The UK audit watchdog has been accused of brushing-off a whistleblower who claimed HBOS had understated loan-loss provisions in its 2007 accounts.
An MP described the handling of the case as “astounding”.
Rob Kennedy, a former employee in the lender’s corporate division, was part of the team that worked directly to calculate the provision and report it to HBOS’s senior management during 2007 and 2008.
Emails seen by City A.M. appear to show Kennedy receiving little attention after he contacted the Financial Reporting Council (FRC) in 2017 to provide information, which he claimed showed senior managers slashing the model-generated provision figure.
“I went to the FRC and I just got whitewashed,” he told a representative of the All-Party Parliamentary Group (APPG) on Fair Business Banking in an interview last month, a transcript of which has been seen by this paper. “I was astonished by their response,” he added.
He accused auditor KPMG, which was cleared in September 2017 of any wrongdoing by an FRC probe into its audit of HBOS, of “absolute fabrication” in its response to the watchdog’s investigation.
The work carried out by KPMG “did not fall significantly short of the standards reasonably to be expected of the audit, the test that a tribunal would apply,” the FRC said at the time.
Figures from KPMG’s 2007 audit of HBOS were used to support a £4bn rights issue during the financial crisis, which ultimately failed to reverse the bank’s fortunes. HBOS was subsequently bought out by rival Lloyds Banking Group.
In an earlier review of HBOS’s loan-loss provisioning – the process by which a bank sets aside an expense to cover against issues such as losses or defaults on money it has lent – the FRC ruled there had been no grounds to suspect misconduct.
In an email to the FRC, sent in April 2017, Kennedy told the watchdog: “I know the models calculated a provision way beyond expectations, and [a senior HBOS manager], told us ‘we may as well throw away the f**king keys to the business’ if the model’s provision found their way into the accounts.”
The FRC subsequently contacted him, and two days later Kennedy spoke to two officials over the phone. He was then sent an email by Ros Stow, the FRC’s head of case examinations and enquiries, in which he was told the watchdog had already decided against a fully-fledged probe into loan-loss provisioning, and was informed about the “ongoing” investigation into the audit.
Kennedy was not contacted further by the FRC. He retired from HBOS in 2016.
The emails were first reported on by the Financial Times.
The new claims emerged during a parliamentary hearing yesterday, at which FRC chief executive Stephen Haddrill faced questions from MPs. Conservative MP Stephen Kerr, vice-chair of the APPG on Fair Banking, claimed the FRC had “brushed off” Kennedy.
“If we’re thinking about the same case, it’s not true that they’ve been ignored,” said Haddrill. “Indeed, we have been looking further into that information, as indeed have other regulators.”
KPMG rejected Haddrill’s claim that the FRC was still probing parts of its audit work for HBOS. “We strongly refute these allegations, which we believe to have no basis in fact,” said a spokesperson for the accountancy firm. “The events that led to the failure of HBOS have been subject to many investigations with which we have co-operated fully. We have no further comment to make.”
An FRC spokesperson said: “We do not publish the identity of any individual who approaches us as a whistleblower. However, we take such approaches seriously and have clear procedures for dealing with matters raised by whistleblowers and other complainants.”
Kevin Hollinrake MP, chair of the APPG on Fair Business Banking, said: “It is astounding that the FRC completely disregarded Kennedy’s evidence. He is clearly a very cogent witness to the cover up of bank losses on a phenomenal scale.”
In November, Lloyds apologised and paid an undisclosed amount in compensation to another whistleblower, Sally Masterton, who produced an internal report that criticised the lender’s handling of a large-scale fraud.
Masterton, a former senior risk officer at HBOS, raised concerns about Lloyds’s awareness of fraudulent asset-stripping activities at the bank in an extensive document released last summer.
“Kennedy’s account also corroborates the original whistle-blower, Sally Masterton, who had been the subject of a blatant attempt to discredit her and her evidence, which was described as unsubstantiated,” said Hollinrake.