FRC should reconsider decision not to investigate KPMG's role as HBOS auditors prior to bank's collapse
KPMG has come under renewed pressure over its role in signing off the accounts of failed lender HBOS in the years prior to the bank’s collapse in 2008, despite the profession’s regulator clearing KPMG of its role as auditor.
Andrew Tyrie, chairman of the Treasury Select committee and the last Parliamentary Commission on Banking Standards (PCBS), has urged the FRC to reconsider its original conclusion not to investigate KPMG’s work as HBOS auditors, following the publication of a much-delayed report into the bank’s collapse which blamed HBOS management and board for its failure.
The Bank of England and Financial Conduct Authority’s investigation into the bank’s £20bn failure did not set out to conclude whether KPMG’s work met the required standards and stated that scrutinising the role of KPMG as HBOS’s auditors falls within the FRC’s remit.
The FRC carried out a review of KPMG work as auditor of HBOS, in relation to work performed on loan loss provisions in the bank’s corporate division. The regulator concluded yesterday there were not reasonable grounds to suspect there may have been misconduct.
Nevertheless, Tyrie said it was clear from the report, and the conclusions of the PCBS, that the “audit process was an important part” of HBOS’s failure, and added that he will write to the FRC about the “misjudgement made of the scale of impairments on the balance sheet, and about whether the auditors allowed themselves to be influenced by undue pressure from senior executives and the board of HBOS”.
Tyrie said the FRC “will need to consider afresh their original conclusion that there were no grounds for an investigation of KPMG, relevant senior KPMG people, and relevant senior HBOS management in relation to the audits of HBOS’s financial statements for 2007 and 2008”.
“It is surprising that the FRC didn’t conclude – and a long time ago – that this work was needed, not least to provide greater public confidence about bank audits after the catastrophe of 2008. Albeit belatedly, they should now do so,” Tyrie said.
To date, the FRC has declined to investigate KPMG and, following the publication of the Bank of England’s report, it reiterated that it lacked sufficient grounds to suspect the auditor of misconduct.
“Based on the findings from this review of the relevant audit work the Conduct Committee of the FRC has concluded that there were not reasonable grounds to suspect that there may have been misconduct as defined under the disciplinary scheme for members of the accounting profession,” the FRC said.
However, the accounting watchdog said it will review the full report for any relevant new information.
KPMG welcomed the recognition that it “provided robust challenge and delivered clear warnings” to HBOS, which resulted in a more prudent approach to provisioning than would otherwise have been adopted.
“We also welcome the FRC’s announcement that it has reviewed the audit work performed on loan loss provisions and concluded that there were not reasonable grounds to suspect misconduct by KPMG,” it said.