KPMG US denies $1bn lawsuit claim

KPMG US has shot down any suggestion it went easy on its audit of New
Century, the giant sub-prime mortgage lender that went bust in 2007, after
lawsuits claiming $1bn (£680m) were lodged against the firm and KPMG
International, the auditor’s network umbrella body.

New Century’s liquidator lodged lawsuits against KPMG US and KPMG
International in California and New York last week.

The California suit alleges the auditor bowed to pressure from New Century to
sign off its 2005 annual report filing, an accusation KPMG flatly rejected.

A KPMG US spokesperson said: ‘Any claim that we acquiesced to client demands
is unsupportable. As the bankruptcy examiner’s report that was seeking to
identify entities to sue said: “KPMG would have significant defenses to any such
suit”.’

The suit, brought by The New Century Liquidating Trust And Reorganized New
Century Warehouse Corporation, alleges KPMG International had vicarious
liability for KPMG US LLP’s ‘gross negligence’. It alleges KPMG International
had a ‘right to control’ the US arm of KPMG, which audited New Century before it
folded on 2 April 2007. ‘KPMG International is vicariously liable for the loss
caused by KPMG US LLP because KPMG US LLP was KPMGI’s agent.’

KPMG US insisted it had met its obligations as auditor and
rejected any suggestions that New Century’s collapse was prompted by an audit
failure.

‘KPMG acted in accordance with professional standards in New Century and we
will vigorously defend our audit work. Any implication that the collapse of New
Century was related to accounting issues ignores the reality of the global
credit crisis. This was a business failure not an accounting issue.’

Steven Thomas, trial lawyer for the plaintiffs told Accountancy
Age: ‘This is the biggest case against an accountancy network in terms of
amount and global impact.’
Thomas alleged KPMG US ‘had a complete lack of independence from KPMG
International’.

How
refusing to ‘piss everybody off’ could cost KPMG International $1bn