KPMG cleared of failing to twig HBOS’S number was up

Comment Martin Flanagan

So, KPMG has been cleared by the accountancy industry watchdog of any wrongdoing in its 2007 audit of HBOS in the run-up to the bank’s collapse into the arms of Lloyds Banking Group when the bank ran out of money, management nous and regulatory credibility. The Financial Reporting Council (FRC) found no evidence of misconduct or lack of diligence by KPMG, and indicated that the firm couldn’t have foreseen the collapse of Lehman Brothers and the wider financial crisis in the autumn of 2008.

The FRC said following a detailed investigation it had concluded there was no realistic prospect of any tribunal making an adverse finding against the accountancy giant. It is bound to feed scepticism among the industry’s critics, however, about what one of the Big Four accountancy groups has to actually mess up to get hauled over the regulatory coals.

To recap: we had had the freezing up of wholesale money markets and the extraordinary run on Northern Rock in the summer of 2007. HBOS told KPMG that it still felt it could fund itself as a going concern in 2008, but the writing was on the wall when a £4 billion rights issue by the bank that July flopped, with the vast majority of the shares left with the underwriters.

The listing bank at that time may have been passing its auditors’ tests, but not the investor smell test.

The audit, true and fair etc, did not raise serious questions about the bank’s viability when, operationally, HBOS was going to hell in a handcart.

KPMG has also been drawn recently into a scandal in South Africa over its links with the politically connected Gupta family. It was on the ropes and needed this FRC decision to go its way.

Maybe it is simply as KPMG said yesterday that the implosion of HBOS and other examples of corporate failure and fraud over the past decade “have highlighted a gap between what society expects of an audit and what an audit has been designed to do”.

Quite so. But it does make you wonder, if a putative rigorous audit could not result in HBOS being called out before its collapse how many more less egregious examples are out there of superficial audits that fail, even in good faith, to locate the smoking gun.