I’m In Congress! Foreclosure Review Work Cited By Congressman

A column I wrote for American Banker on March 5, 2012, “What Little We Know About Foreclosure Reviews Is Troubling”, was mentioned during the recent House Financial Services Subcommittee hearing on issues facing the accounting and auditing industry, “Accounting and Auditing Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard Setters and the Economy.”

The good news: regulators are pulling back the curtain on the consultants that the big mortgage servicers hired, under orders from the agencies, to review their foreclosure processes.
The bad news: what’s been revealed isn’t pretty.

Why, you might ask, did Congressman Brad Miller of North Carolina ask PCAOB Chairman Jim Doty and SEC Chief Accountant Jim Kroeker about my column? You thought I left town after the PCAOB two-day hearings on auditor independence and auditor rotation!

Not so fast! Congressman Miller wanted to know if they knew about Deloitte’s assignment to review their own work at JP Morgan Chase.

The Deloitte partner in charge of the JPMorgan engagement, Ann Kenyon, was a partner on Deloitte’s audit of Washington Mutual. So it would not be in her interest for Deloitte’s consultants to turn up any auditing errors the firm made with that mortgage originator, particularly since Deloitte is a defendant in shareholder litigation related to Washington Mutual’s collapse. In addition, Deloitte audited Bear Stearns, and is going to trial as a defendant in Bear Stearns investor litigation related, in large part, to EMC. So the consultants wouldn’t have a strong incentive to find any auditing goofs there, either.

If that’s not enough conflict to disqualify a firm, I don’t know what is.

Doty seemed a little surprised to hear my name and Kroeker said that it’s not his job. Not good answers. (I’ve whispered in both sets of ears since to try to help them recover from what I think is a big problem – the perception they left that the consulting side of the audit firms is unregulated.)

You can listen for yourself here. My name and my work is mentioned starting at the 1:14:00 mark.

10 replies
  1. Len Green
    Len Green says:

    “The Deloitte partner in charge of the JPMorgan engagement, Ann Kenyon, was a partner on Deloitte’s audit of Washington Mutual.” – wouldn’t that in itself cause Deloitte to consider declining the engagement. It’s not as if Deloitte folk are not trained on/aware of conflicts of interest.

  2. Francine
    Francine says:

    @Len Green

    On the contrary. Deloitte probably thought it was a good re-use of a partner who no longer had as many audits to work on. WaMu, Bear Stearns, Merrill Lynch, American Home… Deloitte lost all this work. But the OCC should have stopped it. Probably did not look past the first Google page. How many other former Deloitte audit partners of these failed institutions are working on the JPM consulting engagement? I’d like to know.

  3. David
    David says:

    It is a good thing that you are recognized. It takes a great deal of work to keep up the level of expertise that you offer. Consider for a moment. Who can put in the many hours you are putting in if they are not in the audit field itself. The objectivity of the group of public auditors is deeply compromised.
    The field of auditing is truly esoteric. Only a few really come to understand the subtleties asked for in concluding on the viability of a set of financial statements. … and it does not work. True, there are thousands of successful audits with good results. But, a failed audit has such a devastating result, that it cannot be tolerated. How could a Shearson fail and have gotten a clean IC opinion and FS opinion?
    The regulators need a clear knowledgeable voice – at the moment, you are that voice. Thanks for all your work.

  4. Oversight For the Better
    Oversight For the Better says:

    My thanks as well. You show that persistence pays. I appreciate your time and effort. Where do I send my donation?

  5. Francine
    Francine says:

    @ Oversight For The Better

    Thanks. Buy a Forbes Magazine when my story on social media company accounting comes out next week. Tell them you want me to do more!

  6. Michael Wallace
    Michael Wallace says:

    Congratulations Francine. Our real estate crisis will never be solved until we end all these conflicts of interest and introduce a new loss mitigation process that is a break from the broken model we have now. Looking forward to your article in Forbes!

  7. CPA to Go
    CPA to Go says:

    Your conclusion (i.e. anyone who worked on a defunct client is not capable of performing work) is based on a failed premise (i.e. that individual was responsible or to blame) for the failure. Additionally, partners have different roles with respect to any engagement (e.g. one might look at SF loans, one might look at MF loans, one might be in charge of Corporate, one might be the overall leader) – that wouldn’t preclude them from using those industry insights on another client. Your theory seems to be that any “partner” within a Big Four firm wouldn’t uncover an error for fear of upsetting a different Firm client elsewhere – and that’s not the case – people do have ethics.

  8. Francine
    Francine says:

    @CPA to Go

    You have misunderstood my premise. You also did not go and look at the specific area of expertise that Ann Kenyon has and do not appreciate the fact that she is now the partner in charge of the JPM foreclosure review. My theory is not that “any partner” would be unable to uncover an error. That’s the easy part. A partner with a vested interest in the litigation against her firm for a client she was involved with – in particular in the same subject matter, the same assets, she is consulting on now – would be unwilling to address an error or potential liability to her present client because she is reviewing her own work. Independence rules are there to protect both shareholders and professionals. In the case of the professionals and their firms, the independence rules protect them from their own human tendency to exhibit hubris, to be tempted by greed and to act first from the perspective of self-preservation.

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