Bank Auditors on Hot Seat Over Mortgage Accounting


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EDITOR’S ANALYSIS: Seems boring, doesn’t it. All those numbers and columns. But here is actually where the rubber meets the road because the difference between what the banks  SAID they were doing and what ACTUALLY happened with the money is the like night and day. And the auditors should have caught it. But they didn’t because like the ratings firms they were paid not to see what was right in front of them.

Like the ratings firms, if they had REALLY done their job there would have been no money from investors, there would have been no crazy guaranteed to fail loans to hapless homeowners who didn’t understand the traditional loan papers, much less ones designed for use in securitization. The absence of loans receivable would have been one clue that the banks were not taking losses on defaulted loans. It would have also alerted the auditors that a pile of liability was mounting because the the profits and fees for “selling” (“trading”) on investor money were outsized by any standards compared to prior deals. They would have questioned whether those were indeed profits and fees, or just money owed to the investors.

I could give a long list. The point is that the actual financial health of the Banks was misrepresented to shareholders, to the public, to people trading in the stocks of these Banks, to investors buying the bogus mortgage bonds and other ‘bonds” “securing” other types of consumer debt. It also is the final nail in the coffin as to disclosures that should have been made to borrowers as to who they were doing business with and whether the firm was acceptable to them.

For one thing, borrowers, in a transparent world, would have been told, pursuant to the requirements of the Federal Truth in Lending Act, something like “we have no interest in whether or not you pay on this obligation. In fact, we are being paid a fee and making profits based upon your signature and we are using your identity to sell securities to investors all over the world. The amount we are making on your particular loan is 300% of the actual loan amount. Your loan is $200,000.

“The fees, commissions and trading profits that are assured upon your signature are $600,000 and if you do not make payments, we will get even more from insurance, credit default swaps, over-collateralization, cross collateralization, and other credit enhancements.

“No underwriting committee and thus no underwriting procedures exist for granting loans. The sole basis for granting and funding a loan is whether the initial payment conforms with standards set by Goldman Sachs. The value of your property has not been determined. The appraiser has been given instructions as to the contract amount and is further instructed to certify a value $20,000 higher than the amount needed to close the transaction.

“No confirmation of property values, income or viability of the loan has been undertaken by anyone. The party to whom you have promised to pay this obligation did not loan you the money, and is not empowered to issue a satisfaction of mortgage since the obligation is actually owned by a third party, whose name is Goldman Sachs. The investors who advanced funds from which your loan was funded have already taken a substantial loss because Goldman Sachs has diverted money that was intended to fund loans and instead re-categorized them as trading profits. Please sign below to acknowledge that you have received full disclosure, and you may have your loan.”

Ok, we all know THAT didn’t happen. So what does that mean for borrowers? Besides the obvious question mark it puts after the words “amount due” it also raises the issue of whether the auditing firms, in addition to facing liability to investors and shareholders, might have liability to borrowers who were mislead by the financial practices of the investment banks and therefore about the viability of their loan, and the accounting for payments made on account of the obligation owed to the creditors (investors).

Proper accounting would have required that payments received and passed around like a whiskey bottle should have been credited to the borrowers’ obligations and correspondingly reduced those obligations as well as reducing the obligation owed to the investors because — they received PAYMENT.

The Banks take the position that since they stole the money fair and square from the investors that the investors obligation should not be reduced by the amount the banks received for the investors but not distributed to them. I disagree. And if the auditors had done their job, the borrowers would have learned the true balance due, if any, under the obligation that arose when their obligation began (and possibly ended) at their closing.

Audit Flaws Revealed, at Long Last


With hindsight, we now know that auditors in 2007 should have been looking carefully at bank books.

They should have drilled into allowances for loan losses, and they should have been especially alert for signs that the banks were playing games when they sold loans. Auditors should have carefully reviewed how the banks were valuing their mortgage-backed securities and loans that they planned to sell.

It won’t surprise you to learn that in at least one case, the auditor seems to have done a pretty poor job.

What may be surprising is that the Public Company Accounting Oversight Board figured that out at the time, and was harshly critical of Deloitte & Touche, one of the Big Four audit firms, for not doing the work to check assumptions in those areas and for being overly reliant on whatever the bank’s management said was proper.

Those comments were made after the board’s inspectors reviewed Deloitte’s audit of a bank’s 2006 results, as part of the annual inspection of the firm. The inspection of 61 Deloitte audits concluded in November 2007.

Had the auditor taken the criticism to heart, it might have gone back in and checked more thoroughly.

But it did not.

The bank was not named in the report, even in the previously confidential part released this week.

I thought it might have been Washington Mutual, a Deloitte client that collapsed in September 2008, but Deloitte says that was not the case.

Deloitte, in its response to the board, stated that at the bank, “the audit procedures performed, the conclusions reached and the related documentation were appropriate in the circumstances.”

In other words, Deloitte concluded the board simply did not understand what it was talking about.

All that became public in early 2008, when the censored version of the board’s report became public. But it was little remarked on at the time. Now we have seen the rest of the report, and it is even more critical.

The report said its inspections indicated “a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations.”

Deloitte responded by denying almost everything. It did not like the “second guessing” shown by the regulators. It said “we strongly take exception” to the observation about its culture, which it said was simply wrong.

In any case, the firm concluded, “there were only a limited number of instances,” not nearly enough to justify questioning Deloitte’s quality controls.

The board inspectors found problems in 27 of the 61 Deloitte audits.

The Sarbanes-Oxley law that established the board included provisions to protect the public images of audit firms. If a board inspection found problems with the quality control systems, that was to be kept confidential unless the firm did not move to fix the problems over the following year. Then the release could be delayed while the firm tried to persuade the board to keep the information private. If that effort failed, the firm could appeal to the Securities and Exchange Commission.

Only then could the report be made public. So in this case, it took 41 months from the issuance of the report — more than three years — for Deloitte’s clients to learn of the problem.

The board also has the authority to file enforcement actions against auditors, but those, too, are private until the S.E.C. rules on an appeal. It is as if charges of robbery had to be kept confidential until all appeals had been completed. There is no way to know if the accounting board has taken action against anyone. An auditor that the board deems to be in violation of rules may keep working for years while secret proceedings continue.

Firms have every incentive to stall, and then to say that whatever is being criticized happened years ago.

Deloitte’s current chief executive, Joe Echevarria, tried to sound cooperative in his response this week, and was careful to point out he was new on the job. A Deloitte spokesman said that Barry Salzberg, the chief executive when Deloitte sent the response letter in 2008, was traveling in Asia and unavailable for comment.

Mr. Echevarria emphasized in an interview that the firm was investing in training, and spoke of a desire to be the leader in audit quality.

Until 2002, audit firms were basically unregulated. The board was established in response to the WorldCom and Enron scandals, but all the secrecy has made it hard for outside observers to know how well it is doing. The fact that its inspectors zeroed in on mortgage issues when they did is impressive.

In theory, the board can put a firm out of business, but since the demise of Arthur Andersen reduced the Big Five to what some call the Final Four, there is general agreement that going to three would be unacceptable. So while the board can credibly threaten to close down a small firm that does a dozen or two audits each year, no such threat would be credible for Deloitte or one of the other three major accounting firms.

Contempt for regulators is nothing new in the auditing world. Back in 1999 and 2000, Arthur Levitt, then the chairman of the S.E.C., tried to impose some limited rules to increase the independence of the auditors from the companies whose books they audit. The firms fought back, arguing the S.E.C. had no such authority, and in the end Mr. Levitt got only part of what he was seeking.

In private conversations I had then, chief executives of some firms were resentful of any effort to regulate them. How dare some government bureaucrats question their judgment?

By protesting that it was unfair to criticize Deloitte’s culture, the firm may have spoken volumes about that culture.

In a culture that investors might prefer, a Deloitte partner whose audit failed to pass muster with the board might find that his career prospects had worsened, as others who did better audits were promoted. Imagine if the partner responsible for the audit of that bank had seen his career suffer, or even end.

But the letter makes it appear that Deloitte’s culture was one that pulled together and provided backing for a partner criticized by a picky regulator. Would the culture provide similar backing for a partner who angered a client’s management by forcing changes in financial statements that the company did not like?The secrecy mandated by Congress preserved Deloitte’s reputation for years. Now it may be unfairly raising doubts about other firms. Did others have audit failure rates approaching Deloitte’s 44 percent? Is Deloitte the only one of the Big Four to have failed to fix problems? We don’t know. The accounting oversight board last week said it might require that audit firms disclose the names of partners in charge of each audit. The firms hate the idea, warning it could unfairly damage the reputation of individual auditors who would suffer “guilt by association” if their clients got into trouble. Secrecy about who does the work seems to be a way of life at the Big Four. Deloitte’s letters to the board dismissing its concerns were not signed by anyone other than the firm as a whole. I’d love to know which executives signed off on assuring the board there was no need to look again at that bank’s books, and to ask them if they still held that opinion.Only Congress could change the law to require that full inspection reports be released and to make enforcement actions public when formal charges are filed. But the board could at least require that letters responding to board inspections be signed by real people, and that they carry statements saying the firm’s chief executive had approved the response.

16 Responses

  1. other quotes from ANONYMOUS:

    “…did servicer advance payments or not? Only ledgers will tell — and both servicers and securities trustees MUST have those ledgers. Because if they did not advance as required by PSA — then the “security investor” argument as creditor is immediately quashed — even without application of TILA Amendment as to defined Creditor. If they did advance — then loan not in default — but then have to apply — security investors are not the creditor. When anyone advances payments on another party’s behalf — this does NOT mean the borrower is not in default –they are in default to the party that advanced the payments. Of course, servicers rarely act on their own behalf — they act on behalf of someone else — the current “investor/creditor.” — And, that is why the creditor definition must be introduced.
    Courts that continue to apply antiquated law to subprime securitization — otherwise called — the advent of fraud — are simply not “educated.” They need to educated. And, if not plead properly — court will “simplify” for its own convenience…”

    “…Congress voted down BK reform twice — which would have made disclosure of creditor easy — why??? lobbying — And, lobbying by who??? financial services debt buyers — protected identity — by DEREGULATION.”

    The financial services debt buyers are the ones foreclosing—illegally…with courts letting it happen.

    How to fight back…there must be a way to get them to prove the accounting…demanding discovery and all that?!?!?

  2. Thanks Carie.

    Yes cease and desist and multiple qwrs all of the above. Evidence. Conficting one liners in response to investor and ” all other info requested unavialable and confidential” when it’s public knowledge on SEC site for anyone to dig out. Simple stuff your honor – I have this this and this verified – documented – what else are they hiding and why – this ought to be enough to make them cough it up don’t you agree? Who has the right to enforce the point of sale or satisfy the lien? Not determined, not disclosed. Simple request. Hearsay and fraud docs not allowed.

    Got a whole slew of CA UCC and trust laws to throw at them and wished to do it even before I was delinquent. Couldn’t get a response from attorneys if current, if not willing to mod, if not willing to go bankrupt and most important if you can’t afford. Also got no point in trying in CA.

    The thing is – just knowing what we know isn’t enough. They continue to do what they do because they can. They foreclose illegally and trample the property rights of this nation because they can and because they profit big time. Delighted when someone doesn’t pay on time. Don’t want it brought current. Un-noticed and un-opposed by most in non judicial CA. Good for MA but getting ignored. by judges in CA everyday – not all and I have those published cases to cite and will cite – don’t care if that is “unprofessional”. Attorney looking it over left it intact. This homeowner will not give up the keys to an interloper thief who never advanced a dime. Whover is damaged by the non payment gets the keys and if that is no one I keep the keys. In CA homeowner has title until the point of sale. No jack booted thugs allowed (but this happens anyway too). Just hope this doesn’t get speeded up by our Pres and friends. Need more than 90 days to sell stuff work three jobs (not happening easily and hard to believe people who want to work are not getting hired for any wage) to even relocate without being homeless. Could even rent out this house if I had anywhere ot go – tenants have more rights than homeowners. They can throw me out but not the tenants. I am not a lost cause even to get in a position to pay one day soon. But no throw out someone who has paid the same lender for fifteeen years on time – victimless crime.

    You are right – accounting needs to be produced “Request for Production”. To govt. to courts to investors to homeowers. No foreclosures without it. Not in anyones interest so far but the last and fat chance of that. Right now the challenge is getting a judge to compel it with enough of your own “proof” presented. Burden of proof on the Plaintiff. Have details, specifics and exhibiits (can’t afford the ink and paper) – going to try. Might be lame duck, wild goose chase, swan song, albatross or phoenix – going to try.

    RE TILA – this mortgage is 5 years old – after three years I don’t think you can make any TILA claims even the one Anonymous mentions – statute of limitations for TILA is up but will ask that question. It is one reason they drag out the mods and then foreclose after three years is up.

  3. I really believe the future of these cases lies in the demand for accounting—this has to be our plan of attack…

  4. @joann—I know the “know-it-alls” here will give me grief—but I don’t give a damn—here is what I would do if I were you—and, obviously I’m not an attorney—but since they (pretenders), are ILLEGALLY attempting foreclosure on you (and have been getting away with it because the courts are asleep), for an originally ILLEGAL contract—what the hell:

    Since we are now in the Wild West of the housing industry, I would use what ever laws are—or could be—on your side. Specifically, TILA Amendment and FDCPA.

    this quote from ANONYMOUS:

    “…current creditor obligated to divulge itself by TILA Amendment — since a “sale” of collection rights has occurred. Current creditor also subject to FDCPA — but, you have to know who that current creditor is — in order to apply the FDCPA…”

    Anyway—have you DEMANDED they tell you who “owns” you loan—ie current creditor?

    Have you DEMANDED for PROOF—with a LEDGER and MORTGAGE LOAN BALANCE SHEET—showing ALL payments from you conveyed to an actual “mortgage loan”—NOT just a DEBT COLLECTOR?

    Tell them that a DEBT COLLECTOR cannot legally foreclose. They are in VIOLATION of FDCPA and TILA amendment.

    If not—do it. Tell them they are in violation of these laws if they don’t give you this payment information—and cannot legally foreclose on you if they don’t have this proof…and that they need to back off and halt ALL foreclosure proceedings…You have to get VERY aggressive and tell them you are on to their lies—fax, email, certified mail—ALL addresses to all these jokers—Then you must attack the “foreclosure mill” in the same way. Certified Cease and Desist/dispute of “alleged debt” letters—telling them they have no standing—they are not the real party in interest—this is unsecured debt and you have not proved otherwise—

    please email me for more info:

  5. Re accounting from homeowner perspective:

    All accounting for my mortgage stopped four months ago. No statements. No update to the web account. No transactions updated as of the day I stopped the auto debit. Customer service quotes the rate of four months ago when it changes monthly. No accounting for interest rate used to calculate the growing balance. No accounting for penalties and now “mill” services that are starting (note left on door for “3rd party inspection”). Before that – I phoned and said I wished to bring it current. Was selling items to bring it current. (Not going to do it – selling items just to survive – but what if I was? – I am just very stressed that there is no accounting and was trying to get it and also maybe thought it would delay NOD a little longer). They literally said I could not bring it current unless I applied for a “workout” and even said “not a mod” Mind you no NOD filed yet. (Hud told me that was not correct – can apply for mod any time). Said they have no updated financial information and need to get it from me in an application. I said my priority was to bring it current and would consider a mod ap at a later date but needed the interest rate they are using (I watch my index – they apparently do not) and all transactions added to my account and how to pay past due and receive verification it was brought current. Interrupted didn’t want to discuss bringing it current. They said you can’t go into a local branch and pay anymore. They told me several times in the last months that “you don’t get a statement unless you make a payment”. It took two qwrs to get transactions and interest rate and 40 days to just get figures through june. So now it is almost Nov. Nothing – no way of knowing what they are adding to balance…..

    Tonight it is the least of my worries. Just found out NOD filed yesterday. Shaken. Online in my county – no details. Will have to wait for personal visit to courthouse Monday to see details. It may make my day perhaps if trust and trustee bank is not named – only original defunct lender recorded and online listing just shows filed by original trustee (not mers loan). Have trust info and loan listed in FWP (but no MLPA). Was working on quiet title case – pro se – only choice but lucky an attorney is willing to look it over. Using all learned here. Can you file declaratory relief to quiet title after a NOD? Anyone? No money for tender or bond. Is this still an offense or is it now a defense? Paid on time for years and years and years. They want this home bottom line. Geez how long do I have before homeless? 3 months? CA – wish it was MA.

  6. ok we figured that out when we all pulled our mortgage papers out of the file cabinets. the thing that stood out the most after wells fargo started losing my paper work so i dug out my papers was my appraisal. i have some appraisal knowledge and about how you have alot of homes in one area but if none match your home you can go further away. but the appraiser some how felt using homes that have a straw buyer and a home that was flipped making 50k in profit in 6 months. when the following month a friend of mine bought a similar house for 35k less, we didnt know each other yet, she had different real estate office, appraiser, broker /bank. her house 2200sqft same 1/2 acre, mine 2000sqft with inground pool. same 1/2 acre mine was tad bigger .67 vs .50, makes no sense. i was taken to the cleaners at closing. its fustrating to find such bs. the worst is the stated income crapola when i have proof i sent my broker my paycheck stubs but she chose to not use them. i was a long distance buyer and did not personally fill in my application. i learned alot about who not to ever trust again in my life. never again. sounds quite simular to the holocaust and hitler. hmmmmm

  7. wow, what a great read. Bill Black is the bomb. Now, if he could just educate a few hundred FBI agents, we’d be getting somewhere.

  8. Off topic but a great read to get a clearer idea of what was taking place while we were sleeping and why big banks have to fail. It really isn’t a question of if but rather of when. This focuses on B of A but I expect it to reflect the motivations behind the purchase of Wamu by Chase as well.

    October 21st, 2011 | Author: Matthew D. Weidner, Esq.


  10. […] Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud Tagged: accounting, amount due, auditing, bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, mortgage bonds, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND Livinglies’s Weblog […]

  11. I never thought I’d agree with that communist Bernie Sanders … but the FED must go … Do not pass GO , Do not print $200 ,,, it’s been corrupted for it’s entire history and has allowed our current problems to grow and compound beyond anyones ability to comprehend.

  12. Remember that satellite that recently was gonna drop a chunk ….. somewhere – maybe Canada, maybe India, maybe Washington State
    …. but it was gonna fall “somewhere”? And, there was “only a 1/3200000 chance” that it would injure somebody?
    Then, NASA announced that it had fallen to earth, but they didn’t know where? Well, here’s the straight skinny.

  13. END the Fed!

  14. Elaine…

    This is a great new for you.

    US Senator Bernie Sanders’ Dream Team Includes Deficit Owls and Elite Fraud Fighters from UMKC

    WASHINGTON, Oct. 20 – Nobel Prize-winning economist Joseph Stiglitz and other nationally-renowned economists agreed today to serve on a panel of experts to help Sen. Bernie Sanders (I-Vt.) draft legislation to reform the Federal Reserve.

    Sanders announced formation of his expert advisory panel in the wake of a damning report that faulted apparent conflicts of interest by bank-picked board members at the 12 regional Fed banks.
    Top executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank’s policies during the financial crisis, the Government Accountability Office investigation found. The dual roles created an appearance of a conflict of interest, according to the GAO.

    After the report was issued Wednesday, Sanders said he would work with top economists to develop legislation to restructure the Fed and tighten rules on conflicts of interest, ensure that the Fed fulfills its full-employment mandate, increase transparency, protect consumers and reduce income inequality.

  15. Audit the FED!!!!!!!
    Audit the FED!!!!!!!
    Audit the FED!!!!!!!
    Audit the FED!!!!!!!

    Isn’t it about time to quit mish mashing all the mundane mediocre topics and speak the truth?

    Therein is the real culprit of this mess.

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