Dodd-Frank News Center

CFPB issues FY 2017 'Independent Audit of Selected Operations and Budget'

This story appeared in Bank Digest

The Consumer Financial Protection Bureau has issued its "Consumer Financial Protection Bureau Independent Audit of Selected Operations and Budget" for fiscal year 2017, in accordance with the Dodd-Frank Act. The purpose of this annual audit is to provide objective analyses to improve program performance and operations, reduce costs, facilitate decision-making, and contribute to public accountability.

This year's independent audit was conducted by KPMG LLP and evaluated: (1) the CFPB's budget process relative to CFPB policies and procedures established over budget formulation, execution, and monitoring; (2) the CFPB's monitoring and oversight of the interagency agreement with third-party service provider Bureau of Fiscal Service--Administrative Resource Center; and (3) the corrective actions taken to resolve the findings included in the CFPB's FY 2016 "Independent Audit of Selected Operations and Budget," also completed by KPMG.

Bank Executives Charged with Understating Losses During Financial Crisis

This story appeared in Bank Digest.

The SEC has charged three former bank executives in Nebraska with allegedly participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis. The SEC alleges that Gilbert G. Lundstrom, James A. Laphen and Don A. Langford played a role in TierOne Bank, Lincoln, Neb., understating its loan-related losses as well as losses on real estate repossessed by the bank.

TierOne had expanded into riskier types of lending in Las Vegas and other high-growth geographic areas in Arizona and Florida, and the bank was experiencing a significant rise in high-risk problem loans. TierOne's primary banking regulator, the Office of Thrift Supervision, directed TierOne to maintain higher capital ratios as a result of the bank's increase in high-risk problem loans. To appear to comply with the heightened capital requirements, Lundstrom, Laphen and Langford disregarded information showing that the collateral securing certain TierOne loans and real estate repossessed by the bank was overvalued due to the bank's reliance on stale and inadequately discounted appraisals, according to the SEC. The losses were understated by millions of dollars in multiple SEC filings.

Lundstrom and Laphen agreed to settle the SEC's charges as did Lundstrom's son Trevor A. Lundstrom, who is charged with illegally trading on nonpublic information from his father about an anticipated asset sale. The Lundstroms and Laphen agreed to collectively pay nearly $1.2 million in the settlements, which are subject to court approval. The SEC's case continues against Langford.

House Passes Regulatory Freeze Legislation That Also Imposes Added Rulemaking Duties on SEC, Including 404(b) Impact

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The House of Representatives passed with a bi-partisan vote of 245-172 the Red Tape Reduction and Small Business Job Creation Act , H.R. 4078, to prohibit any federal agency from taking any significant regulatory action until the Secretary of Labor reports that the Bureau of Labor Statistics average of monthly unemployment rates for any quarter after the enactment of the Act is 6 percent or less. H.R. 4078 would also require the SEC to conduct a more thorough cost-benefit analysis of proposed regulations.

SEC Brings Action against Chinese Audit Arm of Big Four Audit Network for Failing to Produce Work Papers

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The SEC has begun an administrative proceeding against the Chinese member firm of a Big Four audit network for its alleged willful failure, in response to a Commission request, to provide audit work papers despite its legal obligations, as a registered accounting firm, to do so. The firm is a public accounting firm registered with the Public Company Accounting Oversight Board, and located in Shanghai, the People’s Republic of China. (In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Release No. 34-14872, May 9, 2012)

House Legislation Would Prohibit PCAOB from Mandating Auditor Rotation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Against the backdrop of a PCAOB concept release on mandatory auditor rotation, Rep. Michael Fitzgerald (R-PA) has prepared draft legislation prohibiting the Board from mandating auditor rotation. Specifically, the measure would amend Section 103 of the Sarbanes-Oxley Act to provide that the PCAOB will have no authority to require that audits conducted for a particular company in accordance with the standards set forth under this section be conducted by specific auditors, or that such audits be conducted for a company by different auditors on a rotating basis.

Fed Gov. Duke Calls for Guidance on Accounting for Troubled Debt Restructurings and Sets Goal for Loan Loss Accounting

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Federal Reserve Board Governor Elizabeth Duke favors the issuance of guidance clarifying the regulatory and accounting treatment of troubled debt restructuring, non-performing assets, and classified loans which, while they have different definitions, time frames, and regulatory consequences, often seem to be used interchangeably. In remarks before the California Bankers Association, the Fed official also sees a need to clarify expectations, improve transparency, and heighten consistency around accounting for loan losses.

With regard to troubled debt restructuring, Gov. Duke noted that some bankers are reluctant to offer modifications that would help struggling borrowers and enhance the potential for ultimate repayment because they are concerned that the loan would be classified as a TDR and remain classified even after performance under the modified terms is demonstrated.

Federal Judge Asks SEC to Provide Factual Predicate in Settling Enforcement Action Involving Disgorgement of Bonuses

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

A federal judge has asked the SEC to provide a written factual predicate for why the agency believes the court should find that proposed final judgments in an enforcement action alleging that a company prepared materially inaccurate financial statements and lacked adequate financial controls are fair, reasonable, adequate, and in the public interest. (SEC v. Koss Corporation, No. 2:11-cv-00991, ED Wis). Citing Judge Rakoff’s opinion in SEC v. Citigroup Global Mkt. (SD N.Y. Nov. 28, 2011), Judge Randa specifically requested that the SEC provide, by January 24, 2012, a written factual predicate addressing the adequacy of the proposed final judgment provision regarding disgorgement by the company’s CEO.

PCAOB Finds Big Four Audit Firm Deficient in Testing Issuer’s Fair Value Measurement Procedures and Internal Controls

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

A PCAOB inspection team identified matters that it considered to be deficiencies in the performance of the audit work of a Big Four firm, primarily including failures involving fair valuation of asserts and internal control over financial reporting. In some instances, follow-up between the audit firm and the issuer led to a change in the issuer’s accounting or disclosure practices. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.

Senator Schumer Urges PCAOB to Discipline Chinese Audit Firms that Resist Oversight

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

In a letter to the PCAOB, Senator Charles Schumer called on the PCAOB to discipline Chinese accounting firms that continue to resist independent regulatory inspections. The letter expressed the Senator’s concern about the PCAOB’s ``continued failure’’ to inspect Chinese audit firms. Noting that close to 100 Chinese auditors, or China-based affiliates of U.S. auditors, have registered with the Board to perform audit work for over 300 U.S. public companies with operations in China, Senator Schumer said that the Board’s failure to inspect means that investors have no independent assurance that Chinese accounting firms’ audits on U.S. public companies’ operations in China comply with U.S. law. The Banking Committee member called this a serious problem that threatens to undermine public confidence in the companies’ financial statements, which is critical to confidence in the markets. In a separate letter, Senator Schumer asked the SEC to require upfront disclosure by public companies that use China-based audit firms.

Obama Administration Says Deficit Reduction Should Include Financial Crisis Responsibility Fee and End LIFO Accounting

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The Obama Administration wants the deficit reduction legislation produced by the Joint Select Committee on Deficit Reduction created by the Budget Control Act to include a Financial Crisis Responsibility Fee on the largest financial institutions to fully compensate taxpayers for the extraordinary support they provided to the financial sector through the Troubled Asset Relief Program (TARP). The Administration also seeks the repeal of the LIFO accounting system used by public reporting companies.