New UK regulator may investigate accounting giant over audit of failed bank HBOS
In light of HBOS’s 2008 taxpayer-funded bailout, much scrutiny has been placed on the bank’s management, as well as the accounting firm that had recently given it a clean bill of health. Despite KPMG clearing HBOS’s decision to set aside £370m for bad loans, the bank was shown to be carrying £47bn of losses when it was rescued by the British government.
Even though an investigation in 2009 by then regulator the Financial Services Authority (FSA) cleared KPMG of any wrongdoing in their audit of HBOS, two new reports have spurred industry watchdog the Financial Reporting Council (FRC) to look at whether the accounting firm could face a further investigation in the coming months.
One report, by the Parliamentary Commission on Banking Standards, speculated that HBOS would have gone bust regardless of the 2008 financial crisis because of “reckless” management. In response, the FRC said it would look closely at the findings, adding in a statement: “If there is evidence that financial statements were misleading, and there were deficiencies in the audit, we would take this as a basis to launch an investigation into potential misconduct under our powers.”
In the previous investigation by the FSA in 2009, KPMG was found not too have been responsible for any malpractice in their audit of HBOS, with the regulator blaming a “collective denial” at the corporate division of the bank and strategies that hid the entire catalogue of problems facing the firm from regulators and the auditors.
It said: “The firm adopted an optimistic approach to levels of provisioning despite repeated warnings from HBOS’s auditors and the Corporate Division’s risk function of the need for a more prudent approach.”
Were there to be a further investigation of how KPMG handled the situation, it would prove embarrassing for the new chairman of one of the regulatory bodies that has succeeded the FSA. John Griffith-Jones chairs the newly formed Financial Conduct Authority (FCA), but was previously chairman of KPMG at the time of the HBOS audit. If there were claims against KPMG in light of any investigation, he would be liable, having been a partner in the firm. The FCA is currently putting together a report, continued from the work of predecessor the FSA, into the collapse of HBOS.
Labour MP and member of the Treasury Select Committee, John Mann, told reporters in light of the concerns that Griffith-Jones should step down: “He should absolutely resign. These grossly failed businessmen should not be in any senior positions in any organisation. Griffith-Jones played along with this Alice in Wonderland economics and the taxpayers are now footing the bill.”
HBOS was later bought by Lloyds bank in 2008, which subsequently reported £25bn in losses as a result of the bad loan book inherited from the failed bank.