KPMG cleared over HBOS audit but watchdogs now facing a rough ride from MPs

Treasury Committee chair Nicky Morgan has already fired a warning shot. This could get messy for the Financial Reporting Council

Treasury Committee chair Nicky Morgan wants answers from Financial Reporting Council (Rex)

“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,” huffed KPMG after its watchdog, the Financial Reporting Council, decided to stand pat over its auditing of the bank for the second time.

You may recall that HBOS avoided collapse in 2008 only by dint of a hastily arranged rescue by Lloyds, a matter of months after its auditor had signed off its accounts and certified the business as a going concern.

As Nicky Morgan, chair of the Treasury Committee, pointed out, the Financial Services Authority had described the bank as a disaster waiting to happen as far back as 2004. So at least someone was aware that all was not rosy in its garden.

Given what subsequently emerged about the state of the business, and some of its big ticket loans in particular, one might very well ask what exactly was expected of its auditors. And what the point of the audit was.

Any thoughts 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, for example, by offering extended audit opinions which give a view on corporate risks.”

So nice to see that the firm is part of the solution and has, along with its peers, “risen to and responded to this challenge” after the FRC mildly suggested they might like to do a little bit more.

If society is left scratching its head over the point of a banking audit, it’s probably similarly flummoxed about the purpose of the FRC

Now the latter has decided that KPMG’s work “did not fall significantly short of the standards reasonably to be expected of the audit” does that mean another chapter in the unlovely history of the financial crisis can be closed with no one really being called to account?

The FRC decided to take a second look at KPMG only after intense pressure was exerted by former Treasury Committee chair Andrew Tyrie, a man whose disapproving gaze could bring an errant polar bear to heel.

Ms Morgan has been making it rather clear that she has no intention of being eclipsed by the long shadow he casts.

“When it publishes its detailed report next month, the Committee will expect the FRC to provide a full explanation of its decision not to take further action against KPMG. It may take further evidence in due course,” she said, shortly after the FRC went public.

In other words, you can expect the FRC’s boss Stephen Haddrill to find himself in the cross hairs of Ms Morgan and her committee very soon.

If I were him, I’d get fitted out for some armour.