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HBOS & BHS audit investigations launched

The UK’s Financial Reporting Council (FRC) has launched two separate audit investigations,one into KPMG’s audit of HBOS in 2007 and secondly PricewaterhouseCoopers audit of BHS in 2014 – under its accountancy scheme which it allows it to take disciplinary action against members of the profession.

The investigation into KPMG has been instituted by the FRC’s conduct committee following preliminary enquiries by the executive counsel that began in January following the publication of the report into the HBOS collapse by the Prudential Regulatory Authority and the Financial Conduct Authority.

The enquiry will consider relates to the extent to which KPMG  during the course of their audit of HBOS considered the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements for the year ended 31 December 2007; and considered whether there were material uncertainties about the entity’s ability to continue as a going concern that needed to be disclosed in the financial statements. HBOS was subsequently bought by Lloyds as the banking crisis took hold in 2008.

KPMG was HBOS’s external auditor from the company’s creation in 2001 until the end of 2008. The PRA/FCA report showed how a number of factors – including its rapid expansion, exposure to lower quality lending and large loans to a small number of entrepreneurs  – led to the annual report and accounts for the year ending 31 December 2007 (published early 2008) showing a  a profit before tax of £5.5 billion and the annual report and accounts for the year ending 31 December 2008 (published in 2009) showing a loss of £11 billion. The deterioration in the quality of HBOS’s loan book and the speed with which it all happened, are a notable part of the HBOS story, the report stated.

The FRC will also investigate the conduct of PricewaterhouseCoopers in relation to the audit of the financial statements of BHS for the year ended 30 August 2014. The retailer BHS went into administration in April this year and no buyer has been found for the business.

A member or a member firm can be investigated by the FRC where, in the opinion of its conduct committee the matter raises or appears to raise important issues affecting the public interest in the UK and there are reasonable grounds to suspect that there may have been misconduct or it appears that the member or member firm has failed to comply with any of his or its obligations under the scheme rules.

What do you think?