HBOS hid debt portfolio stress from its auditors

by Richard Crump

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12 Mar 2012

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COLLAPSED high street bank HSBOS hid the deteriorating health of its sub-investment grade debt portfolio from its own auditors at KMPG, an investigation by the Financial Services Authority (FSA) revealed.

The City watchdog said on Friday that Bank of Scotland, a subsidiary of HBOS, was guilty of "serious misconduct" between January 2006 and December 2008, which contributed to the UK government having to inject taxpayer funding into HBOS.

The investigation found that Bank of Scotland did not have appropriate systems and controls that were appropriate to the high level of risks its corporate division, which pursued an aggressive growth strategy that focused on high-risk, sub-investment grade lending.

According to the FSA, a lack of adequate systems and controls ensured the bank failed to spot the also meant the full extent of the stress within the corporate portfolio was not visible to its auditors at KPMG.

"While the firm's auditors agreed that the overall level of the firm's provisioning was acceptable, in relation to the corporate division provisions were consistently made at the optimistic rather than prudent end of the acceptable range, despite warnings from the divisional risk function and Bank of Scotland's auditors," the FSA said.

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