KPMG and the HBOS whistleblower

By Ian Fraser

Published: Sunday Herald

Date: December 18th, 2011

KPMG was already auditing Halifax when the ex-building society merged with Bank of Scotland a decade ago, and the audit firm took over responsibility for auditing HBOS books from September 2001. The firm fulfilled this function until HBOS had to be rescued via a shotgun marriage with Lloyds TSB in September 2008.

KPMG does not seem to have done a particularly good job, seemingly turning a blind eye to the riskiness of many of HBOS’s activities. The firm signed off the bank’s accounts year after year even though the valuations placed on many of the “assets” amassed by HBOS ex-head of corporate lending, Peter Cummings,  are now known to have been fanciful.

Speaking to the Economic Affairs Committee of the House of Lords last year,  senior adviser to Hermes Pensions Management, David Pitt-Watson, said:

‘I’m intrigued that when HBOS was taken over by Lloyds that, of their £432bn loan book, Lloyds said £186bn of that was not business that they would have wished to do. It would have been helpful … if [KPMG] had said, “Your loan book seems to us to be rather different from the loan books that we’re finding in other banks.” Perhaps there should be some provision behind this.’

For its pains KPMG, whose audit partner on HBOS was Guy Bainbridge, received £55.8m in audit fees and £45.1m in non-audit fees from HBOS. The other fees included consultancy work, tax advisory, advising on the abortive acquisition of Abbey National in 2004 and the handling corporate insolvencies of bankrupt HBOS clients. There was massive scope for conflicts of interest in these assignments.

In 2004 HBOS’s group head of regulatory risk, Paul Moore, sought to warn the bank’s board that weak governance coupled with its out-of-control culture might prove terminal for the Edinburgh-based bank. Moore’s reward was to be muzzled and fired by the bank’s former chief executive Sir James Crosby.

The bank appointed KPMG, its own auditors, to produce a so-called “independent” investigation into Moore’s allegations – even though, as auditor, KPMG was obviously conflicted. Having failed to interview key witnesses, KPMG then produced a report claiming that Moore’s allegations were “without merit”. The bank collapsed – at vast expense to the UK taxpayer – three years later. As part of Lloyds Banking Group, Halifax Bank of Scotlnd is now audited by PWC.

Note: an edited version of this article accompanied a wider piece on plans from EU commissioner Michel Barnier to reform the audit sector. It was an accompanied by a similar piece on Deloitte and RBS 

Short URL: https://www.ianfraser.org/?p=5712

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