Raymond Doherty 19 Sep 2017 04:53pm

FRC clears KPMG over HBoS audit

The Financial Reporting Council has ended its investigation into KPMG's audit of HBoS in the lead-up to the financial crisis

The probe focused on why HBoS was granted “going concern” status in 2007, a year before it had to be bailed out following the financial crash.

The accountancy watchdog has today concluded that there is not a realistic prospect that a tribunal would make an adverse finding against KPMG.

A previous Parliamentary Commission on Banking Standards report revealed that HBoS was carrying £47bn of losses when it was bailed out, despite being given a clean bill of health by KMPG.

Prior to the taxpayer rescue, the final divisional losses for HBoS’s corporate business totalled £25bn, despite KPMG clearing the management’s decision to set aside just £370m in provisions.

The FRC came under renewed pressure to investigate the firm last year. The Treasury Select Committee – and its chair at the time Andrew Tyrie MP – took the view the audit process was central to the bank’s failings.

KPMG has firmly denied any wrongdoing throughout the process.

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

“HBOS did not expect market conditions to worsen and judged that it would be able to fund itself. The auditor considered and accepted this conclusion. HBOS published its audited financial statements in February 2008 on that basis. 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.”

It added that the extreme funding conditions, which arose in October 2008, were not anticipated.

A spokesperson for KPMG said the firm was “pleased” with the conclusion of the investigation.

“We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time.”

The firm added, “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. Since 2008, while 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.”