The SEC accuses the two – partner John Aesoph and senior manager Darren Bennett – of failing to scrutinise properly management’s estimates of TierOne’s allowance for loan and lease losses (ALLL). It says that they did not exercise appropriate professional scepticism but “rubber-stamped” the bank’s collateral value estimates.
“Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit,” the SEC says, “yet Aesoph and Bennett failed to obtain sufficient evidence supporting managements’ estimates of fair value of the collateral underlying the bank’s troubled loans.
“Instead they relied on stale information and management’s representations, and they failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the banks internal controls over its financial reporting.”
For example, it says, the pair identified TierOne’s asset classification committee as a key ALLL control. But there was no reference in the audit work papers to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment, and the committee did not generate or review written documentation to support management’s assumptions.
“Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.”
TierOne filed for bankruptcy in June 2010 after its regulator forced it to disclose more than $130m in loan losses and its share price plummeted by more than 70%. Had the losses been disclosed correctly, the SEC says, the bank would have missed its required capital ratios almost two years earlier.
Three of the bank’s former executives were charged with misleading investors and federal regulators.
Two of them, CEO Gilbert Lundstrom, and COO James Laphen, agreed to settle the charges and collectively pay nearly $1.2m in fines.