ACCOUNTANCY group KPMG has been cleared by the accounting watchdog over its auditing of HBOS in the run-up to the bank’s near collapse in the 2008 financial crisis.
The Financial Reporting Council (FRC) said it had closed the investigation into KPMG’s handling of HBOS’s accounts and concluded that its work had not fallen short of standards. It added it did not believe there were grounds for further action.
“There is 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,” said the FRC.
“The firm’s work did not fall significantly short of the standards reasonably to be expected of the audit, the test that a tribunal would apply.”
The FRC’s decision will come as a relief to KPMG. It had also been drawn into a mounting scandal in South Africa over its work with the politically connected Gupta family, who have in the past been accused of wielding influence in the country’s politics under President Jacob Zuma’s administration.
Its South African arm’s chief executive Trevor Hoole, chairman Ahmed Jaffer, chief operating officer Steven Louw and five other senior partners all left the firm last week following an internal investigation into work it did for the family.
The FRC launched a probe 15 months ago into KPMG’s auditing of HBOS in 2007 amid worries about whether the accountancy giant properly considered whether HBOS was a going concern in its accounts for that year.
Andrew Tyrie, former Treasury Select Committee chairman, said at the time the investigation was welcome, but overdue.
HBOS was taken over by Lloyds TSB in a rescue deal in the autumn of 2008 after expanding too quickly with risky lending, weak funding and management failures.
Lloyds then had to be bailed out with £20.5 billion of taxpayers’ cash in 2008.
HBOS, formed from the merger of Halifax and Bank of Scotland in 2001, had said in 2008 it would be able to fund itself and did not expect market conditions to worsen, according to the FRC.
KPMG “considered and accepted this conclusion” and HBOS published its accounts in February 2008 on that basis, the FRC said.
The watchdog added: “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.
“The extreme funding conditions which arose in October 2008 were not anticipated.”
The FRC said it conducted a “thorough” investigation, liaising with other regulators and gathering expert advice from independent and experienced lawyers and audit professionals.
“We are pleased that the FRC has reached this conclusion after a thorough investigation,” said KPMG. “We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time.”
It added that industry-wide efforts had been made to improve auditing of banks. “The collapse of HBOS and other examples of corporate failure and fraud in the last decade have highlighted a gap between what society expects of an audit and what an audit has been designed to do,” said KPMG.
“Since 2008, whilst we recognise that there is more to be done, we have worked hard to contribute positively to this debate and have explored ways to close the expectation gap.”
A damning review of the HBOS saga by the FCA and Prudential Regulation Authority in November 2015 said the bank’s executives were “ultimately responsible” for the demise of HBOS.
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