The Financial Reporting Council (FRC) has announced that it will undertake a preliminary investigation into KPMG’s auditing of banking giant HBOS before its collapse in 2008.
In a statement issued today the FRC said that Gareth Rees, the accounting regulator’s head of enforcement, will examine whether KPMG was guilty of misconduct after signing off HBOS’s books for 2007.
The investigation will focus on KPMG’s use of the going concern assumption for HBOS’s 2007 accounts, and whether the Big Four firm needed to disclose concerns about the bank’s continued sustainability in the financial statements.
Once Rees concludes his investigation, he will present his findings to the FRC’s conduct committee, which will then decide if KPMG are liable for further investigation.
Should the investigation lead to a full inquiry, both KPMG and the individual accountants who worked on the HBOS statements could face punishment.
The announcement represents a change of heart for the accounting watchdog, who had previously examined the bad debt provisions at HBOS and chosen not to initiate a full investigation. However, the FRC has recently come under pressure from MPs and business leaders to reconsider.
After receiving a clean bill of health in February 2008, HBOS asked shareholders for £4bn to bolster its finances in April before being rescued by a government-backed Lloyds in September. The Lloyds-HBOS bank then went on to almost collapse before being bailed out the following month by the government to the tune of around £20bn.
‘Not before time’
Commenting on the watchdog’s decision, Chairman of the Treasury Committee Andrew Tyrie said: “This is not before time. A great deal depends on the quality of audited accounts. They were found wanting during the financial crisis. It is essential that everybody fully understands why. That is why this investigation is so important. The committee will be keeping a close eye on it.”
Although KPMG was cleared over its role as auditor of HBOS in the years before the bank’s near collapse, Tyrie had previously called into question the FRC’s refusal to investigate KPMG’s audit, stating that reviews like this were “essential” to prevent billions of pounds’ worth of taxpayers money being used in bail-outs for financial failures.
Following the announcement a KPMG spokesperson said they will “continue to co-operate with the FRC as it makes its preliminary enquiries. In the interests of everyone, it is now important that final conclusions are reached in a timely fashion”.
“We were pleased that the PRA and FCA's report issued last November recognised that KPMG provided robust challenge and delivered clear warnings to HBOS”, continued the statement, “and that this resulted in a more prudent approach to provisioning than would otherwise have been adopted”.