Last week we heard from a number of people on the topic of Citigroup’s internal controls that while it didn’t sound like they were quite up to snuff, KPMG was somehow cool with it and Vikram Pandit signed his name to it, saying that everything was hunky dory.
Now along with bloggers and journalists, the scourge of Citigroup, CLSA analyst Mike Mayo, has decided to get into the act:
Citigroup may have violated Sarbanes-Oxley with its 2007 10-K submission, in our opinion. The new information relates to letters from regulators that were only revealed earlier this year as part of the FCIC archive. We believe these letters between Citi and the Fed, Citi and the OCC, and the OCC with internal staff, imply that Citi should have known about internal control shortfalls for the year 2007 and was directly told about them by the OCC only eight days before the 10-K was signed. Also, Citi reported large unexpected losses with less than two months left in the year. Thus, the lingering question in our mind is why Citi signed off on its 2007 10-K as having effective controls in light of such problems. This information is still relevant today because it reflects on the magnitude of the risk shortfalls and what we feel is the higher-than-perceived task of turning them around.
That’s from Mayo’s update on the bank, dated today, and along with the “opinion” on a Sarbanes-Oxley violation, he has a few questions:
To what extent was the audit committee and board at Citi aware of the concerns voiced by various regulators at the time, and who gave the advice to sign the 10-K? To what extent has Citi’s board examined the issue since the release of letters from the FCIC? Has the SEC and DOJ looked into this matter?
We bolded that portion since it might – just might – be referring to KPMG and the apparent disregard everyone had for the letter sent to Citigroup from the OCC. Of course, not everyone always agrees with Mayo, namely Dick Bové who has gave HofK the thumbs up although it was obvious that he’d never heard of the firm. Bové hasn’t weighed in on this particular report but it’s only Monday.
Anyway, Citigroup remains steadfast in their thoughts on the matter, telling The Street’s Lauren Tara LaCapra that the “certifications were entirely appropriate,” although things increasingly seem to be pointing to the possibility that wasn’t the case. A message left for Marianne Carlton, a KPMG spokeswoman, hasn’t been returned.
Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:
The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation metho gage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.
Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:
Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.
The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.
Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:
[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.
Actually, just kidding, he ran it by an expert:
“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”
What Vikram Pandit Knew, and When He Knew It [Jonathan Weil/Bloomberg]
John Carney wonders aloud if Citigroup’s low reserves (approximately $1b reserve for $500b in exposure) for its repurchase risk is thanks to the guidance provided by KPMG. Citi has said that they are, “comfortable with this level of reserves because historically realized repurchase risk has been quite small.” Carney explains, “In short, they haven’t had to pay out much on these claims in the past, so they figure they won’t pay out much in the future.”
Be that as it may, JC and his colleague, Ash Bennington are pret-tay sure Citi has it wrong (they lay out their case in full) and speculates that KPMG is, at the very least, an enabler here.
Carney points out that Francine McKenna has been following KPMG’s not so stellar guidance on this particular issue for years. Starting with New Century in 2007, Wells Fargo last year and Countrywide who was purchased by Bank of America.
Carney then writes that Bank of America is “widely assumed to have the largest repurchase risk, largely thanks to the acquisition of Countrywide.”
So that’s a helluva trail to be sure and Carney wraps up:
So is the advice of KPMG part of the reason for Citi’s complacency when it comes to repurchase risk? Given the history of companies audited by KPMG missing repurchase risk, perhaps Citi should rethink that complacency.
Of course Carney forgets that Dick Bové would take exception with everything he’s saying, since this firm is perfectly acceptable. Even if he doesn’t know who they are.
We’d like to get anyone familiar with the matter (read: Citi audit team members) on the record, so get in touch and we’ll put it out there. Or you can chime in below.
E&Y auditors investigated over Lehman Brothers [Accountancy Age]
“The Accountancy and Actuarial Discipline Board (AADB) has begun an investigation of E&Y in its role in reporting to the FSA on audit client Lehman Brothers International Europe’s compliance with the authority’s client asset rules, which govern the protection of client money.”
And since they were on a roll, the AADB is also investigating PwC for its role in J.P. Morgan’s misuse of client assets.
Study Finds the Mortgage Interest Deduction to be Ineffective at Increasing Owner ef=”http://www.taxfoundation.org/blog/show/26762.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TaxPolicyBlog+(Tax+Foundation+-+Tax+Foundation’s+%22Tax+Policy+Blog%22)”>Tax Foundation]
“Proponents for the MID often offer the justification that it increases homeownership rates, which they say has positive benefits for society. But most economists seriously question the benefits of MID and many believe homeownership is greatly over-subsidized.”
Visa, MasterCard Antitrust Decision by U.S. Said to Be Near [Bloomberg]
“The U.S. Justice Department may decide as early as this week how to resolve its two-year antitrust probe of merchant restrictions imposed by Visa Inc., MasterCard Inc. and American Express Co., three people briefed on the matter said.
The department still hasn’t decided whether it can reach a deal with the three biggest U.S. payment networks or challenge their policies in court, one of the people said. The department likely will file a lawsuit, and MasterCard and Visa are expected to settle, people familiar with the matter said.
The talks focus on rules that bar merchants from charging extra to customers who use credit cards and steering them to competing cards, and require retailers to accept every type of card banks issue, said the people, who requested anonymity because the discussions are private. The department is leaning toward allowing the companies to maintain prohibitions against surcharging, two of the people said.”
Will KPMG Ever Wake Up and Finally Learn Its Lesson after Being Duped into Completing Crazy Eddie’s Audits Too Early Twenty Three Years Ago? [White Collar Fraud]
Today’s lesson in duping auditors – Sam Antar explains exactly how he fooled KPMG (then Peat Markwick Main) into signing off on incomplete audits back in the 80s.
PwC takes $26.6bn in global revenues [Accountancy Age]
Thanks to the miracle of rounding, $26.6 billion puts P. Dubs in a tie with Deloitte for largest firm in terms of revenues, who reported the same number last month. This obviously will not stand and we will investigate the matter further to the appropriate number of significant digits to determine who the top dog is.
Citi says CEO, CFO “rebutted” Mayo’s criticisms in meeting [Reuters]
On Friday, banking analyst Mike Mayo met with Citi execs including CEO Vikram Pandit and CFO John Gerspach and they discussed, among other things, why Citi hasn’t been writing down their DTAs. Citi says that successfully rebutted the Mayo Man who is issuing a report today with his thoughts on the sit-down.
Accountant gets year-and-a-day in Petters scam [Minneapolis Star-Tribune]
“Harold Katz, the hedge fund accountant who doctored financial statements to hide the Petters Ponzi scheme from investors, was sentenced Friday to 366 days in prison after apologizing to family, friends and investors.
Katz, 43, will be eligible for parole in about 10 1/2 months. He was sentenced for conspiracy to commit mail fraud.
‘I made a colossal error in judgment,’ Katz told U.S. District Judge Richard Kyle. ‘I hope I can use this horrific experience to help others not make the same mistakes as I have.’
Katz created false financial statements at the behest of Gregory Bell, manager of Lancelot Investment Management, a Chicago-area hedge fund, to mislead investors about the stability of Petters Co. Inc., which was defaulting on various promissory notes as its decadelong Ponzi scheme unraveled in 2008. Katz also assisted Bell in making phony banking transactions with Petters Co. Inc. to make it appear the Petters Co. was paying off notes it owed to Lancelot.”
Fox Business Network’s ace news-breaker Charlie Gasparino reports that Citigroup’s management team, including CEO Vikram Pandit and CFO John Gerspach will not meet with CLSA banking analyst Mike Mayo since he’s been telling investors that the big C should be writing down their $50 billion in deferred tax assets.
Carlito reports that Mayo states that this refusal to write down the DTAs amounts to “cooking the books by inflating its earnings through an accounting gimmick.”
Simple question from Mayo via CG, “I’d like to know why all my competitors get meetings with Pandit and the key people there and I don’t.” It’s not like the guy is one of the top banking analysts in the entire world. It’s not like Citigroup has a solid track record of transparent financial reporting. Or did everyone forget that C has the U.S. Treasury as its backstop?
The KPMG audit team can weigh in on this at any time. Or just email us the details.
Auditors don’t know the meaning of ‘competition’ [FT]
In a letter to the Financial Times, David Herbinet, the UK Head of Public Interest Markets for Mazars, takes issue with the notion (he says ‘puzzled’) that there is robust competition in the audit market, “Figures calculated from the most authoritative research available – the Oxera report that first spurred examination of the issue – show that a FTSE 100 auditor can on average expect to remain in place for an eye-watering 48 years and their FTSE 250 counterpart for 36 years. When the research was conducted more than 70 per cent of the FTSE 100 audits had not been subject to tender for at over, 97 per cent of current FTSE 350 audits are held by just four firms. If this represents fierce competition I would not like to see a stagnant market.”
Facebook Said to Put Off IPO Until 2012 to Buy Time for Growth [Bloomberg]
“Facebook Inc. will probably put off its initial public offering until 2012, giving Chief Executive Officer Mark Zuckerberg more time to gain users and boost sales, three people familiar with the matter said.
Facebook would benefit from another year of growth absent the added scrutiny that comes with a public listing, instead of holding an IPO in 2011 as investors speculated, said the people, who asked not to be identified because Facebook doesn’t discuss share-sale plans. Still, Zuckerberg, who holds board control, could push for a stock sale at any time, they said.”
U.S. Financial System Still at Risk, Says IMF [WSJ]
Get RIGHT out of town. “The International Monetary Fund says the U.S. financial system is “slowly recovering,” but remains vulnerable to crisis, in part because Congress and the administration have failed to streamline a regulatory system marked by turf battles and overlapping responsibilities.
‘We asked many times why bolder action could not be undertaken,’ said the IMF’s Christopher Towe, who oversaw the agency’s first broad review of the U.S. financial sector.”
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets [SEC]
That includes former CFO Gary Crittenden who agreed to pay a $100,000 fine.
Colbert on the Expiration of the Bush Tax Cuts [TaxProf]
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DB is reporting that there’s swine flu at Citi and since we’re fairly certain that none of the 1,200 vaccination units were reserved for Klynveldian auditors, you better have your firm-issued surgical masks handy.
That goes for anyone else (read: Big 4 types) working at the Greenwich St. building.
If not, start washing you hands like Howard Hughes.
Earlier: Big 4 Sick Days: Open Thread
• Bernanke defends bail-out package – “Ben Bernanke, the boss of the US central bank, has defended the US bail-out plan citing his fears of a second Great Depression, during a public talk.” [BBC]
• Citi public exchange offer gets 99 percent shares – “Citigroup Inc said on Sunday some 99 percent of its stock was tendered in an exchange offer for publicly held securities, in a key step toward giving the U.S. government a 34 percent equity stake in the bank.” [Reuters]
• Kuwait financier facing U.S. fraud suit found dead – “A brash Kuwaiti financier facing a fraud suit by U.S. authorities was found dead Sunday in an apparent suicide that sent shockwaves through the Gulf Arab financial sector.” [Reuters]
• Chinese state steel workers beat private firm boss to death -“Thousands of angry Chinese steel workers clashed with police and beat to death an executive of the firm trying to take over their company, a Hong Kong-based human rights organisation has said.” [The Guardian]
• What’s email? – Paulson doesn’t use it, thanks for asking. Next question. [FT Alphaville]
• Bank of America Posts a Profit on Trading Gains – “Bank of America, one of the nation’s largest and most troubled banks, announced on Friday a $3.2 billion second-quarter profit, a figure that exceeded analyst expectations.” Ken Lewis will be starting happy hour a little earlier than usual on this Friday. Circa now. [New York Times]
• Citigroup profit soars on Smith Barney sale – “Citi’s profit was not driven by improved trading like other banks, and instead came from the gain on the sale of its Smith Barney unit and the increasing values of some of its riskier assets that had plunged during the credit crisis. The New York-based bank recorded an after-tax gain of $6.7 billion on the sale of a majority stake in its Smith Barney brokerage unit to Morgan Stanley.” Selling profitable assets usually ends up looking good. This should not be surprising. [AP via Miami Herald]
Don’t mind if Uncle Sam is up in your biznass 24/7? Thrive in a thankless atmosphere? KPMG is your favorite Big 4 firm? We know that you don’t sleep. Job is yours.
The bastions of financial responsibility at Citigroup have announced a new CFO, the second in four months. The lucky SOB is John Gerspach who got the bump from Controller. Best of luck John. Now how about those dividend checks?
Citigroup Names Gerspach CFO; Kelly Shifted to Strategy Role [Bloomberg]