978-1285770178 Case Printout Case CPC-27-04 Part 2

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Independent audits are an integral part of the system of controls designed to

professionalism and poor quality audit work by CPA’s [sic] helped mask the

notify regulators about poor management practices at failing thrifts, which

ultimately delayed regulatory action against many unscrupulous thrift

the bank as those terms are used in 12 U.S.C. §§ 1813(u)(4)(C), 1818(b)(1), and

1818(b)(1) and 12 U.S.C. § 1818(i)(2)(B)(i)(II) expressly include an Institution

Affiliated Party (IAP) within their respective sanctions so that there must be some

[c]oncern … that [the OCC] could obtain enforcement orders against a

firm, since the term “person” includes entities as well as individuals, and that

1818(i)(2)(B)(i)(II).” Maj. Op. at 1329. As the majority itself notes, the statutory

identify and report problems in thrift’s [sic] when they arise. A lack of

presence of fraud at a number of failed thrifts. In many instances auditors did not

[T]he Committee expects the [OCC] to limit enforcement actions in the usual

case to individuals who have participated in the wrongful action, to prevent

unintended consequences or economic harm to innocent third parties.

However the Committee strongly believes that [OCC] should have the power to

proceed against such entities if most or many of the managing partners or senior

officers of the entity have participated in some way in the egregious misconduct.

For example, a removal and prohibition order might be justified against the local

office of a national accounting firm if it could be shown that a majority of the

managing partners or senior supervisory staff participated directly or indirectly in

*1337 Keystone audit, Grant Thornton had approximately 300 partners and 3,500

other employees in 40 offices throughout the United States. Hr’g Tr. 2160, Nov.

23, 2004. The failure of Grant Thornton’s Keystone audit, however, was caused

by the actions of only two individuals. The OCC made no finding that the flaws in

FN1. The OCC argues that this language limiting firm-wide liability applies only

to “12 U.S.C. § 1818(e)’s removal and prohibition sanctions against professional

firms…. There was no hint in the House Report that professional firms were not

I also firmly disagree with the majority’s vacillating assessment of the audit Grant

Thornton conducted. See Maj. Op. at 1333 (“while Grant Thornton’s audit may

have been ‘strikingly incompetent,’…” (emphasis added)). A fuller exposition of

was losing money as it was being looted by its management. To preserve the

illusion of profitability, Keystone’s management fraudulently misrepresented its

financial condition. At the center of the fraud was a business arrangement

Keystone entered into with United National Bank (United) of Wheeling, West

for securitization.FN2 After purchasing the mortgages with funds provided by

United and arranging for servicing and securitization, Keystone included the

mortgages on its books as assets despite the fact that United owned them. See

OCC Dec. at 4-5.

irregularities in Keystone’s management and accounting practices reflected in the

quarterly reports Keystone was required to file with the OCC. On May 8, 1998 the

OCC informed Keystone that it was considering imposing a civil monetary

penalty after Keystone filed an inaccurate report for the third quarter of 1997;

FN3. The Supervisory Agreement required that Keystone retain a national

accounting firm to, inter alia,

(3) assess the appropriateness of all carrying values of entries on the balance

sheet and income statement.

between the OCC and Keystone to discuss the OCC’s earlier investigations of

Keystone. The OCC representatives explained that Keystone had overstated its

assets by about $90 million (almost 10% of its reported assets) in three earlier

quarterly reports. Grant Thornton assigned one partner, Stanley Quay, and one

2159, Nov. 23, 2004. Buenger had over four years of auditing experience with

Grant Thornton. See Tr. 2590, Nov. 24, 2004.

(1) in a short period of time Keystone had grown rapidly in asset size and

internal control structure (FF 132-134); (6) The OCC had just downgraded the

bank to an unacceptable composite “4” CAMELS rating, and downgraded

Keystone’s management to the lowest rating of “5” (FF 150); (7) the FBI had

investigated [Keystone’s “senior vice president” and “controlling officer”] Ms.

139); (10) Keystone also recently had claimed ownership of $16 million in

residual interests in securitizations even though Keystone had pledged those

interests to other parties (FF 139); (11) the bank had a history of filing inaccurate

Call Reports, key insiders had been assessed CMPs [civil monetary penalties] in

OCC Dec. 10-11. Despite these obvious red flags, Quay and Buenger began with

what Grant Thornton’s audit manual termed a “Basic” audit. FF 176-77, 182-83.

Performing only a “Basic” audit, Quay and Buenger were to (1) obtain written

confirmation from Compu-Link and Advanta that they were in fact servicing the

to Grant Thornton’s audit manual, in auditing a maximum risk client, an auditor is

required to perform a “Comprehensive” audit, including a “test of details” to verify

the accuracy of the client’s interest income. FF 185-89. Despite Keystone’s

classification as “maximum risk,” the original audit plan was not amended and

information in the bank’s financial statements. See FF 66-68, 180. The more

searching method, a “test of details,” requires the auditor to review the bank’s

“primary financial documents such as … remittances and cash receipts” and to

“trace[ ] those items into bank records.” FF 63–65.

$14 million in Keystone accounts and Advanta had serviced approximately $6.3

million. Buenger asked Compu-Link and Advanta in writing to verify the size of

Keystone’s loan portfolios. CompuLink verified, without explanation, that it had

serviced just over $227 million “of Keystone loans.” FN6

After receiving no response from Advanta for several weeks, Buenger followed

up by telephone and fax. The Advanta manager in charge of the Keystone

accounts, Patricia Ramirez, then sent Buenger a statement via FedEx indicating

that Advanta had serviced only approximately $6.3 million in Keystone

titanic*1340 discrepancy, Buenger did not request a written clarification as

required under Generally Accepted Auditing Standards (GAAS).FN8 Instead,

relying on the earlier telephone call with Ramirez, Buenger simply concluded that

the $242 million figure was accurate.

audit. See Ferriso v. NLRB, 125 F.3d 865, 871 (D.C.Cir.1997). Under 12 U.S.C.

§ 1831m(f)(1) an auditor examining a federally insured depository institution is

required to comply with GAAS. GAAS requires, inter alia, that an auditor exercise

“due professional care” and “professional skepticism” in conducting an audit. See

writing. See AU § 330.29. Buenger’s reliance on her telephone conversation with

Ramirez that Ramirez had located an additional $236 million in “Keystone loans”

flagrantly violated the requirement that all “significant” confirmations of financial

data be in writing.

independently verify the accuracy of the figures as they were required to do

under GAAS and Grant Thornton’s own internal audit manual.FN9 In reality

almost the entire $98 million that Keystone reported in interest income for 1998

did not exist-a fact that could have quickly been verified by requesting the

220-27. Nor does it appear that the auditors confirmed that any of the reported

interest income was in fact deposited in Keystone’s account by reviewing

Keystone’s general ledger. Compare Tr. 2502-10, Nov. 24, 2004 with FF 257.

FN9. See, e.g., FF 225 (“Grant Thornton did not follow the requirements of its

audit manual to conduct a ‘Comprehensive’ audit that called for primary reliance

upon a ‘test of details’ in connection with the audit of interest income from loans

serviced by third-party servicers.”); FF 230 (“Before an analytical test could be

used for substantive purposes in place of a ‘test of details,’ GAAS, as described

in Grant Thornton’s auditing manual, required Grant Thornton’s auditors to

identify and describe the internal controls pertinent to the assertions to be

audited, test the controls to be relied upon, and re-evaluate such controls in light

of the results to determine if reliance would be warranted.”); FF 232 (“Where an

entity’s internal controls have not been tested for reliability, GAAS imposes a duty

upon the auditor to independently verify all financial data generated internally or

otherwise provided by the client’s management before that data may be used for

overstated, the OCC contacted Grant Thornton. Grant Thornton performed a

“test of details” and uncovered the fraud in under one hour. See OCC. Dec. 30

(citing FF 226).

interest income, FF 259, and over $450 million in assets (approximately 50% of

the total assets reported by Keystone), id., and was “hopelessly insolvent,” OCC

Dec. 1. In September 1999, OCC ordered Keystone closed and appointed the

Federal Deposit Insurance Corporation (FDIC) as receiver. The Keystone

v. FDIC, Nos. 1:00-0655 et al., 2007 U.S. Dist. LEXIS 19379, at *100 (D.W.Va.

Mar. 14, 2007).

The conduct of the two Grant Thornton auditors can only be described as

amend their audit plan to require a “test of details”-in violation of Grant Thornton’s

own manual-after Keystone was classified a “maximum risk” audit.

Accountants and auditors perform a critical role in insuring the integrity of

what happened here.