U.S. securities regulators brought charges against two auditors Wednesday, alleging that they failed to uncover undisclosed loan losses at a bank during the financial crisis.
The U.S. Securities and Exchange Commission (SEC) announced charges against two auditors at KPMG for their roles in a failed audit of a Nebraska-based bank that, the SEC says, hid millions of dollars in loan losses during the financial crisis and was eventually forced to file for bankruptcy.
The commission previously charged three former executives at the bank for their role in the scheme. Two of them have settled with the regulator, and a case continues against the third.
On Wednesday, the SEC brought new charges against two KPMG partners, alleging that they failed to appropriately scrutinize management’s loan loss estimates. It claims that they relied on stale information and management’s representations, and failed to heed numerous red flags when issuing opinions on the bank’s financial statements and its internal controls.
The allegations have not been proven. The SEC says a hearing will be scheduled before an administrative law judge to determine whether the allegations are true and what, if any, remedial sanctions are appropriate.
Robert Khuzami, director of the SEC’s enforcement division says that the auditors “merely rubber-stamped” the bank’s estimates and ignored red flags concerning its troubled real estate loans. “Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations,” he added.