Auditing

Provident Bankshares Dumps KPMG for Deloitte

Dispute over "other-than-temporary" impairment of investment securites leads to the switch.
Stephen TaubSeptember 15, 2008

Provident Bankshares fired KPMG as its independent accountant, replacing it with Deloitte & Touche, after a dispute related to treatment of “other-than-temporary impairment of investment securities.”

The parent company of Provident Bank said that KPMG’s audit reports for the two most recent years had not contained adverse opinions or disclaimers, and had not been qualified or modified to reflect uncertainty, audit scope, or accounting principles. But Provident said that during the course of KPMG’s review of the company’s financials for the three- and six-month periods ended June 30, 2008, there had been a disagreement about the application of accounting principles for investment-security impairment.

In addition, Provident said that KPMG and the company determined that the company would engage a third party appraiser to prepare a valuation report for the company’s use in evaluating its goodwill for potential impairment as of Sept. 30, 2008. That report has been completed and will be provided to Deloitte, Provident added.

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In a letter to the Securities and Exchange Commission included in Provident’s 8-K filing, KPMG said that it agrees with many of Provident’s statements in its filing. However, it said, “we are not in a position to agree or disagree with the Corporation’s statements that: 1) our dismissal was approved by the Audit Committee of the Board of Directors of the Corporation, or 2) a valuation report has been completed and will be provided to Deloitte & Touche LLP.”

In a note to clients on Monday morning, JPMorgan Chase said that the investment securities at the center of the accounting dispute were likely the recent additional non-agency mortgage-backed securities for which “Other-Than-Temporary Impairment” issues had been disclosed by the company last month. On Aug. 13 Provident announced it would recognize an additional noncash, pretax charge of $16.7 million as of June 30 for impairment of certain investment securities, adding that the charge would reduce previously announced earnings for the quarter and six-months ended June 30.

It also said the recognition of this additional other-than-temporary impairment charge would have only a minor impact on the corporation’s equity position as of June 30 because the securities had already been marked to market. However, it did say that recognition of the additional other-than-temporary impairment charge decreased net income for the second quarter 2008 from the previously announced $15.1 million to $10.2 million.

“The other-than-temporary impairment analysis originally conducted by the corporation in connection with its second quarter 2008 earnings release was consistent with analyses completed for previous quarters and reviewed by our independent registered public accounting firm,” Provident said in its regulatory filing at the time.

It added that the immediate analysis determined that $4.1 million of other-than-temporary impairment charges were required as of June 30. However, on July 31, during the course of their quarterly review procedures, KPMG advised the company that applicable accounting literature, discussed with the SEC on June 20, indicated that recognition of an other-than-temporary impairment charge on certain investment securities, primarily due to the current value of the securities, may be required.

“We regret the timing of this announcement, but we were not made aware of the guidance until forty-one days after our independent registered public accounting firm received communication on this issue from the SEC,” said Gary N. Geisel, chairman and CEO, in the regulatory filing at the time. “These noncash writedowns, or paper loss adjustments, are frustrating because substantially all of the issuers in these securities are paying principal and interest as agreed and are expected to do so until maturity. The bottom line is that we remain a well-capitalized institution and these revisions take nothing away from our core bank operating results for the second quarter.”