In its first case against auditors stemming from the financial crisis, the Securities and Exchange Commission on Wednesday took action against two KPMG employees who had given a clean audit opinion to a Nebraska-based bank holding company that later failed because of bad loans it had made to real estate developers in Nevada and Florida.
The S.E.C. asked an administrative law judge to bar John J. Aesoph, 40, a partner in the Omaha office of KPMG, and Darren M. Bennett, 35, a senior manager, for their roles in an audit of TierOne in 2008.
That included what the S.E.C. said was a failure to take steps to review the audit after evidence emerged that the auditors had been misled about whether the bank had taken large enough write-downs on the value of real estate development loans.
“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 Robert Khuzami, the commission’s enforcement director. “Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations.”
George S. Canellos, the deputy director of the division, said the case was “in keeping with our focus on the important responsibility of gatekeepers” who fail to do their jobs properly.
He pointed to a case filed last month against eight former directors of Morgan Keegan mutual funds, who were charged with failing to prevent fund managers from overvaluing fund assets during the financial crisis.
Lawyers for Mr. Aesoph and Mr. Bennett did not comment on the case, but KPMG issued a statement saying, “Our partner and senior manager look forward to presenting the facts in support of the work that was performed under the circumstances at TierOne.” A KPMG spokesman said Mr. Aesoph and Mr. Bennett remained at the company.
TierOne was a savings bank that focused on its home markets in Iowa, Kansas and Nebraska until it began to look for faster growing markets and opened loan production offices in Arizona, Colorado, Florida and Nevada. Loans to developers grew in those markets, leaving the bank exposed when property values began to plummet.
In 2008, TierOne closed those offices and wrote down the value of some of its largest loans. But the S.E.C. said that in doing so, the bank had not acted rapidly enough, particularly with regard to Nevada loans.
It said the auditors should have noted numerous red flags, including the fact that the few new appraisals that were done showed management had underestimated the expected losses.
It noted that the auditors had signed off on the financial statements even after the Office of Thrift Supervision, the bank’s primary regulator, warned of serious problems.
In 2010, the bank failed and was taken over by the Federal Deposit Insurance Corporation, which estimated its losses would be $298 million, or about 10 percent of total assets. The F.D.I.C. has since revised the estimate to $212 million.
KPMG, one of the largest audit firms in the world, was not named as a defendant in the case, which may reflect the S.E.C.’s lack of possible remedies as much as it does a view of the firm’s actions.
Under the law, the S.E.C. does not have the authority to levy financial penalties on auditors who fail to do their jobs. It can only suspend or bar them from practicing before the commission, a penalty that would prevent them from having any role in accounting or auditing the books of a public company.
Taking such a step against KPMG would be tantamount to putting it out of business, something the commission would not want to do in any but the most extreme circumstances.
The commission previously filed charges against three former officials of TierOne, two of whom settled and one of whom is fighting it in federal court in Omaha.
