Politics

EXCLUSIVE: Clinton Foundation Auditor Has Troubled Regulatory History

Federal regulatory agencies have repeatedly issued sanctions and fines against BKD, the small Midwestern accounting firm that for 13 years was chief auditor for the Clinton Foundation’s operations, according to an investigation by The Daily Caller News Foundation.

The Springfield, Missouri-based firm served as the external auditor that certified the financial soundness of the Clinton Foundation.

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The foundation began as Bill Clinton’s Presidential Library, but it soon ballooned into an entity fighting global problems. The Clinton Foundation reported assets of around $200 million since 2007, with multiple operating programs in far flung corners of the world.

For most of its history, BKD has served clients in the Midwest with the highest concentration of offices in Missouri, Oklahoma, Texas and Arkansas.

The company’s “testimonial” section highlights no national corporation. But it does feature testimonials from an Oklahoma tubular steel company, a semolina flour company in St. Louis, Newton’s Jewelers in Joplin, Missouri and a Kentucky mattress manufacturing company.

BKD ranks in the bottom half of all auditing companies in the United States, with reported revenue of $500 million. That compares to accounting leader Deloitte, LLP, which billed nearly $15 billion in revenue. BKD employs 1,523 professionals nationwide, while Deloitte has 64,884 professionals worldwide.

BKD has made news in other ways, however. It was indicted by the Securities and Exchange Commission and the Federal Depository Insurance Corporation for “unprofessional conduct” and “gross negligence,” according to federal court documents

And the Public Company Oversight Accounting Board (PCOAB), the nation’s top federal oversight agency for American accounting firms, reported that BKD violated auditor independence rules over the years, which its inspectors reported as “significant deficiencies.”

BKD — which stands for founders Baird, Kurtz & Dobson —  also has been hauled into court by unhappy clients who have charged it with “malpractice” and the manipulation of accounting books.

Leslie Lenkowsky, an expert in the practice of philanthropy at Indiana University and a director of the Philanthropy Roundtable, said he was surprised that the Clinton Foundation had not used one of the top accounting companies in the nation.

“You would think, as a protective measure, the Clinton’s would use only accountants of substantial reputation. Given the visibility of the Clinton’s, you’d think they would have one of the main accounting firms overseeing their books,” Lenkowsky told TheDCNF.

“People will wonder how accurate is this audit,” he said. Lenkowsky served as a founding director for President Clinton’s Corporation for National and Community Service and President George W. Bush later named him CEO.

Rep. Marsha Blackburn, a Tennessee Republican who called upon the Federal Trade Commission to investigate the Clinton Foundation’s financial practices, told TheDCNF, “it would be a ‘red flag’ for me when a firm had been reprimanded and been called into accountability by professionals.”

Last year, the Clinton Foundation restated all of its tax filings from 2010 to 2013, the same four years that Hillary Clinton was secretary of state. The 2010 to 2012 restatements along with eleven previous years of tax returns were all audited by BKD.

Charles Ortel, a private investor on Wall Street who has twice served as trustee for tax exempt nonprofits, said it was “preposterous” for the foundation to stay with BKD when its mission and finances exploded.

The Wall Street expert who has examined the foundation’s reporting in depth, said using a small, under-resourced accounting firm “strikes me as a long pattern of gross negligence and willful malfeasance on the part of the trustees.”

In 2010 alone, the first year of the restatement, the foundation operated programs in 27 different countries, and reported $138 million in gifts and contributions, according to its tax return.

The foundation’s audits have been done by PriceWaterhouseCoopers (PWC), one of the nation’s largest accounting and auditing firms, since 2013. But Ortel said the PWC audits rely on the potentially flawed earlier audits.

“Audits build on themselves. You can’t have BKD screw up October 23, 1997 through December 31, 2009 and then Pricewaterhouse says ‘well we’ll take BKD’s work and move forward.’ You can’t do that. But that’s what they did,” Ortel told TheDCNF.

President Clinton chose the Little Rock, Arkansas office of BKD in 2001 during construction of his presidential library there. Even then there were signs of conflicts of interest as BKD was also the auditor for the construction company’s parent company. In addition, the parent company’s chief financial officer also served on BKD’s official management committee.

Nevertheless, the Clintons kept BKD and retained it after the foundation dramatically altered its mission to fight global problems and its assets reached $200 million.

The BKD office in Little Rock also was embroiled in a major Arkansas scandal of its own making. Federal regulators blamed BKD for the sudden 2010 collapse of a Batesville, Arkansas savings bank after only five years of operation. Federal Deposit Insurance Corporation (FDIC) regulators accused BKD of failing to discover a fraudulent bond deal that cost the bank $19 million, which exceeded all of its assets.

FDIC regulators hauled BKD into U.S. District Court for Eastern Arkansas in December 2013, charging that its 2009 audit services contained “omissions constituting professional negligence, gross negligence and breach of contract by BKD.”

Court documents show that BKD had approved the bond deal that FDIC officials found fraudulent. Regulators reported the fraudulent bonds were discovered “in the course of a routine examination of the bank.” The auditing firm and the federal government eventually settled the case out of court.

Just before the Clinton Foundation engaged BKD in 1999, a federal jury in Kansas City, Kansas, found that BKD’s Wichita office committed accounting malpractice in connection with a company sale. The jury hit the accounting firm with $22 million in damages.

Another client, Thayer/Patnicef Education Holdings sued BKD in April 2003 over a flawed 1996-97 audit. The company stated, “this is yet another case of a public accounting firm that looked the other way.” The company and the education company settled out of court.

The Securities and Exchange Commission publicly censured BKD in 2014, charging that it “engaged in improper professional conduct, violated the auditor independence rules, and caused each of the broker-dealers’ failure to file an annual report audited by an independent accountant.”

The SEC said BKD “jeopardized their objectivity and impartiality” by taking its client’s data and claiming it as its own audited findings.

“To ensure the integrity of our financial reporting system, firms cannot play the roles of auditor and preparer at the same time,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “Auditors must vigilantly safeguard their independence and stay current on the applicable requirements under the rules.”

The Public Company Oversight Accounting Board established by the Sarbanes-Oxley financial reforms that became law in 2002 also identified many deficiencies with BKD. The PCOAB conducts periodic inspections of auditing companies, but only makes public a portion of its findings.

“A substantial portion of the board’s criticisms of a firm,” PCOAB said of its inspection reports, “occurs out of public view, unless the firm fails to make progress to the board’s satisfaction in addressing those criticisms.”

The PCOAB went public on multiple deficiencies in December 2010 it found in BKD’s auditing work, saying “the inspection team identified what it considered to be audit deficiencies. They found deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

Three other PCOAB inspection teams again found deficiencies with BKD in 2015 at the same time the firm was restating the foundation’s tax returns.

The inspection teams did not identify a specific BKD client, but noted that it found many “material misstatements” in the audits they were evaluating.

In the 2015 audit of BKD, the board concluded that, “Many audit deficiencies involve a lack of due professional care.”

The inspectors emphasized that it requires all outside auditing firms like BKD to display “professional skepticism. These standards state that professional skepticism is an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence.”

Team A found a total of four separate deficiencies and Teams B and C found deficiencies in one area.

A BKD spokesman declined to comment. Joey Lambert, a BKD marketing specialist, told TheDCNF  “this involves confidential client matters, and accordingly we’re not at liberty to discuss our experiences or relationships with any client, past or present.”

The Clinton Foundation also did not respond to requests for comment by TheDCNF.

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