Banking Law

Bailout beneficiary Citigroup got a boost from its largest shareholder--the US Treasury Department--when Treasury recently voted its 27% ownership interest (the largest single shareholder block) to affirm the reappointment of KPMG as Citi's auditor. That makes it 41 years in a row that KPMG has been Citi's auditor and, given how swimmingly Citi performed throughout the lead-up to the 2008 banking meltdown and the government's bailout of Citi, who could possibly have wished to replace such a crackerjack auditing outfit?

Well, Francine McKenna might be one such person.

Maybe KPMG knows this client best ? a dubious honor. KPMG has been on the scene of Citi?s crimes and misdemeanors all over the world for 41 years.

Maybe Treasury feels like a mother who puts up with a gold digging daughter-in-law because daughter-in-law saw mom kissing the tennis pro and mom knows her son has slept with the baby-sitter?

Ouch!

Francine's just warming up, though. She notes that KPMG's fees to Citi have been relatively flat from 2007-2009.

This seems quite odd given the tumultuous times we?ve had the last two years. Auditors are supposed to assess the additional risk of fraud and material misstatement associated with events like a global economic crisis, taking on taxpayers as significant shareholders (November 2008) and the credit chaos in industry and sovereign capital markets.

Although she can't prove it, Francine thinks that it's more than merely a coincidence that Treasury acquired a huge chunk of Citi's common stock in 2008 and in 2009 KPMG's fees went down.

While the US Treasury, via the IRS, was scaring the living daylights out of KPMG over tax shelter abuses in 2005 and the Department of Justice was considering indicting the firm, KPMG was busily auditing the Department of Justice and the US Mint.  In 2007 and 2008 KPMG also audited the Department of Treasury?s Financial Management Service.

Re: The Auditors, November 28, 2006:

KPMG is negotiating with the Department of Justice about its troubles while Department of Justice is negotiating with KPMG, their auditors, regarding their audits of DOJ financial statements? in addition to the ?too few to fail? doctrine at work here, there was also an attitude on the part of KPMG of, ?Hey DOJ losers, who are you to call us a mismanaged, uncontrolled mess??

At the last moment, the Department of Justice changed their mind about putting KPMG effectively ?out of business? over the tax shelter sins.

[...]

This decision cemented the US government and general global regulatory posture of  ?too few to fail? with regard to the largest audit firms.  What makes you think the US Treasury would ever force its close friend KPMG out of Citi?

When you read posts such as Francine's, which focus on the incestuous relationships among Capitol Hill, Wall Street, and the large "service providers" who "service" both, you'd swear that you could hear you grey-haired granny, sitting in her rocking chair on her front porch, puffing on her corncob pipe, and declaring knowingly,"This is what happens when cousins marry."

In banking, on Wall Street, and, apparently, in auditing, it's good to be "too big to fail."