Accountancy watchdog clears KPMG over 2007 HBOS audit

The Financial Reporting Council today announced that it has cleared KPMG over the firm’s conduct during its audit of HBOS in the months immediately prior to the bank’s collapse at the height of the financial crisis.

Following the 2007 audit, HBOS found itself in such severe financial danger that the government had to step in with a £20 billion bailout for its new owner, Lloyds Banking Group.

Having now been cleared of failing to recognise the danger the bank would soon find itself in, KPMG said that it had always maintained that its audit was “robust and undertaken in accordance with the regulations and practice of the time”.

The Executive Counsel to the FRC said it had closed the case having carried out a “detailed investigation” before concluding “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”.

The watchdog said that 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 investigation related to the extent to which KPMG, during the course of their audit of HBOS:

  • considered 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
  • considered 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
  • In early 2008 HBOS concluded that its financial statements for the year ended 31 December 2007 should be prepared on a “going concern” basis.

    HBOS did not expect market conditions to worsen and judged that it would be able to fund itself.

    KPMG had considered and accepted this conclusion.

    HBOS then published its audited financial statements in February 2008 on that basis.

    The FCA said: “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 its investigation included it liaising with other regulators with knowledge of the relevant events, and obtaining expert advice from independent and experienced lawyers and audit professionals.

    The FRC will publish in October a report on its actions in audit and corporate reporting developments since the financial crisis, including on the audits of banks.

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