Auditors of JPMorgan Should be Testifying Before Congress

It’s Wednesday and it means Mr. Dimon goes to Washington.

JPMorgan Chase & Co. (NYSE:JPM)’s CEO is expected to apologize about the bank’s mistakes to the Senate Banking Committee, blaming overconfidence, poor judgment and weak risk controls–just to name a few.

Other fingers have pointed at the bank’s internal controls for the trading losses and interestingly enough this isn’t the first time.

In 2010, concerns had been raised after the bank had been fined by the Financial Services Authority for 33 million pounds. It had been cited for the failure to segregate its client month from its own in the UK.

In addition to the fine, it also led to its auditor, PwC PWC.UL to be fined $1.4 million by its professional body for the failure to identify violation.

According to Reuters, no one from PwC, the firm’s global auditor, commented on the matter.

Here we have pointed our fingers at the auditors for some time. Back in September, we wrote,

The main job of the external auditors is to understand and assess the business processes, document internal controls and verify compliance. Basically, they are there to check and comment on the risks of the business model. The inability on their part to detect the warning signs and report these on time is never a job well done.

So fast forward to June and the question again is, where are the auditors in this mess? Namely, PwC.

When the news hit about the CIO trading loss, JPMorgan Chase & Co. (NYSE:JPM) saw $15 billion in its stock market value erased on the following day. The takeaway from the news–one of many–was that some analysts expressed surprise that Dimon appeared to have less control of the bank’s derivatives unit than initiallly thought.

Prior to the loss, Dimon had been received kudos for his successful management of the company through the credit bubble and the 2008 financial crisis.

But his strategy in dealing with this current “crisis” has been too many apologies and yes, “the bank has erred attitude.” He has stayed away from details on the bank’s trading positions which had led to this debacle, fearing traders would hear this information and even greater trading losses could occur.

In Dimon’s prepared Congressional testimony, via the Wall Street Journal, there’s a section called, “What Went Wrong.” He includes five bullet points, two of  the following:

  • Personnel in key control roles in CIO were in transition and risk control functions were generally ineffective in challenging the judgment of CIO’s trading personnel. Risk committee structures and processes in CIO were not as formal or robust as they should have been.
  •  CIO, particularly the synthetic credit portfolio, should have gotten more scrutiny from both senior management and the firmwide risk control function.

Not only in this section but throughout the document, Dimon does not include his auditors. If they got in trouble before for failing to identify a violation, don’t you think this is an another incident that the PwC should be held accountable?

While the traders may have not have understood the risks and Dimon is probably in the same camp, isn’t it time to make it a threesome and add the auditors?