The US Securities and Exchange Commission (SEC) has charged two KPMG US auditors of improper professional conduct in relation to the audit work of failed Nebraska-based bank TierOne.

The SEC’s investigation, the first in which the watchdog charges auditors for their role during the financial crisis, concluded that KPMG partner John Aesoph and senior manager Darren Bennett failed to comply with professional auditing standards.

"Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans," said SEC division of enforcement outgoing director Robert Khuzami.

The SEC maintains that the auditors lacked the appropriate professional scepticism to detect TierOne’s misbehaviour which managed to understate millions of dollars in loan-related losses and losses on real state repossessed by the bank at the height of the financial crisis.

Bank’s chief executives- also charged by the SEC in September last year- engineered a scheme through which TierOne appeared to comply with required high capital ratios as it engaged in riskier types of lending across Las Vegas, Arizona and Florida.

A statement issued by the SEC said a hearing will be scheduled before an administrative law judge who would hear the auditors and the regulator’s allegations.

"Our partner and senior manager look forward to presenting the facts in support of the work that was performed at TierOne," a spokesperson for KPMG told the International Accounting Bulletin.

Enforcement following financial crisis

The financial crisis has spawned stimulus for enforcement in many countries and regulators seem to be more proactive, according to London School of Economics senior lecturer Carsten Gerner-Beuerle, a corporate law and securities regulation specialist.

"Of course auditors were found liable before, but as far as the financial crisis is concerned I’m not aware of another case brought by the SEC," Gerner- Beurle told the International Accounting Bulletin.

Gerner-Beurle says the SEC has always been a forceful regulator however liability with respect of auditors could be extremely large. "There has to be a limit somewhere and traditionally regulation has been protective and there should be a very clear case as to find an auditor liable."

In the view of Gerner-Beurle this approach might be changing although regulators tend "to strike a balance because if the risk of liability is too high then the audit fees would also be higher and jeopardise the business model of auditors."

Related links

US Securities and Exchange Commission