KPMG cleared over HBOS audit before collapse

The UK’s Financial Reporting Council (FRC) — which regulates auditors, accountants and actuaries — announced the closure of its investigation into the conduct of KPMG’s audit of HBOS plc for the year ended December 31, 2007.

“The Executive Counsel to the FRC has, following a detailed investigation, concluded that there is not a realistic prospect that a Tribunal would make an Adverse Finding against KPMG in respect of the matters within the scope of the investigation,” said the FRC.

“The firm’s work did not fall significantly short of the standards reasonably to be expected of the audit, the test that a Tribunal would apply.”

Nicky Morgan MP, chair of the UK’s Treasury Committee, said: “When it publishes its detailed report next month, the committee will expect the FRC to provide a full explanation of its decision not to take further action against KPMG.

“It may take further evidence in due course.”

The FRC said the investigation related to the extent to which KPMG, during the course of their audit of HBOS plc:

  • 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; and
  • considered whether there were material uncertainties about the entity’s ability to continue as a going concern that needed to be disclosed in the financial statements.

The FRC said that in early 2008, HBOS concluded that its financial statements for the year ended December 31, 2007 should be prepared on a “going concern” basis.

“HBOS did not expect market conditions to worsen and judged that it would be able to fund itself,” said the FRC.

“The auditor considered and accepted this conclusion.

“HBOS published its audited financial statements in February 2008 on that basis.

“The evidence of market conditions at that time did not show this decision of HBOS or the auditor’s assessment of it to be unreasonable at the time.

“The extreme funding conditions which arose in October 2008 were not anticipated.

“The FRC conducted a thorough investigation, liaising with other regulators with knowledge of the relevant events, and obtaining expert advice from independent and experienced lawyers and audit professionals.”

The FRC said it will publish in October a report on its actions in audit and corporate reporting developments since the financial crisis, including on the audits of banks.

Morgan added: “As early as 2004, the FSA described HBOS as ‘an accident waiting to happen.’

“As the PRA and FCA have since made clear, responsibility for its subsequent failure lies not with external market conditions during the financial crisis, but with the failure of its board to instil an appropriate culture, and to provide the necessary challenge to the executive.

“HBOS’ corporate governance was, in the words of the PCBS, ‘a model of self-delusion.’

“The FRC initially decided not to investigate KPMG’s audit of HBOS.

“The Treasury Committee concluded that ‘this was a serious mistake’ that ‘suggests a lack of curiosity and diligence’.

“It was only after pressure from the committee that the FRC decided to investigate the role of auditors in the bank’s demise.”