KPMG has been absolved of responsibility by the accounting watchdog over its auditing of HBOS in the run-up to the bank's collapse in 2008, saying at the time there was no evidence market conditions would take such a dramatic turn.
The Financial Reporting Council (FRC) said today after a detailed investigation, it had decided it was unlikely a tribunal would find against KPMG for its 2007 audit of the lender, which concluded it was a going concern.
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 accounting watchdog said it had considered the "appropriateness" of KPMG's use of the going concern assumption in the preparation of its financial statements in 2007, as well as whether there were any material uncertainties.
The evidence of market conditions at that time did not show [its] 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 announced plans to investigate KPMG over its 2007 audit of HBOS last summer.
A KPMG spokesman said:
“We are pleased that the FRC has reached this conclusion after a thorough investigation. We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time.
“However, we also recognise the findings of the FRC’s 2014 thematic review on bank audits, which highlighted that the quality of bank audits needed improving in certain areas. This review also showed how the profession had risen to and responded to this challenge.
“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, 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.”
Lloyds rescued HBOS with a £12bn takeover in September 2008 after it unveiled a 70 per cent fall in profits. However, the losses were so large, they dragged down the larger entity as well, resulting in a £20.3bn bailout from the government which left taxpayers owning a 40 per cent stake in the combined lender.
In April the government announced it had finally made back the money it spent bailing out the company.
In February this year six people, including two HBOS bankers, were jailed for more than 50 years between them over a scheme which ran businesses into the ground for their own personal gain. The scheme generated losses of more than £250m for the bank.