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
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.
See also:Senators to put Wells Fargo CEO Stumpf on the spot
Read:Wells Fargo CEO’s $41 million ranks only third among executive-pay clawbacks, forfeitures
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.”
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.
KPMG wrote it did become aware, as early as 2013, of “instances of unethical and illegal conduct by Wells Fargo employees, including incidents involving these improper sales practices.” But the firm said it was “satisfied that the appropriate members of management were fully informed with respect to such conduct.”
Yet the auditor said nothing about these issues to investors, either in its audit opinion, its opinion on the bank’s internal controls, or elsewhere.
Instead, KPMG told the senators, its view is that “not every illegal act has a meaningful impact on a company’s financial statements or its system of internal controls over financial reporting. From the facts developed to date, including those set out in the CFPB settlement, the misconduct described did not implicate any key control over financial reporting and the amounts reportedly involved did not significantly impact the bank’s financial statements.”
KPMG did not respond to a request for comment from MarketWatch for this article.
But the fallout from the scandals are certainly having a meaningful impact on the company.
Wells’ stock is down 5.6% in the year to date, compared with a 6.2% gain for the Financial Select SPDR exchange-traded fund
and 9% gain for the S&P 500
The company has paid hundreds of millions in fines and is in talks to pay hundreds of millions more in a class-action settlement for the illicit accounts. Municipalities from Los Angeles to Illinois are divesting from securities holdings with the bank, and canceling contracts.
What can shareholders do if they believe an auditor isn’t doing its job? The audit committee of the board of directors is responsible for hiring, evaluating, and, possibly, firing the auditor. In this case the board recommended rehiring KPMG every year and asked shareholders to vote yes for reappointment at every annual meeting.
Read:Warren to Yellen: Fire Wells Fargo directors
But when a situation is as tumultuous as Wells’ is, the board may be in turmoil. On Tuesday Wells Fargo & Co. said Elizabeth Duke, the current board vice-chairman, would become chairman on Jan. 1, replacing Stephen Sanger who will retire. A very high percentage of shareholders voted against directors at the annual meeting in April. Two more directors will also retire at the end of 2017.
James Quigley, a former CEO of global audit firm Deloitte, joined the bank’s board in 2013 and chairs the audit committee. He is expected to continue in that role.
On Wednesday, Warren renewed her calls for Federal Reserve Chairwoman Janet Yellen to use her legal authority to remove Wells board members who served between May 2011 and July 2015.
When asked by MarketWatch if the senator is also still pressing KPMG and its regulator, the PCAOB, to answer for its miss, a spokeswoman emailed: “Senator Warren continues to monitor the new developments regarding Wells Fargo, and will keep pressing for the Banking Committee to hold a hearing with the new CEO and Chairman, and for the Fed to remove all responsible Board members.”
“This is a perfect example of why we need auditors to say more, not less, and provide more disclosure, not less,” said Green from the Center for American Progress. “It’s also why we need rigorous application of a robust materiality standard that gives investors the longer-term information they need. As this case has shown, auditors need to look beyond just the short-term financial impact as hurting customers will negatively harm reputation over the long-term.”
Read:Proposals would deter auditors from warning boards of deleted disclosures
See also: Investor advocates protest proposals limiting disclosure
Organized efforts to oust auditors after frauds and scandals have had little success. Data compiled for MarketWatch by research firm Audit Analytics shows that in April, 1.2% of shareholders or almost 54 million, voted against the retention of KPMG as Wells Fargo’s auditor. But that was not the highest vote against KPMG since the scandal began. In 2010, 2.32% voted against KPMG, or more than 100 million shareholders.
|Vote Year||Votes for||%||Votes against||%|
|2016||4.421 billion||98.59||53.8 million||1.2|
|2015||4.454 billion||98.91||40.4 million||0.90|
|2014||4.458 billion||98.71||47.8 million||1.06|
|2013||4.447 billion||98.31||57.8 million||1.28|
|2012||4.462 billion||98.24||65.4 million||1.44|
|2011||4.442 billion||98.04||77.1 million||1.70|
|2010||4.306 billion||97.44||102.6 million||2.32|
Companies don’t have to give shareholders the option to vote on auditor choice but most do. Those votes are non-binding. Although they often say the auditor vote is intended to promote good corporate governance, it’s more likely an obscure SEC rule change effective in 2010 that’s behind it, and behind the 2010 Wells Fargo’s big vote against KPMG.
The 2010 Securities and Exchange Commission rule prohibits brokers from voting in director elections without their customers’ direction. Frederick Lipman, a partner at Blank Rome LLP and president of the Association of Audit Committees, told CFO.com at the time, “Everyone will have shareholders voting on auditors for this reason [to reach a quorum] alone.”
A recent Audit Analytics look at shareholder votes filed between January 1, 2014, and December 31, 2016, shows that, on average, 98% of votes were cast in favor of auditor ratification. Even when shareholders vote against auditors in big numbers, it rarely matters to executives who are under no obligation to accept the results.
and Big Lots Inc.
all had more than 40% of votes against auditor ratification in 2016 but did not fire the auditor.
View more information: https://www.marketwatch.com/story/where-was-wells-fargos-auditor-kpmg-while-the-funny-business-was-going-on-2017-08-17