FRC to investigate KPMG over HBOS audit 

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The Financial Reporting Council (FRC) has announced it will be holding an investigation under the accountancy scheme into the conduct of KPMG’s audit of HBOS for the year ended 31 December 2007, after coming under severe criticism for failing to take action sooner to examine the Big Four firm’s role in the run up to the bank’s collapse

The audit watchdog said the investigation will focus on two key questions relating to KPMG’s work on the HBOS audit.

These are firstly, the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements for the year ended 31 December 2007; and secondly whether there were material uncertainties about the entity’s ability to continue as a going concern that needed to be disclosed in the financial statements.

This latest investigation follows on from the FRC’s preliminary enquiries into the issues which began in January and was expected to be completed by the spring. The audit watchdog previously carried out a supervisory inquiry in 2013, which focused on the bank’s loan loss provisions.

This earlier report was heavily criticised by the Treasury select committee, which accused the FRC of dragging its feet on the issue, claiming it should have widened the scope of its investigation and made more of the details public.

Earlier this year the chair of the select committee, Andrew Tyrie, had an exchange of letters with FRC CEO Stephen Haddrill, in which he made plain MPs’ dissatisfaction with the regulator’s approach.

Tyrie said: ‘The FRC’s decision to publish a report is overdue, but welcome. The HBOS report exposed the staggeringly poor quality of HBOS’ loan book. The role of the auditors – for years left unexamined – will now be subject to a measure of public scrutiny. And not before time.

‘The Treasury committee has done what it can to ensure the public obtains the explanation it deserves. The committee will persist with its effort to secure a thorough examination of the role of the auditors. The committee will be watching the FRC’s work closely.’

In a statement, KPMG said: ‘It has now been eight years since the financial crisis. The FRC, PRA and FCA have already looked at the events that led to the failure of HBOS in exhaustive detail and we have cooperated fully with all inquiries and investigations.

‘We will continue to do this, but trust and ask that the investigation be completed as quickly as possible. Throughout it has been our position that our audits of HBOS were performed to the appropriate prevailing standards. We are confident that our work will stand up to objective scrutiny.’

KPMG pointed out that HBOS reported pre-tax profits of £5.5bn in its 2007 financial statements and continued to raise capital in the wholesale markets well into 2008.

The firm said: ‘Banking analysts continued until August 2008 to expect that it would be profitable in that year. With hindsight, market conditions all changed with the failure of Lehman in September 2008 and the effective closure of the wholesale funding markets.’

The FRC has given no timeline for the latest investigation, which will be carried out by its executive counsel and the enforcement division.

Source: CCH Daily

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