KPMG could face FRC investigation over HBOS audit

THE PROFESSIONS’ WATCHDOG has admitted that it could investigate KPMG over its audit work of embattled bank HBOS.

The Big Four firm is facing a possible inquiry into its audit work which saw it give the rescued bank a clean bill of health.

The Financial Reporting Council (FRC) will consider whether an investigation, which will lead to a tribunal, will be necessary based on two reports; one from the Parliamentary Commission on Banking Standards and one from the Prudential Regulation Authority (PRA). If evidence of audit failures are uncovered the disciplinary arm of the FRC will take the firm to tribunal.

However, the FRC reiterated that a previous enquiry in 2009 showed no evidence of audit failures. It was also suggested in an FSA enquiry, published last year that KPMG auditors were not at fault.

In the report the FSA said that there was a “collective denial” in the corporate division of the bank and that the culture of optimism pervaded the business’ ability to identify and effectively manage transactions, so the full extent of the “stress” on the portfolio was not visible to the group, auditors and regulator.

The report also said: “The Firm [HBOS Corporate Division] adopted an optimistic approach to levels of provisioning despite repeated warnings from HBOS’s auditors and the Corporate Division’s risk function of the need for a more prudent approach.”

The FRC said it was working with the PRA which has access to information from the companies’ books and records that it could not obtain under its powers and therefore it is now necessary to work closely to build a full picture on the issue.

“If there is evidence that financial statements were misleading, and there were deficiencies in the audit, we would take this as a basis to launch an investigation into potential misconduct under our powers,” a statement said.

As reported in Accountancy Age this week, former KPMG chairman John Griffith-Jones has been dragged into the argument. Griffith-Jones now leads the Financial Conduct Authority, which succeeds the FSA, and faces mounting calls to resign for allowing KPMG to sign off on HBOS’ accounts under his tenure.

John Mann, Labour MP and member of the Treasury Select Committee, last night called for Griffith-Jones, to quit: “He should absolutely resign. These grossly failed businessmen should not be in any senior positions in any organisation. Griffith-Jones played along with this Alice in Wonderland economics and the taxpayers are now footing the bill,” he said.

In the report by the Parliamentary Commission on Banking Standards it was highlighted that KPMG signed off on HBOS’s decision to set aside just £370m for bad loans.

Lloyds rescued HBOS in 2008 and then went on to rack up £25bn in losses from the fall-out of the HBOS bad loan book.