KPMG and the HBOS audit

This does look like something of a problem really:

Although the Big Four accounting firm was not criticised by the Parliamentary Commission on Banking Standards, the damning report revealed HBOS was carrying £47bn of losses when rescued by the taxpayer despite getting a clean bill of health from KPMG.

In HBOS’s corporate arm alone, KPMG cleared management’s decision to set aside just £370m in provisions in May 2008, when the final divisional losses ended up being £25bn.

You know who will be all over it. Nothing at all to do with the fact that he was trained by one of the big four but had to go inde3pendent rather than climb through the ranks. Not at all.

The problem with blaming the auditors here is threefold:

1) No one actually knew that there were all those bad debts.

2) The law at the time (instituted under the Brown Terror) said that banks could only provision for actual losses, not for potential ones.

3) As to the going concern thing, I\’m pretty sure that the various auditors did in fact ask BoE/Treasury whether there would be government support for banks that got into trouble. Because without that assurance they weren\’t willing to sign off on them as going concerns. And as we know, they support was there and on that basis the banks were all going concerns. So the audit was correct in that sense.

And wouldn\’t it have been amusing if the audit had declared that they weren\’t going concerns?

7 thoughts on “KPMG and the HBOS audit”

  1. I’m afraid that the excuse of “I didn’t know nuffink, guv” has been used to death by everyone in public and private life. Everybody is therefore stupid or a liar, which, whilst believable sometimes, probably isn’t true. Somebody in the banks (admittedly, not people like Andy Pandy, who couldn’t run Smartie factory, let alone a bank) knew of the exposure to losses.

    No business is proscribed from providing for probable losses if that is what is required to show a true and fair view. Why are they providing billions to cover potential mis-selling of PPI?

    I’m well aware that a qualified audit report can easily turn into a self-fulfilling prophesy, but then again I thought it was fiscally and financially and morally wrong to bail out the banks…

  2. since when did auditors give “clean bills of health”? I suppose they mean an unqualified audit opinion.

  3. Did Broon say you cannot make provision at all, or just that you cannot claim it as a loss for tax purposes?

  4. tory boys never grow up

    The law at the time (instituted under the Brown Terror) said that banks could only provision for actual losses, not for potential ones.

    This is correct except that the law concerned had been around since the Companies Act 1981 (instituted under the Thatcher Terror!) – before then Banks were allowed to hold “hidden reserves” in order to cover such eventualities.

    IFRSs are of course in the process of changing to allow some recognition of expected/potential losses.

  5. tory boys never grow up

    It is also a debateable question under IFRSs (which was used to prepare the HBoS accounts concerned) with regard to loans which are impaired as at the impairment date as to how much account you take of anticipated future declines in the value of collateral during the period to expected realisation – if you look at accounting policies and disclosures carefully you will see that there is some diversity in practice on this score.

  6. tory boys never grow up

    “As to the going concern thing, I’m pretty sure that the various auditors did in fact ask BoE/Treasury whether there would be government support for banks that got into trouble. Because without that assurance they weren’t willing to sign off on them as going concerns.”

    Looking at the evidence presented to the Parliamentary Commission I wouldn’t be so certain – the FSA regulations are pretty clear that in situations where there are doubts about going concern then both the auditors and the bank should raise the matter with the Regulator ( and the auditing standards allow the auditors to breach confidentiality requirements in such cases if necessary) – from the evidence I can see nothing that indicates that this might have happened before signing off the 2007 accounts.

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