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]
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.