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December 5, 2022

Accounting News Roundup: KPMG and Wells Fargo; Internal Auditors Under Pressure | 11.02.16

KPMG and Wells Fargo

This Wall Street Journal report on KPMG's role as Wells Fargo's auditor went with a classic headline: Where Was the Auditor? People like to ask this question when a company — often times a bank — has outraged the public by doing something brazen, fraudulent or brazenly fraudulent. In the case of Wells Fargo, that something is opening millions of fake accounts without customers' knowledge. Or from another point of view, Wells Fargo put insane pressure on its employees to cross-sell its products which led to employees creating millions of fake accounts without customers' knowledge.

So where were the auditors while this was going on? That's what Senator Elizabeth Warren wants to know. My hunch is they won't be satisfied by the questions because the responses will be quite academic. Like this one:

If a fraud doesn’t have a direct, material impact on a company’s financial reports—and Wells Fargo says its problems didn’t—then the auditor isn’t required to proactively search for it. “The financial-statement audit is not designed to detect every fraud,” said Doug Prawitt, a Brigham Young University accounting professor.

What's interesting is that KPMG's audit didn't have to detect this fraud! This Forbes article from Rob Berger explains:

[O]ne can assume KPMG was well aware of the creation of unauthorized accounts. Why do I say that? Well, the LA Times had been reporting on this story for years. In 2013 they described Wells Fargo’s pressure-cooker sales practices, noting that to “meet quotas, employees have opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts.” The same year the LA Times reported that Wells Fargo fired 30 branch employees in the Los Angeles area over similar practices.

And if these reports weren’t enough, in 2015 Los Angeles sued Wells Fargo over this very issue. According to the LA Times, the “suit described how some bankers pilfered customers funds — not to pocket the money directly, but to fund additional customer accounts opened surreptitiously to meet sales quotas imposed by branch, district and regional managers.” Given the very public nature of these events, it wouldn’t be surprising if KPMG auditors were aware of these and similar events.

So if fraudulent activity — regardless of materiality — has been part of the public record, then auditors don't have to search for it! They know where it is! Now, if KPMG didn't know about the reporting in the LA Times that's pretty lazy and careless. And if they did know and then didn't look more closely at the effect of the "pressure-cooker sales practices" at the bank or investigate the scope of the opening "unneeded accounts," that seems more than a little careless and you could maybe pull some people into a hearing and yell at them for a few hours.

But lots of people — auditors, mostly — look at this in purely a quantitative and academic sense; that is, the size of the fraud was too small to be on KPMG's radar, ergo, it's not reasonable for them to have responsibility to root it out. For them the answer to the question, "Where was the auditor?" is "Not looking for tiny frauds that no one cares about."

But people do care about this tiny fraud and the LA Times reporting should've been on KPMG's radar. Those two things together add up to KPMG getting some unwanted attention for the foreseeable future.

Internal auditors > External auditors

This may come as a shock, but a global survey from the Institue of Internal Auditors found that sometimes internal auditors are asked to not report the bad things that are happening at their companies. IIA CEO Richard Chambers says not to worry, though:

“Many of those in our profession who are asked to suppress or be quiet have the fortitude to hold their ground and call it like it is,” Mr. Chambers said.

But sticking by your findings comes at a price. Internal auditors cited exclusion from meetings as the main consequence of the pressure, at 33%, followed by loss of opportunities at 18%.

“It’s pretty tough to be courageous in those circumstances,” said Mr. Chambers. “The good news is that as a profession, we’re not that easily manipulated and we’re not that easily intimidated.”

That's wonderful. Maybe some of them want to become external auditors?

Accountants behaving badly

Usually, accountants behaving badly go at it alone, driven by personal greed or a gambling problem or whatever to take money that doesn't belong to them. Most of these scams are short-lived, unraveling due to a mistake or incompetence. Jack Weichman had help from his son and two others to do all sorts of bad stuff, but the end result was the same:

Jack Weichman, 64, who also owns MMDS, a medical billing business, pleaded guilty in U.S. District Court to two counts of bank fraud, one count of concealment of assets, one count of wire fraud and one count of filing a false tax return, court records stated.

Also entering guilty pleas in the case: Ari Weichman, 36, of Schererville, one count of bank fraud; James Schaefer, 66, of Lowell, one count of bank fraud; and William Bercaw, 69, of Munster, one count of wire fraud. 

The 34-count federal indictment alleges the men of embezzling more than $3 million from two doctors who had hired MMDS to do their medical billings. The indictment also claimed Jack Weichman illegally hid income during his bankruptcy case and filed a false tax return. He also accused of opened up two lines of credit for approximately $1.1 million in one of the doctors' names, the indictment said.

I think all criminal conspiracies could really benefit from appointing a devil's advocate prior to starting any endeavor. You know, someone who could listen to the plans and feel comfortable saying, "Hey guys, I think we'll probably end up in jail if we take this route. Maybe we should open a coffee shop."

Has Donald Trump released his tax returns?

Nope! After the New York Times and Washington Post articles, the calls have grown louder again but I feel like most people have accepted the fact that we won't be seeing DJT's tax returns. Just for fun, can someone on Hillary's team send the duck back to Trump Tower for the next six days?

Previously, on Going Concern…

Rachel Andujar wrote about making the most of your time before busy season. In Open Items, someone asked about auditing cash.

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