HBOS auditor back in spotlight as watchdog does U-turn on inquiry

KPMG could face action over bank’s collapse following shift at Financial Reporting Council

KPMG building, Canary Wharf, London (Rex)

The big four accountancy firm KPMG could face disciplinary action over its audit work for the collapsed bank HBOS, after a volte-face by the profession’s watchdog.

The Financial Reporting Council (FRC) was sharply criticised for its original refusal to launch a full investigation into KPMG, which signed off HBOS’s 2007 accounts and rated it a going concern – just months before the Government brokered a rescue by Lloyds.

The watchdog said it had commissioned its executive counsel, Gareth Rees, to look at the issue after a review of the devastating report on the failure of HBOS by the Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

The FRC said Mr Rees would “undertake preliminary enquiries” about whether the firm had committed misconduct as part of its work for the bank in 2007. KPMG had been HBOS’s auditor since 2001.

Mr Rees will also look at the assumptions made by management during that year.

However, this still falls short of a fully fledged investigation. The FRC said its conduct committee would decide whether that is merited after Mr Rees had presented his findings. The watchdog has been under mounting pressure to act since the report’s publication in November.

Andrew Tyrie, the Tory MP who chairs the Commons Treasury Select Committee, wrote to the FRC’s chief executive, Stephen Haddrill, the following month demanding that he reconsider the need for an investigation.

In the letter, he warned that the FRC would need to “act quickly to maintain its public and professional credibility”.

Mr Tyrie described the FRC’s latest move as “not before time”. “A great deal depends on the quality of audited accounts,” he added. “They were found wanting during the financial crisis. It is essential that everybody fully understands why. That is why this investigation is so important.”

Simon Walker, the director-general of the Institute of Directors, echoed Mr Tyrie’s sentiment, saying: “Shareholders and customers deserve to know what role the firm’s auditors, KPMG, played in this scandal. The announcement of this long-overdue inquiry, therefore, is better late than never.”

KPMG said: “We have consistently supported the regulatory process as we believe a thorough review is in the interests of the audit profession, shareholders and society as a whole. We were pleased that the PRA and FCA’s report... recognised that KPMG provided robust challenge and delivered clear warnings to HBOS, and that this resulted in a more prudent approach to provisioning than would otherwise have been adopted.

“We will continue to co-operate with the FRC as it makes its preliminary enquiries. In the interests of everyone, it is now important that final conclusions are reached in a timely fashion.”

The wheels began to come of at HBOS in 2008, with the bank first tapping its shareholders for £4bn in April 2008, with the rescue following in September. HBOS’s loan book was the main reason that Lloyds subsequently had to accept a multibillion-pound taxpayer bailout.