The Financial Reporting Council (FRC) has closed an investigation into KPMG’s audit of HBOS plc, concluding that the firm “did not fall significantly short of the standards reasonably to be expected of the audit”.
The FRC investigation related to a KPMG audit of HBOS for the year ending 31 December 2007. The council said that HBOS could not have anticipated the “extreme funding conditions” of October 2008, six months prior to which the bank had published its audited statements, which had been afforded a “going concern” status by KPMG.
The bank was taken over by Lloyds in late 2008 to prevent its collapse.
The FRC said that it had investigated the use of the going concern assumption in addition to considering whether there were “material uncertainties” regarding HBOS’ ability to continue as a going concern that should have been disclosed in the financial statements.
It concluded that a tribunal would “not make an adverse finding against KPMG” in relation to the audit.
Yet, Nicky Morgan, chair of the Treasury Committee, said that it expected a “full explanation” of the FRC’s decision not to take further action against KPMG, and that it could take “further evidence in due course”.
Morgan said: “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.”
The FRC is scheduled to publish a full report on audit and corporate reporting developments in October.