April 25, 2017

Senators Raise Concerns with Accounting Regulator about Wells Fargo Auditor KPMG

Reveal that KPMG and the Wells Fargo Board were Aware of Wrongdoing; Auditor Did Not Identify Major Corporate Risks

Text of the letter available here (PDF)

Washington, D.C. - U.S. Senators Elizabeth Warren (D-Mass.), and Edward J. Markey (D-Mass.) today wrote to the Public Company Accounting Oversight Board (PCAOB), which sets standards for audits of public company financial statements required under Sarbanes-Oxley, raising questions and releasing new information about KPMG's role and findings as the independent auditor of Wells Fargo during the time period in which thousands of Wells Fargo staff engaged in fraudulent behavior affecting millions of accounts.

In a response to a request from the senators, KPMG revealed it was previously aware of Wells Fargo's problems, but claimed that they "did not involve key controls over financial reporting" and thus did not report them or address them in their audit work.  

Senators Warren and Markey, along with Senators Bernie Sanders (I-Vt.) and Mazie K. Hirono (D-Hawaii), first sent a letter to KPMG in October, 2016, to determine why KPMG failed to detect wrongdoing at Wells Fargo, and how, despite the ongoing Wells Fargo fake account scandal, KPMG's work resulted in five consecutive years of clean audit reports.

The response revealed three new findings:  (1) that KPMG was aware of the illegal activity years prior to the CFPB and DOJ settlement, (2) that Wells Fargo's Board had extensive knowledge of the wrongdoing (and that KPMG was aware of this knowledge), and (3) that KPMG's claim that "the improper sales practices do not implicate the effectiveness of internal controls over financial reporting" conflicts with the recent findings of Wells Fargo's independent Board members' investigation, which found that the problem was caused by the bank's basic corporate structure and its top executives' misconduct.

"KPMG, in its role as Wells Fargo's independent auditor, failed to prevent or even publicly disclose the fraud that affected hundreds of thousands of customers, and cost the company CEO his job," wrote the Senators. "In response to questions about this failure, KPMG denied any wrongdoing, standing by their conclusion that Wells Fargo - during the entire time the scandal was ongoing - ‘maintained ... effective internal control over financial reporting.'"

The Senators asked whether PCAOB has conducted a review of KMPG's financial reporting, if the auditor's decisions were consistent with PCAOB rules and guidance, and if PCAOB updated its guidelines following the Wells Fargo crisis. The Senators also asked if PCAOB rules and guidance hold auditors responsible for reporting illegal or inappropriate activity by their clients.

The link to the Senators' October letter to KPMG is available here. KPMG's November response is available here.