KPMG and the Wells Fargo board of directors knew the company had fake accounts on the books, but KPMG didn’t flag it because the firm didn’t regard it as relevant to the financial statement audit, according to a letter from U.S. Senators to audit regulators asking how that could be possible.
Sen. Elizabeth Warren and Sen. Edward Markey, both Democrats from Massachusetts, have asked the Public Company Accounting Oversight Board to look into “three pieces of troubling new information” they learned in doing their own inquiry to the Wells Fargo scandal. They say:
KPMG “became aware of and analyzed in detail” the production of false accounts at Wells Fargo,
the Wells Fargo board knew of the activity, and KPMG knew the board knew, and
KPMG concluded the improper sales practices did not implicate the effectiveness of internal controls over financial reporting.
Warren, Markey, and two other senators wrote to KPMG in October asking how the firm could have given clean audit opinions to Wells Fargo from 2011 to 2015 while failing to notice fraud and mismanagement affecting millions of customer accounts perpetrated by thousands of bank employees that led to billions in lost market capitalization. The senators say KPMG responded in November by indicating it was not unaware of the false account practices, but found the misconduct “did not implicate any key control over financial reporting and the amounts reportedly involved did not significantly impact the bank’s financial statements.”
According to the senators’ account of KPMG’s November response, the firm says it knew of false account activity as early as 2013 and interviewed the company’s chief auditor, investigations unit, company controller’s office, attorneys in the legal department, and outside counsel. The firm said it inspected regulatory reports, interviewed banking regulators, and reviewed reports provided to executive management and board members. KPMG says in its letter the firm was "satisfied that the appropriate members of management were fully informed with respect to such conduct."
Quoting KPMG’s November letter, the senators point out to the PCAOB: “as a result of these procedures, KPMG became aware of instances of unethical and illegal conduct by Wells Fargo employees, including incidents involving these improper sales practices.” The firm reported it even reviewed the work of an additional outside consultant, who calculated the potential financial impact of the unauthorized account activity and concluded it would likely be insignificant.
Warren and Markey are asking the PCAOB whether it has reviewed KPMG’s conclusions on Well Fargo and whether they pass muster under auditing standards. “KPMG did not publicly report the widespread fraud, despite now acknowledging that its auditors were aware of it prior to the 2016 settlement,” the senators wrote. “Do PCAOB rules or guidance indicate whether auditors have a responsibility to publicly report or otherwise act on their knowledge of illegal or inappropriate activity by their clients?”
A PCAOB spokesman said the board looks forward to reviewing and responding to the letter. A KPMG spokesman said the firm takes seriously its role as independent auditor and is confident its audits were planned and performed in accordance with professional standards. “Beyond that, our response letter stands on its own, and we have nothing further to add,” the firm said.