8-K: Arrow Financial Corporation Appoints Crowe LLP as New Independent Auditor, Replacing KPMG

Arrow Financial Corporation has replaced KPMG with Crowe LLP as its independent registered public accounting firm for the fiscal year ending December 31, 2024, following a competitive selection process.

Summary

• Arrow Financial Corporation's Audit Committee has appointed Crowe LLP as the company's new independent registered public accounting firm for the fiscal year ending December 31, 2024.
• This decision follows a competitive selection process where several firms, including the previous auditor KPMG, were considered.
• KPMG was dismissed as the company's independent auditor on March 14, 2024, effective immediately.
• KPMG's audit reports for the fiscal years 2022 and 2023 did not contain any adverse opinions, disclaimers, or qualifications regarding uncertainty, audit scope, or accounting principles.
• There were no disagreements between Arrow Financial and KPMG on accounting principles, financial statement disclosure, or auditing procedures during the fiscal years 2022 and 2023 and the subsequent interim period through March 14, 2024.
• The company reported material weaknesses in its internal control over financial reporting for the fiscal years 2022 and 2023, specifically related to monitoring controls and risk assessment procedures following a core banking system conversion in September 2022.
• Crowe LLP was not consulted on accounting principles or audit opinions prior to their appointment.
• KPMG has agreed with the statements made by Arrow Financial in the 8-K filing, except for the statements related to the competitive selection process and the decision to dismiss KPMG.

Sentiment

Score: 5

Explanation: The change in auditors is neutral, but the disclosure of material weaknesses in internal controls is a concern. The company needs to address these issues to maintain investor confidence.

Positives

• The transition to a new auditor was conducted through a competitive selection process, suggesting a thorough evaluation.
• KPMG's audit reports for the past two fiscal years were clean, indicating no major issues with the company's financial statements.
• KPMG agreed with the majority of the statements made by Arrow Financial in the 8-K filing, providing assurance of the accuracy of the information.

Negatives

• Material weaknesses in internal control over financial reporting were identified for both 2022 and 2023.
• These weaknesses relate to monitoring controls and risk assessment procedures, indicating potential vulnerabilities in the company's financial oversight.
• The company did not effectively perform risk assessment procedures related to the conversion of its core banking information technology system in September 2022.

Risks

• The identified material weaknesses in internal control over financial reporting could lead to future financial reporting issues.
• The transition to a new auditor could introduce some short-term uncertainty.
• The company needs to address the weaknesses in its internal controls to ensure accurate and reliable financial reporting.

Future Outlook

The company will be working with Crowe LLP as their new independent auditor for the fiscal year ending December 31, 2024.

Management Comments

• The Audit Committee conducted a competitive selection process to determine the company's independent registered public accounting firm.
• The Audit Committee approved the appointment of Crowe LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2024.
• The company has authorized KPMG to respond fully to the inquiries of Crowe concerning the subject matter of the reportable event.

Industry Context

Changes in auditors are not uncommon, but the disclosure of material weaknesses in internal controls is a concern that investors will be watching closely. The appointment of a new auditor may also be a sign of a change in strategic direction or a desire for a fresh perspective on financial reporting.

Comparison to Industry Standards

• The disclosure of material weaknesses in internal control is not uncommon in the financial services industry, but it is a concern that needs to be addressed promptly.
• Other financial institutions such as Bank of America and JP Morgan Chase have also reported material weaknesses in the past, highlighting the complexity of maintaining robust internal controls in the sector.
• The transition to a new auditor is a standard practice, and many companies, including Wells Fargo and Citigroup, have changed auditors in recent years.

Stakeholder Impact

• Shareholders may be concerned about the material weaknesses in internal control over financial reporting.
• Employees involved in financial reporting may need to adjust to new procedures and controls.
• The change in auditors may have a short-term impact on the company's reputation.

Next Steps

• Crowe LLP will complete its standard client acceptance procedures.
• The company will work with Crowe LLP for the audit of the fiscal year ending December 31, 2024.
• The company needs to address the identified material weaknesses in its internal control over financial reporting.

Key Dates

Keywords

auditor, KPMG, Crowe LLP, financial reporting, internal control, audit committee, accounting, material weakness