HBOS auditors KPMG face ‘preliminary probe’

The UK’s Financial Reporting Council (FRC) said on Thursday that preliminary enquiries under a “disciplinary scheme” will be made into KPMG’s work as auditors of HBOS just before the bank’s collapse.

The FRC’s executive counsel will carry out preliminary enquiries under its disciplinary scheme for members and member firms of the accounting profession “where matters involve important issues affecting the public interest in the UK.”

The enquiries will focus on the extent to which KPMG Audit plc “considered whether there were material uncertainties about the entity’s ability to continue as a going concern that HBOS needed to disclose in the financial statements.”

The probe will also focus on the extent to which KPM “considered the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements for the year ended 31 December 2007.”

The regulator’s executive counsel will present his findings to the FRC’s conduct committee which will then decide whether KPMG or any member “are liable to investigation.”

KPMG said a thorough review was in the interests of the audit profession, shareholders and society as a whole, according to Reuters.

“We were pleased that the PRA and FCA’s report issued last November recognised that KPMG provided robust challenge and delivered clear warnings to HBOS and that this resulted in a more prudent approach to provisioning than would otherwise have been adopted,” KPMG said.

“We will continue to co-operate with the FRC as it makes its preliminary enquiries. In the interests of everyone, it is now important that final conclusions are reached in a timely fashion,” KPMG added.

The Institute of Directors (IoD) welcomed the FRC’s decision and urged the regulator to conduct a fast inquiry.

“The failure of HBOS was one of the bleakest events in Britain’s corporate history,” said Simon Walker, director general of the IoD, in a lengthy statement.

“While the financial services industry, and the health of Britain’s economy, has come a long way since then, it is essential that every possible lesson is learnt from what happened at HBOS.

“It is clear that the bank’s senior executives fostered a toxic culture of short-termism which ultimately brought the organisation to its knees. However, this is far from the full picture.

“Shareholders and customers deserve to know what role the firm’s auditors, KPMG, played in this scandal.

“The announcement of this long-overdue inquiry, therefore, is better late than never. External audits must be rigorous and fit for purpose, especially when it comes to systemically important and bewilderingly complex financial institutions.

“It is absolutely right, therefore, that the FRC will look hard at HBOS’s financial statements at the appropriateness of the ‘going concern’ statement offered by the bank in 2007.

“There is more at stake here than just the integrity of a few regulators and the inquiry cannot just be about spreading blame.

“It is critical that the FRC review is rigorous and transparent, and that it provides relevant and timely updates to key stakeholders.

“We urge the FRC to dedicate sufficient resources to conduct this inquiry as quickly and thoroughly as possible and not dilly-dally.

“Shareholders need confidence in the financial statements offered by companies and they have a right to know that auditors are properly scrutinising the books.”

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.