the government.

The Department of Justice, the SEC and the PCAOB each declined comment.

Corporate governance expert Nell Minow, the vice chair of ValueEdge Advisors, said investors shouldn’t be satisfied with the SEC’s statement. “The breadth and seriousness of the charges and the importance to the financial markets of the companies affected should require a through internal investigation with results made public. If the SEC or KPMG do not insist on it, investors and clients should.”

Lynn Turner, a former chief accountant for the SEC, was even more emphatic. “I believe Chairman Clayton misled investors when he said they could rely on the audits report issued by KPMG,” Turner told MarketWatch. “In my opinion, the information that has come to light raises a serious question with respect to the integrity, objectivity and professionalism of the audits.”

/zigman2/quotes/201523430/composite
US : U.S.: NYSE
$ 286.69
+5.09 +1.81%
Volume: 183,356
Aug. 12, 2020 11:07a
P/E Ratio
33.23
Dividend Yield
1.87%
Market Cap
$62.20 billion
Rev. per Employee
$548,319
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/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 53.76
0.00 0.00%
Volume: 5.30M
Aug. 12, 2020 11:06a
P/E Ratio
9.29
Dividend Yield
3.81%
Market Cap
$111.92 billion
Rev. per Employee
$479,167
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/zigman2/quotes/202835784/composite
US : U.S.: NYSE
$ 11.69
+0.40 +3.50%
Volume: 1.45M
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P/E Ratio
6.89
Dividend Yield
0.48%
Market Cap
$26.70 billion
Rev. per Employee
$743,916
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/zigman2/quotes/203042512/composite
US : U.S.: NYSE
$ 9.79
+0.23 +2.41%
Volume: 1.25M
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P/E Ratio
N/A
Dividend Yield
0.00%
Market Cap
$19.93 billion
Rev. per Employee
$493,032
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/zigman2/quotes/201417262/composite
US : U.S.: NYSE
$ 12.14
+0.12 +1.00%
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N/A
Dividend Yield
1.98%
Market Cap
$603.78 million
Rev. per Employee
$609,030
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/zigman2/quotes/204078760/composite
US : U.S.: NYSE
$ 3.12
-0.0100 -0.32%
Volume: 903,223
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P/E Ratio
5.27
Dividend Yield
7.35%
Market Cap
$21.11 billion
Rev. per Employee
$213,392
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/zigman2/quotes/204260791/composite
US : U.S.: NYSE
$ 13.87
-0.08 -0.57%
Volume: 52,461
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P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$639.04 million
Rev. per Employee
$4.92M
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