Two Auditors Charged Over Bank Failure
By MICHAEL RAPOPORT
The Securities and Exchange Commission charged two KPMG LLP employees with failing to uncover problems at a Nebraska bank that later failed, marking the first time the agency has taken action against auditors related to the financial crisis.
The two KPMG auditors, John J. Aesoph and Darren M. Bennett, didn't do enough to scrutinize bad-loan reserves at TierOne Bank of Lincoln, Neb., the SEC said in an administrative proceeding filed Wednesday. The action could result in the two auditors losing their right to audit public companies.
TierOne hid millions of dollars in losses on troubled loans made during the height of the financial crisis before the bank eventually failed in 2010, according to the commission, which filed suit against three TierOne executives last year.
The SEC case against the auditors, more than four years after the crisis, revives lingering questions about whether auditors did enough to prevent questionable practices and whether authorities have done enough to hold them to account.
While auditors weren't involved in financial institutions' bad lending and risk-management decisions that helped prompt the crisis, all of the Big Four accounting firms had major clients which collapsed or required huge government bailouts, without any warning from the auditors.
"I think it is about time [the SEC] took action against the gatekeepers," said John Coffee, a Columbia University securities-law professor. The SEC has been "somewhat egregious and far less than aggressive" in taking action against auditors, attorneys and other outside professionals who may have abetted the conduct that led to the crisis, he said.
"This is an area where there ought to be a lot more cases," added Barbara Roper, director of investor protection for the Consumer Federation of America. "It does suggest a pretty significant problem with the auditors, and with audits of financial institutions a lot bigger and more central to the financial system than this bank in Nebraska."
An SEC spokesman, said "the criticisms are misinformed and belied by our unmatched record of achievement in financial crisis cases." KPMG, which wasn't charged in the TierOne case, said in a statement that its auditors "look forward to presenting the facts in support of the work that was performed under the circumstances at TierOne." Attorneys for Mr. Aesoph and Mr. Bennett couldn't be reached for comment.
Other authorities have filed only a handful of crisis-related cases against auditors. The New York attorney's general office has sued Ernst & Young LLP, alleging the firm turned a blind eye to accounting fraud at its client Lehman Brothers Holdings Inc. before Lehman collapsed. Last fall, the Federal Deposit Insurance Corp. sued PricewaterhouseCoopers LLP and Crowe Horwath LLP, alleging they failed to prevent a fraud scheme that led to the failure of Alabama's Colonial Bank. The accounting firms have denied any wrongdoing in those cases.
In the TierOne case, the SEC alleges that Mr. Aesoph, a KPMG partner, and Mr. Bennett, a senior manager, ignored red flags and relied on outdated appraisals of the collateral backing TierOne's loans when their 2008 audit gave the bank a clean bill of health. In fact, according to the SEC, the bank had expanded into riskier types of lending in Las Vegas, Arizona and Florida, and its top executives misled investors and regulators about the losses TierOne was experiencing.
In September, Gilbert Lundstrom, TierOne's chairman and chief executive, agreed to pay more than $500,000 to settle SEC allegations, and James Laphen, the bank's president, agreed to pay $225,000, both without admitting or denying wrongdoing. SEC allegations are still pending against a third executive.
TierOne had 69 branches and $2.8 billion in assets before the Office of Thrift Supervision shut it down in June 2010.
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