As calls for the replacement of Wells Fargo’s board mount, experts say attention — and blame — for a continuing pattern of misbehavior should also be focused on the company’s external auditor, KPMG LLP.
The record of management failures at Wells /zigman2/quotes/203790192/composite WFC +0.63% started with revelations last year that millions of accounts had been opened illicitly. It got longer after the admission last month that the bank had also forced unneeded auto insurance on customers and neglected to refund optional guaranteed asset protection, so-called GAP, coverage for auto loan borrowers.
Politicians and regulators see the misbehavior as a pattern that should have been caught — and stopped. And there have been consequences for the bank. One CEO was forced to step down and forfeit millions of dollars in incentive compensation. Thousands of workers, including several executives, have been fired. Most recently the bank reshuffled its board, replacing its chairman and adjusting board committee memberships including on its audit and examination committee.
But external auditors should serve as another line of defense. Each year, auditors offer an opinion on whether their clients’ financial statements are truthful. To do so, the auditors have to determine whether they have enough confidence in the company’s internal controls to offer that blessing.
“There’s been far too little attention since the crisis on how the external auditors should be looking out for the public,” Andy Green, managing director of economic policy for the Center for American Progress, told MarketWatch.
“They are not just bookkeepers, but the investors’, and the capital markets’ last defense against accounting manipulation and fraud.”
“There’s been far too little attention since the crisis on how the external auditors should be looking out for the public. They are not just bookkeepers, but the investors’, and the capital markets’ last defense against accounting manipulation and fraud.”
Andy Green, managing director economic policy, Center for American Progress
KPMG has served as Well’s auditor for more than 85 years — the entire time spanned by the most recent customer scandals, and then some. As Senators Elizabeth Warren, Bernie Sanders, Mazie Hirono, and Edward Markey wrote to KPMG in October 2016 , each year the auditor blessed Wells with a clean audit opinion and its finding that the bank had “maintained…. effective internal control over financial reporting.”
Warren and Markey also wrote to KPMG’s regulator, the Public Company Accounting Oversight Board (PCAOB), to ask whether it had reviewed KPMG’s decisions on the Wells audits and if PCAOB rules hold auditors responsible for reporting illegal or inappropriate activity by their clients.
A PCAOB spokeswoman told MarketWatch that the agency did respond to the senators’ request but declined further comment.
KPMG’s response to the senators in November acknowledged that its audits of Wells Fargo’s financial statements included procedures to identify instances of unethical and illegal conduct.
Those procedures included interviews with the company’s chief auditor, members of the bank’s Corporate Investigations Unit, bank financial executives, and attorneys inside and outside the bank, the auditor wrote. KPMG also reviews regulatory reports and reporting to executive management, the audit committee and the rest of the board from the chief compliance officer regarding investigations that related to accounting, internal accounting controls, auditing, and whistleblower claims and claims of retaliation.
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