KPMG faces FRC probe over HBOS audit

The Financial Reporting Council (FRC) is considering whether to investigate how KPMG audited HBOS, which is now part of Lloyds Banking Group, in the run up to the bank's collapse in 2008.

The independent audit regulator doesn’t currently have the Big Four firm under investigation but is monitoring the situation in the wake of a damning report on the bank's collapse and £20.5bn taxpayer bailout.

An FRC spokesperson said...

Continued...

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Comments
Paul Scholes's picture

It matters

Paul Scholes | | Permalink

My take on the role of auditing in the UK is that the majority of effort in undertaking the work is of no use to companies, shareholders or country, but it keeps the auditors well fed & watered.

However in some industries the audit is crucial and it's outcome should be of value to all the above, and I'd say the banking and financial services industries are at the top in this respect.

In all my years doing it, the biggest challenge was to make sure that everyone in the audit team understood the business and without this knowledge they didn't stand a chance of completing the work properly.  Back in the 80s when I was involved in the audit of the financial sector, I didn't have a clue and just followed what was done last year, there is no way that the same should apply today, but I fear it does.

DMGbus's picture

"He who pays the piper" culture

DMGbus | | Permalink

I am aware that there are allegations that one major UK bank with dodgy lending practices (irresponsible and risky lending directly resulting in near insolvency) had an insider alert the fact to the auditors.

 

The auditors then (under instruction from management) allegedly produced a report belittling the insider who was duly then sacked.

 

"He who pays the piper". (*)

I can't recall which bank it was (might not have been HBOS) nor which auditor it was (might not have been KPMG).

(*) "He" = top management of some organisations who can rely on help from...

(*) "piper" - an auditor who "sells their signature" [they think that their job is to be a "pet" auditor obedient to management be that management good or bad]

Now, if auditors were rotated annually might this stop this culture of auditors being pets in the pocket of bad management?

ditto. increased competition in auditting - ban mergers of top 20 auditing firms.  Unwind mergers of recent decades.

If all above is true, then compensation due to UK government should be claimed from the "piper" - would be good to see the "piper" bankrupted wouldn't it?

A good lesson to other "pipers"!

Not the first time that a "piper" has resulted in taxpayers losing millions of pounds.

Expectation gap

Tickers | | Permalink

DMGbus wrote:

I am aware that there are allegations that one major UK bank with dodgy lending practices (irresponsible and risky lending directly resulting in near insolvency) had an insider alert the fact to the auditors.

 

The auditors then (under instruction from management) allegedly produced a report belittling the insider who was duly then sacked.

 

"He who pays the piper". (*)

I can't recall which bank it was (might not have been HBOS) nor which auditor it was (might not have been KPMG).

(*) "He" = top management of some organisations who can rely on help from...

(*) "piper" - an auditor who "sells their signature" [they think that their job is to be a "pet" auditor obedient to management be that management good or bad]

Now, if auditors were rotated annually might this stop this culture of auditors being pets in the pocket of bad management?

ditto. increased competition in auditting - ban mergers of top 20 auditing firms.  Unwind mergers of recent decades.

If all above is true, then compensation due to UK government should be claimed from the "piper" - would be good to see the "piper" bankrupted wouldn't it?

A good lesson to other "pipers"!

Not the first time that a "piper" has resulted in taxpayers losing millions of pounds.

 

In fairness, the "piper" is not the one committing the fraud and despite many people's perception, an auditors job is to determine whether the financial statements give a true and fair view and not not to detect fraud.

DMGbus's picture

"piper" covering up things & gets paid for this "service"

DMGbus | | Permalink

Collusion between an auditor and management to cover up mis-management that may have cost the taxpayer £ millions or £ billions is fraud on the part of both auditor and management.  The shareholders have been deceived for a longer period of time than might otherwise have been the case.  

I suppose a defence of "we followed all of our approved procedures and checklists" (and passed our practice assurance visits by our regulatory body) might be tried by "piper" in such circumstances.

 

The fact remains concealment of material facts (eg. financial mismanagement, wreckless lending, insufficuient bad debt provision, etc.) means that the financial statements cannot possibly give a true and fair view.  So, "piper" sold their signature and got paid for it.   Now we have the suggestion that an auditor who just ticks boxes is "OK".  Honesty is not part of the audit exercise.  Nor is professionalism.  It's just a matter of being a box ticker who complies with proceedures and sells their signature ignoring facts brought to their attention by an insider who "spills the beans".

It really is a serious matter when serious financial issues are brought to the attention of an auditor who then rubbishes the suggestion of mismanagement and proceeds to "sell" a clean audit report to the management who can carry on being wreckless as a result.

No, I don't "buy" the arguement that in the circmstances outlined (were they to be accurate) that an auditor is free from blame.