Senator Elizabeth Warren on Thursday expanded her campaign to shake up the financial world in the aftermath of revelations that Wells Fargo (WFC) - Get Wells Fargo & Company Report employees set up as many as two million unauthorized customer accounts, this time focusing her criticism on the mega-bank's auditor, KPMG, and the post-Enron Sarbanes-Oxley Act.
"KPMG conducted audits assessing Wells Fargo's internal control over its financial statements...But none of KPMG's audits identified any concerns with illegal behavior that resulted in the creation of over two million unauthorized accounts by thousands of employees ....," said a letter to KPMG written by Warren and three other Democratic senators. "In fact, in each of your audits, your firm concluded that Wells Fargo 'maintained ... effective internal control over financial reporting.'"
Warren's effort comes after Wells Fargo in September was fined $185 million by state and federal regulators for setting up phony consumer credit card and savings accounts. The accounts led to the dismissal of about 5,000 employees over a five-year period and set off a firestorm of criticism that ultimately led to the resignation of Wells Fargo CEO John Stumpf and the installation of an independent board chairman at the bank. Stumpf on Oct. 17 subsequently resigned from his board positions at Target (TGT) - Get Target Corporation Report and Chevron (CVX) - Get Chevron Corporation Report as well.
Seeking to expand their investigation into Wells Fargo, Warren and the other senators asked KPMG if it was aware of any of the sales practices addressed in the regulatory settlement and whether any concerns were raised with top executives at the bank. The senators also asked whether Wells Fargo employees misled KPMG employees at any point about unauthorized accounts being created and whether the accounting firm conducted any re-assessment of its audits.
And Warren also suggested that problems at Wells Fargo also raise questions about the effectiveness of the 2002 Sarbanes-Oxley Act, or SOX, written in the wake of accounting scandals at Enron and Worldcom. She specifically focused attention on the Public Company Accounting Oversight Board, or PCAOB, which was created by SOX to oversee the accounting industry and provides advice on establishing auditing and related professional practice standards. Accounting firms register with the PCAOB and open up their books to inspections by the agency.
"Your firm's failure to identify the illegal behavior at Wells Fargo raises questions about the quality of your audits and the effectiveness of the implementation of these Sarbanes-Oxley requirements by the PCAOB," Warren and the senators wrote.
Boston University Law Professor Cornelius Hurley said that an investigation into KPMG is warranted given the magnitude of the unauthorized accounts and the number of people dismissed in the wake of revelations concerning them. Hurley pointed to concerns raised by the Los Angeles City Attorney's office alleging that many of the unauthorized accounts were fake and set up as part of an effort to achieve sales goals.
A KPMG spokesman said the accounting firm has received the letter and is currently reviewing it. "We are confident in our work and look forward to responding," he said.
"The issue of KPMG's oversight of internal controls at Wells Fargo should be raised given the fact that many of the near two million accounts were for individuals who did not exist and for those that did exist they were unsolicited by customers," Hurley said, emphasizing that the sheer number of such accounts were a cause for regulatory concern. "If we were talking about an order of magnitude of 10% of the number then you could say it was not material."
Hurley said the Wells Fargo situation raised concerns with the effectiveness of Section 404 of SOX, which requires companies to file reports on the strengths of their internal financial controls and have outside auditors attest to their veracity.
It is possible Warren is focusing her attention on the PCAOB, in part, because, as an influential senator, she wants to have a role in choosing new members of the five-person board overseeing the agency in a possible Clinton Administration. Currently, the PCAOB's chief is James Doty, a former George W. Bush adviser.
PCAOB members are chosen by the Securities and Exchange Commission, another agency that Warren has put in her cross-hairs, after the agency consults with the Federal Reserve and Treasury Secretary. The Massachusetts senator recently urged the White House to replace SEC Chairman Mary Jo White over concerns that the agency hasn't pushed for rules that would require publicly-traded corporations to disclose their political contributions.
BU's Hurley argues that Warren's criticism of White, the SEC and the PCAOB, may be part of a broader effort to "be a gatekeeper" for all appointments to run key financial and securities regulatory agency in a possible Clinton administration. "She considers herself to be a box that has to be checked when it comes to appointments to the Federal Reserve, SEC and PCAOB," Hurley said.