A half-dozen publicly traded banks, many of them once known for their squeaky-clean accounting and financial reporting practices, have been dinged by auditors for deficiencies.
In recent weeks banks including Eagle Bancorp in Bethesda, Md., Central Pacific Financial in Honolulu, Banc of California in Irvine, and Webster Financial in Waterbury, Conn., have disclosed “material weaknesses” in their internal controls. Two others that have made similar disclosures, Hope Bancorp in Los Angeles and CIT Group in Livingston, N.J., also have delayed filing their 10-Ks.
In addition, First Commonwealth Financial in Indiana, Pa., said recently, without specifying any reasons, that it is delaying its 10-K.
The tangible damage has been limited so far. None of the banks have restated results or reported losses tied to any of the discoveries, but the criticism of their disclosure, loan-loss accounting and other practices puts investors on alert and can tarnish bank brands for a long time.
Moreover, the flurry of disclosures will get the attention of other publicly traded banks — especially the small ones — that are already complaining of heavy compliance costs.
Pinning down the source of the problems is hard as the banks range in size from the $5.3 billion-asset Central Pacific to the $64.2 billion-asset CIT.
Some banks have recently changed auditors and now work with firms that could be applying more scrutiny, observers said. Another factor is that Public Company Accounting Oversight Board — the agency created by Congress to oversee financial audits — has recently criticized big accounting firms for not taking a close enough look at internal controls in the banking industry.
“It appears that the accounting firms are flexing more muscle than they have in the past,” said Tim Coffey, an analyst with FIG Partners.
The problems disclosed by the banks vary. Webster, for instance, was cited by KPMG for not properly documenting the approvals needed to change how it calculates its loan-loss provision. Central Pacific was also cited by KPMG for using incomplete information in estimating its allowance.
“There has definitely been an increase in banks disclosing these issues,” said Collyn Gilbert, an analyst with Keefe, Bruyette & Woods.
The examples of tougher auditing are a contrast to the prevailing sense that more lenient oversight of banks is on the way. Bank stocks have surged since the presidential election, in part on hopes that President Trump will take a lighter regulatory touch. In a meeting with community bankers Thursday, the president reiterated promises to scale back compliance burdens for community banks.
Experts were quick to note that each bank has its own unique set of financial circumstances. Banc of California, for instance, was cited by KPMG for setting an “inadequate tone at the top” about the importance of internal controls and for not emphasizing the importance of internal controls.
The bank is fighting back claims of alleged financial ties between its senior leaders and Jason Galanis, an imprisoned financier. CEO Steven Sugarman resigned in January after the bank admitted it misled investors about the matter. The Securities and Exchange Commission is investigating the bank.
In the case of Banc of California, the accounting problems were “indicative” of broader set of issues facing the company, Coffey said.
Additionally, Eagle — which was cited for weak controls in income tax preparation — recently switched auditors, Chief Financial Officer Jim Langmead said. The new accounting firm, Dixon Hughes Goodman, simply applied stricter standards in its inspection, he said.
“It’s a question about a deeper drill,” Langmead said.
Still, if there’s a thread that runs through several of the cases, it’s this: The auditor that signed off on several of the annual reports, KPMG, was recently been cited by the PCAOB for not paying close enough attention to internal controls in the financial services industry.
The PCAOB, established by the Sarbanes-Oxley Act of 2002, last year found a number of problems with KPMG audits as part of its annual inspection of the New York firm. Out of 49 audits included in the PCAOB inspection, the board found deficiencies with nearly half of them.
Among the audits included in the inspection were several financial services companies. KPMG was cited for failing to closely scrutinize the internal controls for the way the banks calculate their allowance for loan losses.
A possible reason for the increase in material-weakness disclosures is that the PCAOB has been “flagging the audit firms for their failures to sanction the little banks,” said Roman Weil, professor emeritus of accounting at the University of Chicago.
The PCAOB declined to comment. KPMG did not answer American Banker’s questions by deadline.
Langmead said Eagle is taking steps to remediate the accounting issues it disclosed in its 10-K. He described the tax-related issue as “complex” but noted it’s just one of several areas of banking that have grown more complicated in recent years.
While the increase in accounting woes has created headaches for bankers, there is a bright spot, according to Coffey.
“Ultimately it’s good for the investors” when auditing standards are exacting, he said.