Well, at least one of the dark clouds over KPMG’s head has dissipated: the Financial Reporting Council (FRC) has cleared the Big Four firm of any wrongdoing in HBOS’s collapse.
While KPMG’s South African troubles continue unabated, the FRC’s closure of its belated 15-month investigation into the HBOS audit will be a welcome relief. The accounting watchdog concluded that a tribunal would not be called as “there was not a realistic prospect that a tribunal would make an adverse finding against KPMG in respect of the matters within the scope of the investigation”.
‘A loose rivet below the waterline’
KPMG’s trouble began with its audit of HBOS’s accounts at the end of 2007. As the bank’s auditor KPMG agreed its designation as a going concern. The HBOS accounts which were published in February of 2008 reflected this fact.
Barely six months later the bank was on the edge of extinction.
KPMG’s critics - chief among them MPs on the Treasury Select Committee - have excoriated the firm for what they see as lacklustre due diligence. The Treasury Select Committee didn’t spare the FRC either, with Andrew Tyrie referring to the watchdog as “a loose rivet below the waterline”.
KPMG, however, has always maintained - and the FRC agrees - that they couldn’t have predicted the financial shock of 2008. As the FRC puts it: “The evidence of market conditions at that time did not show this decision of HBOS or the auditor’s assessment of it to be unreasonable at the time.”
For KPMG, it’s an acquittal - but a rather unceremonious one. The FRC, although it cleared KPMG of wrongdoing, said the firm’s work did “not fall significantly short of the standards reasonably to be expected of the audit”.
That is, the Big Four giant fell short of professional standards - but through incompetence, rather than indifference or intent. Indeed, the entire FRC statement is filled with these sorts of constructions.
Most prominent is the accounting watchdog’s contention that KPMG’s assessment was “not unreasonable”. In a letter to the FT Paul Merison, the audit lecturer at the London School of Finance and Business, mocked this as “the equivalent of you asking me if you are attractive, and me replying that you are ‘not ugly’”.
Speaking to AccountingWEB, Merison explained that he believes the issue at hand is deeper than just KPMG. “The underlying problem has been that the auditors check whether last year's accounts are telling the truth. Strictly speaking, auditors are not checking whether the entity is a viable enterprise,” says Merison.
“However, unstrictly speaking, because accounts are produced on a going concern basis, and because companies are required to disclose if there's any significant threat, if you present accounts and say there's no significant threat, you are saying, indirectly, there's no threat to the going concern.”
“Companies don't want to mention something if they don't have to. The auditors don't want to upset their clients, and everytime we have one of these and the auditors didn't spot it, people will start wondering what the point is of bringing in an auditor.”
It's clearly a criticism that the FRC is aware of. The body says it will publish a report in October on the steps it has taken to improve audit and corporate reporting since the financial crisis sparked a wave criticism of the audit profession.
About Francois Badenhorst
Francois is a writer, editor and broadcaster specialising in business.