KPMG's rocky relationship with Banc of California

Banc of California fired KPMG in 2019. Did Banc finally have enough of KPMG’s years of reactive criticisms or did Banc suddenly realize KPMG had been punishing its client for its own mistakes?

You may have heard about market ups and downs for Banc of California (BANC) because you saw the bank mentioned by Bloomberg on December 10, 2021, as an issuer the Department of Justice is reportedly investigating with regard to hedge funds and activist short-sellers.

Underscoring the inquiry’s sweep, federal investigators are examining trading in at least several dozen stocks, including well-known short targets such as Luckin Coffee Inc.Banc of California Inc.Mallinckrodt Plc and GSX Techedu Inc. And they’re scrutinizing the involvement of about a dozen or more firms — though it’s not clear which ones, if any, may emerge as targets of the probe. 

If you have been following the short-interest in Banc of California, you know about the October 2016 publication of a blogger’s allegations against the bank and several of its executives in Seeking Alpha. But that incident was not the peak of short interest in Banc of California.

Instead, short interest was rising throughout 2017, peaking on September 15, 2017 perhaps because of the lawsuits Sugarman v. Benett and Sugarman v. Brown, brought by the former CEO of Banc of California against Banc, its board, its former auditor KPMG and its former chief financial officer, among others. Steven Sugarman was the former chairman of the board, president and chief executive officer (CEO) of defendants Banc of California, Inc., and Banc of California, N.A. (Banc).

Banc, its directors, its former auditor KPMG, and its former chief financial officer responded to Sugarman’s suits with anti-SLAPP motions, based on California’s statute intended to deter “strategic lawsuits against public participation,” or “SLAPPs,” arising from protected speech. The trial court granted KPMG’s anti-SLAPP motion and granted in part and denied in part the former chief financial officer’s motion, leaving Banc, its former CFO, and its directors to file the appeal.

The California Court of Appeals held that “state law claims arising out of disclosures in federal SEC filings may be subject to California’s anti-SLAPP statute, giving defendants a powerful tool to dispose meritless claims early in the process,” according to a write-up by law firm Sheppard Mullin that brought the cases to my attention.

This great write-up concludes:

Because Benett and Brown hold that the anti-SLAPP statute applies to claims arising out of statements made in Forms 8-K, 10-K and 10-Q, they provide another arrow in the proverbial quiver for defendants faced with California state law claims arising out of statements in disclosures to regulators, particularly to the SEC. 

That said, it is important to recognize the limits of these cases:  they did not hold that “all statements to a regulator are protected,” leaving some room for creative arguments by future plaintiffs’ counsel, particularly under subdivision (e)(4). 

Former Banc executive Sugarman’s claims against the defendants were related to statements and press releases made by them to the public and to each other and in filings with the SEC related to the blogger’s October 2016 allegations.

On October 16, 2016, an anonymous blogger calling itself Marcus Aurelius alleged Banc and senior officers and directors had extensive ties to Jason Galanis, who was eventually sentenced to 189 months in prison for his role in a scheme to manipulate the market for Gerova Financial Group, Ltd. a publicly traded company listed on the New York Stock Exchange, and for defrauding the shareholders of that company and defrauding the clients of an investment advisory firm.

(Charts in this article reflect activity in Banc’s share price around the days — in bold— when key news was announced.)

Banc of California immediately began an investigation of the blogger’s allegations. Banc announced on March 1, 2017 it had received a “notice of formal investigation” from the SEC on January 17, 2017.

The bank’s own independent investigation:

…did not find evidence that the individual named in the blog posts had any direct or indirect control or undue influence over the Company. Furthermore, the inquiry did not find any violations of law or evidence establishing that any loan, related party transaction, or any other circumstance impaired the independence of any director. However, the Special Committee did find that certain public statements made by the Company in October 2016 regarding its earlier inquiry into these matters were not fully accurate.

Sugarman resigned as chairman and CEO of Banc on January 23, 2017.

Some may remember that Banc of California was one of the KPMG audit clients I exposed on June 20, 2018 in relation to the KPMG/PCAOB regulatory data theft scandal.

The Justice Department in January brought criminal charges against five former KPMG executives and one former regulator [on January 22, 2018] for allegedly taking advantage of advance notice of regulator inspections. Court filings made June 8 by lawyers for two of the KPMG partner defendants spells out [some of] the audit clients caught up in the scandal. They’re mostly financial companies: Citigroup , Credit Suisse, Deutsche Bank, Banc of California, BBVA , Chemical Financial Corp. , Ambac, Phoenix Life, NewStar Financial, and C&J Energy Services.

The KPMG-PCAOB scandal had initially been made public with a vague press release by KPMG in April of 2017 and then blown open with indictments unsealed on January 22, 2018.

A spokesman for KPMG provided the following statement to me at the on June 20, 2018:

It is important to note that the inexcusable actions of the individuals who were separated from KPMG over a year ago were designed to subvert the PCAOB’s inspection process, and had no effect whatsoever on any of the firm’s audit opinions or clients’ financial statements. Our commitment to audit quality and integrity remains unwavering. In addition, we have taken steps to reinforce our values and culture, and to enhance our governance.

We did not know the names of those KPMG fired or the KPMG audit clients potentially impacted when, on April 11, 2017, KPMG announced that “it had determined that six individuals in its Audit practice, including the head of the Audit Practice, four other partners and one employee, had violated the firm’s Code of Conduct and they are leaving the firm”. The names of the accused were not revealed until the SEC filed civil charges and the Department of Justice unsealed criminal charges on January 22, 2018 against five former KPMG executives and PCAOB employees. Those individuals were accused of stealing “valuable and confidential” PCAOB information and using that information to “fraudulently improve” KPMG’s PCAOB inspection results. Brian Sweet was the sixth defendant — a former KPMG partner and former PCAOB associate director — who pled guilty immediately and agreed to cooperate against the others.

The Justice Department maintained anonymity for the KPMG clients impacted by the scandal until the trial of two of the defendants in February-March 2019. The SEC and PCAOB have never commented publicly on any specific KPMG clients impacted by the scandal and the SEC specifically asked me back in June 2018 not to disclose the client names.

Steven Sugarman’s anti-SLAPP suits and the report of a DOJ investigation into short interest in Banc of California prompted me to go back and look at the history between Banc and its former auditor, KPMG.

The KPMG audits of Banc of California

KPMG became Banc of California’s external audit firm in 2012, when it took over from Crowe Horwath LLP, now known just as Crowe LLP. Crowe LLP and its predecessor firms had been giving Banc of California clean audit opinions — for example, no concerns about internal controls over financial reporting and no other explanatory paragraphs in its reports such as going concern warnings — since 2004.

Two years after KPMG took over, the auditor hit Banc with an adverse opinion on its effectiveness of internal control over financial reporting, issued in an amended 10-K subsequent to the original annual report opinion. Management had originally assessed ICFR as effective. 

However:

Subsequent to the issuance of the consolidated financial statements as of and for the year ended December 31, 2013 immaterial errors related to prior periods were identified that indicated certain deficiencies existed in the Company’s internal control over financial reporting. Specifically, during the year ending 2013, financial reporting resources did not sufficiently complete certain account level reviews that presented a low potential risk of material error to the Company’s financial reporting, to ensure that the possibility that the aggregation of all potential errors in these accounts, which were more than remote, could not result in a material misstatement.

What were these “immaterial errors? The details were first disclosed in the 10-Q filed August 18, 2014.

Correction of Prior Period Errors: During the three months ended June 30, 2014, the Company made cumulative prior period (three months ended March 31, 2014 and years ended December 31, 2013 and 2012) adjustments related to the allowance for loan and lease losses, restricted stock compensation expense, and other expenses, which increased provision for loan and lease losses by $758 thousand, stock compensation expense by $483 thousand, and other expense by $160 thousand.

There was an uptick in votes against ratification of KPMG as auditor at the 2015 annual meeting (6.78% against), according to data from Audit Analytics. This is not as extreme as the votes against KPMG during GE’s most recent dark period, or when KPMG client Wells Fargo admitted to creating fake accounts, but the percentage against KPMG was visibly higher than in any other year for Banc.

Banc of California issue an amended 10-K on August 18, 2014,  describing the weakness and how it would remediate the errors, which included poor controls over the bank’s review and analysis of ALL:

  • Appointed Robert Sznewajs as new Audit Committee chairman and Ronald Nicolas as bank Chief Financial Officer as well as hired additional accounting and finance resources and professionals, including a new Chief Accounting Officer in March 2014, a new Controller in March 2014, a Director of Accounting Policy in May 2014, and a new Director of Internal Audit, together with other new hires in the accounting, finance, and audit departments;

  • Designed new controls around the review and analysis of the allowance for loan and lease losses (“ALLL”) including the addition of a new Credit Risk Analytics team to oversee the ALLL process;

  • Implemented a new automated accounting software platform that eliminates the reliance on manual review of significant spreadsheets; and

  • Established a Sarbanes-Oxley steering committee in 2014 that meets bi-weekly with participation of the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and the Director of Internal Audit.

KPMG was already on its left foot with the client after the anonymous blogger’s allegations were published in Seeking Alpha in October 2016 because, according to Sugarman’s lawsuits, on October 27, 2016, Banc’s independent auditor, KPMG, sent a letter “raising concerns about allegations of ‘inappropriate relationships with third parties’ and ‘potential undisclosed related party transactions.’” 

On October 30, 2016, a Board special committee hired a law firm with no prior relationship with Banc to conduct an independent investigation of the issues raised by the blog post and questions raised by the KPMG letter.

STEVEN A. SUGARMAN et al., Plaintiffs and Appellants, v. HALLE BENETT et al., Defendants and Appellants.
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B307753 (Los Angeles County Super. Ct. No. 19STCV36697)
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So, KPMG had been on Banc of California’s nerves since 2014, barely two years into its relationship with its client. What I didn’t know when I wrote on June 20, 2018 about Banc of California and other KPMG clients on the “to be inspected” lists is KPMG had also been getting a lot of grief from the PCAOB about Banc of California for just as long.

Those additional details were not available until the criminal trial of KPMG No. 2 auditor David Middendorf and PCAOB Inspection Leader Jeffrey Wada. That’s when Banc of California’s place on the stolen PCAOB lists was confirmed and the PCAOB’s comments to KPMG about Banc of California became known.

On February 20, 2019, Brian Sweet gave direct testimony in U.S. v. David Middendorf and Jeffrey Wada, 18 Cr. 0036(JPO) about something the PCAOB and the audit firms like to call a “positive quality events” and about the opposite, “negative quality events” in particular with regard to banks. Questioning is by U.S. Attorney Amanda Kramer:

USA KRAMER: Are you familiar with the term “positive quality events”?

SWEET: Yes.

USA KRAMER:  What do you understand that to mean?

SWEET: Positive quality event is a PCAOB term that is used for an audit that goes really, really well.

USA KRAMER:  Who makes the decision about whether an audit is a positive quality event?

SWEET: The PCAOB does.

USA KRAMER:  And why, in your understanding from your experience at the PCAOB, does the PCAOB classify some audits as positive quality events?

SWEET: This ties back to what we were discussing yesterday about these root cause analysis. That one of the things the PCAOB Inspection Team does as part of its, you know, national office procedures is to evaluate the firm’s overall system of quality is they want to understand what were the underlying factors that may have caused an audit to be really, really good or, in turn, what were the underlying factors that caused an audit to be really, really bad, when there would be a negative quality event. So, they would look at those root causes.

USA KRAMER:  And does the PCAOB classify some audits as negative quality events?

SWEET: Yes.

USA KRAMER:  Do you have an understanding of how many audits the PCAOB classifies as positive or negative quality events in a given year?

SWEET: I don’t know the total number, but from my experience when I was at the PCAOB, because I worked with primarily in the banking practice, there were always a few banks that made the cut of being negative quality events each year, so meaning really, really bad audits.

USA KRAMER:  And so when the PCAOB decides that an audit is a positive quality event, in your understanding, what does the PCAOB root cause subgroup then do with that audit?

SWEET: They make that determination after the inspection is done and so they will then ask the Engagement Team to have one more interview with them where they can talk through why the engagement team thought — what the factors were that caused it to be, you know, really, really good or, again, for a negative quality event, really, really bad.

USA KRAMER:  How does the PCAOB notify the firm that an audit has been deemed a positive quality event?

SWEET: One of the PCAOB inspectors assigned to this root cause subteam will notify usually the national office liaison that was assigned to support the firm or the Engagement Team through that inspection.

USA KRAMER:  Do members of the national office typically participate, in your experience, in the follow-up interview that the PCAOB has with the team about a positive quality event?

SWEET: Yes.

After this general explanation of positive and negative quality events, prosecutor Kramer zeroes in on a “positive quality event” for KPMG related to its 2016 inspections of 2015 audits.

USA KRAMER:  Do you recall whether or not any KPMG audits were identified by the PCAOB as positive quality events at the end of the 2016 inspections?

SWEET: Yes.

USA KRAMER:  Which ones were?

SWEET: I know that Century Bancorp, Banc of California, and TCF

Financial [formerly Chemical Financial] were all identified as positive quality events.

USA KRAMER:  And were any of those part of the rereviews that you

participated in after receiving the Wada list on March 28, 2016?

USA KRAMER:  Do you recall whether any of those three audits, Century, TCF or Banc of California, were part of the rereviews that you participated in after Cindy Holder shared with you the list of banking inspections for the — that the PCAOB had for KPMG that she had received from Jeff Wada on March 28, 2016?

SWEET: Yes.

USA KRAMER:  Which ones were part of the stealth rereviews?

SWEET: Both Century Bancorp and Banc of California were two of the rereviews done for these stealth reviews.

USA KRAMER:  From your experience at the PCAOB on the KPMG Inspection Team and then at KPMG, had KPMG previously had banking audits selected as positive quality events by the PCAOB, to the best of your memory?

SWEET: No. I was not aware of any instance where there had been a banking engagement that had been a positive quality event both from my time at the PCAOB and at KPMG.

It’s not surprising that there had been no “positive quality events” for the firm in Sweet’s memory. KPMG had been struggling to improve its PCAOB inspection results for banking clients for a long time. In particular, the PCAOB had been criticizing KPMG’s audits of the Allowance for Loan Losses, or ALL, since before the financial crisis. I wrote in 2010 that the PCAOB was criticizing KPMG’s approach to ALL already in 2007 and 2008, related to financial crisis era audits.

Brian Sweet proceeds to explain during the trial how badly he thought KPMG wanted to turn this around, in particular so it could keep PCAOB Part II criticisms private, criticisms made in 2014 and 2015 of KPMG‘s overall quality control system, “tone at the top” criticisms of its top leadership. 

USA KRAMER:  What’s your understanding of the effect, if any, on the firm of the PCAOB choosing a banking engagement as a positive quality event?

SWEET: It was a very big deal.

USA KRAMER:  Why?

SWEET: Because most or a significant number of the comments in the prior years had been banking-related, and one of the Part II themes in the KPMG’s report from the PCAOB in the prior years had been specific to these banking issues. For the bank then, and therefore for the firm, then in 2016 to not only have clean inspections, clean banking inspections with no comments, but to then have had three that were identified as not just, you know, passing but of such good quality that they were determined to be positive quality events gave both the PCAOB and KPMG a very significant data point to use in trying to explain that they had been taking such significant steps to fix past issues and keep the prior Part II section of the PCAOB’s report nonpublic.

USA KRAMER:  And to be clear, what does Part II of the report address, generally?

SWEET: Part II of the PCAOB’s annual reports addressed the thematic issues, so kind of the themes that the PCAOB identifies as a whole relating to the firm’s system of quality control. So it’s separate from the individual issuer inspections that are in are Part I, which ones get comment forms. These are more of the themes that are included in Part II.

USA KRAMER:  And do you know which specific theme in the Part II of KPMG’s inspection report the selection of these banking engagements as positive quality events was related to?

SWEET: Yes.

USA KRAMER:  Which one?

SWEET: There had been an allowance for loan loss in one of the banking areas, audit areas, there had been a theme for that kind of multiple years in a row at the PCAOB.

USA KRAMER:  Do you have any understanding as to whether KPMG cited the identification of these banking engagements as positive quality events in its efforts to convince the PCAOB that the ALL comment in Part II should remain nonpublic?

SWEET: Yes.

USA KRAMER:  What’s your understanding about that?

SWEET: My understanding was that that was something that the firm had been pointing to both in its monthly meetings with the PCAOB but that it was also something that they were pointing to in their response to the prior Part II additional remediation response that they had to write.

There’s some specific testimony about how the PCAOB had been writing comments to KPMG about its auditing of ALL at Banc of California, in particular.

USA KRAMER:  Yesterday you testified about which of the banking engagements from the March 28th list of PCAOB inspections that Jeff Wada shared with Cindy Holder that she shared with you were actually inspected in 2016. Do you remember which ones those were?

SWEET: Yes.

USA KRAMER:  Which ones?

SWEET: The ones that had been subject to the stealth rereviews

that ultimately got inspected were Century Bancorp, Banc of

California, People’s United, UMB Financial, and First Business

Financial.

USA KRAMER:  Do you know in what areas, if any, those audits had previously received comments by the PCAOB?

SWEET: I believe some of those were first-time inspections by the PCAOB, but I know Banc of California was one because I’ve worked on that inspection when I was at the PCAOB and I supported it through this liaison role in the rereview, and I know that they had received four comment forms the prior time that the PCAOB inspected. And it included the allowance for loan loss, investments, mortgage repurchase reserve, kind of the — I was going to say just some of the significant banking areas that had been subject to that audit.

USA KRAMER:  Do you know what specific area KPMG banking audits had traditionally been receiving comments in by the PCAOB?

SWEET: Yes.

USA KRAMER:  Which one?

SWEET: The most common area of comment by the PCAOB had been within this allowance for loan loss area.

USA KRAMER:  And with respect to the allowance, was there a particular aspect of it that had previously been receiving comments in KPMG inspections?

SWEET: Yes.

USA KRAMER:  Which one?

SWEET: It’s referred to as the general portion of the allowance for loan losses.

USA KRAMER:  And how did those inspections fare relative to the prior years’ inspections of KPMG banking clients?

SWEET: There had been a significant improvement of those

inspections.

USA KRAMER:  From your experience at KPMG and your experience working on the rereviews and participating in the inspections that were subject to the rereviews, what is your understanding of why the results were so much better?

SWEET: Because the workpapers presented the work in the best light possible, I believe that the rereviews had a very direct impact on the ultimate inspection outcomes.

All that effort by KPMG — legal and illegal, honest and stealth — was orchestrated to cover KPMG’s own behind with the PCAOB. In particular KPMG was keen to keep the regulator’s Part II comments about ALL and the inspection results for its audit of Banc of California, specifically, a secret.

On March 1, 2017, Banc of California also announced in its annual report that KPMG’s opinion on its 2016 financial statements would again include a material weakness in internal controls over financial reporting. The company’s 10-Q was also delayed. Even worse, the material weakness was said to have been caused by “an inadequate tone at the top…”

Material Weaknesses Identified Relating to the Tone at the Top Regarding the Importance of Internal Control over Financial Reporting as of December 31, 2016

As disclosed in the Company’s 10-Q, as of September 30, 2016, we determined that an inadequate tone at the top regarding the importance of internal control over financial reporting gave rise to the material weakness. Specifically, the Company’s tone at the top did not appropriately prioritize the Company’s internal control over financial reporting which has not been sufficient to address new and evolving sources of potential misstatement largely driven by the increased complexity and growth in the size and scale of the business. This ineffective tone at the top adversely impacted a number of processes resulting in an ineffective risk assessment process, ineffective monitoring activities, and insufficient resources or support which caused the Company to experience an increase in the number of control deficiencies across multiple processes. As a result, even though no material misstatement was identified in the financial statements, it was determined that there was a reasonable possibility that a material misstatement in the Company’s financial statements would not have been prevented or detected on a timely basis.

Auditors’ criticism of clients’ “tone at the top” is fairly rare. Audit Analytics reports, “‘Tone at the top’ is very strong language that implies, among other things, improper management conduct.”

The Audit Analytics report documents 6 auditor ICFR opinions issued from 2010-2015 that cite “tone at the top.” I did some research and found 27 more “tone at the top” mentions from 2016 through July 1, 2021. Big 4 firms cited “tone at the top” issues at clients sixteen times. KPMG did it only 3 times. EY, Banc’’s future auditor, never cited “tone at the top” issues during this period.

Banc of California was required to remediate its “inadequate tone at the top” and initiate several management changes in addition to the ones already required back in 2014. 

KPMG charged Banc of California twice as much in audit fees in 2015 versus 2014 for all its trouble. KPMG wrote a letter to the Audit Committee on October 27, 2016 when the blogger allegations surfaced that implied they may have been lied to by management, sparking the costly internal independent investigation and an SEC investigation. KPMG dinged Banc of California twice for material weaknesses including one that forced an amended 10-K and now added the drastic charge of weak “tone at the top”.

Therefore, it was no surprise but a wonder it took so long when, on March 1, 2019, Banc of California also filed an 8-K with the SEC to say it was changing auditors, bringing in Ernst & Young to replace KPMG. The bank disclosed it had been conducting “a competitive review process of independent registered public accounting firms” and “following careful deliberation” the Audit Committee approved the dismissal of KPMG LLP. KPMG was allowed to wrap up a compliance audit conducted in accordance with the U.S. Department of Housing and Urban Development Audit Guide for the year ending December 31, 2018 and then EY would take over all beginning with fiscal year 2019.

Ironically, KPMG slammed its client Banc of California for poor leadership “tone at the top” at the same time its top audit partners were committing federal crimes to maintain secrecy, as we heard in Brian Sweet’s testimony, regarding the PCAOB’s criticisms in 2015 of KPMG’s own “tone at the top”.

Although all of the Big 4 audit firms — Deloitte, EY, PwC, and KPMG — have all experienced a public airing of PCAOB Part II criticisms more than once, KPMG is the only Big 4 firm to ever see its “tone at the top” explicitly criticized by the PCAOB. Those criticisms are very specific:

Concerns Related to the Tone at the Top 

The Firm’s inspection results have deteriorated over the past three years, even though the Firm has taken, and continues to take, steps intended to remediate quality control issues. The Firm has indicated, in communications with both the Board and the Firm’s professionals, that a continued concentrated effort is required to address identified deficiencies. 

Certain of its actions and messaging, however, seem inconsistent with this premise. While multiple factors may have contributed to the negative trend in inspection results, it appears that the Firm’s tone and messaging, in some respects, may present the risk of undercutting the Firm’s specific efforts to remediate quality control concerns, in part because the tone and messaging may suggest a lack of complete commitment to an appropriately concentrated and objective approach to evaluating and responding to identified audit deficiencies and to addressing partners’ audit quality.

Continuing improvement in the Firm’s tone at the top is important, as it is fundamental to the critical goal of achieving significant improvements in audit quality…Maintaining an appropriate tone is important to improving audit quality, as an appropriate (or inappropriate) tone and the behaviors of leadership can have a far reaching effect on the Firm’s culture and on its professionals, including how they view their role as auditors. * * * * Specifically, the Firm should assess whether the behaviors and actions of its leadership are consistent with, and supportive of, efforts to address identified deficiencies and to improve audit quality * * * *. 

In the Matter of KPMG LLP’s Quality Control Remediation Submissions
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PCAOB Release No. 104-2019-003 January 25, 2019 “The Public Company Accounting Oversight Board (“Board” or “PCAOB”) has evaluated the submissions of KPMG LLP (“Firm”) pursuant to PCAOB Rule 4009(a) for the remediation periods ended October 15, 2016 and November 9, 2017 concerning the Firm’s efforts to address certain quality control criticisms included in the nonpublic portions of the Board’s October 15, 2015 and November 9, 2016 inspection reports on the Firm (“Reports”). The Board has determined that as of October 15, 2016 and November 9, 2017, respectively, the Firm had not addressed certain criticisms in the Reports to the Board’s satisfaction. Accordingly, pursuant to Section 104(g)(2) of the Sarbanes-Oxley Act of 2002 (“Act”) and PCAOB Rule 4009(d), the Board is making public the portions of the Reports that deal with those criticisms.1″
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When these criticisms were finally made public, January 25, 2019, long after the KPMG-PCAOB scandal had been exposed but before the trial, KPMG’s response to two years of Part II criticisms was also made public in the same file. KPMG used specific words that acknowledged criticism of the firm’s integrity, “tone at the top,” and culture. KPMG’s leader, Lynn Doughtie, admitted the firm had a problem with its audit/National Office leadership and that they had all been replaced.

In its 2018 annual report also filed March 1, 2019, Bank of California said that the SEC investigation of the anonymous blog posts, first announced in its 10-K filed March 1, 2017, was still ongoing. The bank also said its own independent investigation found no connection between the company its CEO and other executives or that the company was controlled by an individual who pled guilty to securities fraud in matters unrelated to Bank of California.

On December 20, 2019, the SEC concluded its investigation of Banc of California, with no action being taken.

Successor auditor Ernst & Young seems to have caught on quickly at Banc of California, and issued a warning in both 2019 and 2020 to investors and other users of the Banc of California financial statements that its allowance for credit losses was a critical audit matter that may require more time and effort to audit. 

What is a critical audit matter?

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account and the disclosure to which it relates.

EY’s total fees billed to Banc of California in 2020 are 46% less than KPMG’s peak fees in 2017 and 34% less than KPMG billed for 2018, its last full year as auditor, despite high risk and more effort required.

A KPMG spokesman said the firm had no comment on its relationship with Banc of California.

Banc of California did not respond to multiple requests for comment on its relationship with KPMG.

© Francine McKenna, The Digging Company LLC, 2022

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