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thecrashingisles

Will Kpmg Go The Way Of Arthur Andersen?

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Questions about their role in the HBOS fiasco still need to be answered and other embarrassing stories continue to come to light:

http://www.ft.com/cms/s/0/79b3586c-a2d2-11e2-bd45-00144feabdc0.html#axzz2QBiG1mTh

Scott London, the former KPMG partner who issued an unusual public confession to insider trading, was charged with sharing confidential secrets of five companies with his golf partner in exchange for bags of cash and a Rolex watch.

http://dealbook.nytimes.com/2013/04/11/former-kpmg-partner-is-charged-with-insider-trading/

NY Times has the photo of him receiving cash:

dbpix-insider1-tmagArticle.jpg

Edited by thecrashingisles

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Questions about their role in the HBOS fiasco still need to be answered and other embarrassing stories continue to come to light:

http://www.ft.com/cms/s/0/79b3586c-a2d2-11e2-bd45-00144feabdc0.html#axzz2QBiG1mTh

http://dealbook.nytimes.com/2013/04/11/former-kpmg-partner-is-charged-with-insider-trading/

NY Times has the photo of him receiving cash:

dbpix-insider1-tmagArticle.jpg

Guess who we recently appointed to as a HMRC director and where they worked at?

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Hmmm, seen a few articles lately on this issue.

Don't think it will be treated on the Enron scale - one guy takes the fall, media/state declares victory.

Amazing to think Enron was the high-water-mark of punishing crime. Too many fortunes got drowned, doncha know.

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If they decide to push the HBOS issue and KPMG can be shown to be complicit then that could be fatal.

Hmmm, tricky.

I guess the UK can't do it alone and the US regulators need to swing the axe.

My guess: not going to happen, especially when they can spin a morality tale about about one wrongdoer accepting envelopes in a carpark.

edit: Hmmm.

Edited by okaycuckoo

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If they decide to push the HBOS issue and IF KPMG can be shown to be complicit then that could be fatal.

So far as I am aware there is no indication that HBOS's accounts were incorrect much less that there was any complicity from the auditors.

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So far as I am aware there is no indication that HBOS's accounts were incorrect much less that there was any complicity from the auditors.

No indication their accounts were incorrect other than the fact that they collapsed. Last weeks report shows that it wasn't the crisis which brought them down but their own reckless strategy.

http://www.standard.co.uk/business/business-news/ed-balls-and-kpmg-thrown-into-the-middle-of-sir-james-crosby-banking-scandal-8567514.html

The Financial Reporting Council confirmed it would consider launching an investigation of KPMG’s role after last week’s damning Parliamentary Commission report on HBOS once the Financial Conduct Authority presents its findings on the bank’s failure in the autumn.

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No indication their accounts were incorrect other than the fact that they collapsed.

Unfortunately the fact that the bank later collapsed is not evidence that the accounts were incorrect.

Presumably we are talking about the year to 31 December 2006 here and the audit report which would have been signed off in March 2007 (give or take).

Until the credit crunch hit in late 2007 there was no indication that there was anything wrong with any of the UK banks; I don't think anybody (even on this forum) suspected that the interbank lending market would dry up overnight. The losses that followed were the result of the global downturn.

It really isn't the auditor's job to start making predictions about the state of the global economy 3-5 years down the line.

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Unfortunately the fact that the bank later collapsed is not evidence that the accounts were incorrect.

Presumably we are talking about the year to 31 December 2006 here and the audit report which would have been signed off in March 2007 (give or take).

Until the credit crunch hit in late 2007 there was no indication that there was anything wrong with any of the UK banks; I don't think anybody (even on this forum) suspected that the interbank lending market would dry up overnight. The losses that followed were the result of the global downturn.

It really isn't the auditor's job to start making predictions about the state of the global economy 3-5 years down the line.

Collapse of interbank lending finished off Northern Rock but wasn't the root cause of the later collapse of RBS and HBOS. They failed under their own weight and the problems should have already been apparent.

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Don't think it will be treated on the Enron scale - one guy takes the fall, media/state declares victory.

Wasn't it that AA died because its other clients decided they could not stay while everyone else was busy leaving. Otherwise they would be exposed to the allegation that they could not leave for fear of another auditor finding out what was really in their accounts? If so, it's presumably very difficult to predict whether the meme of clients leaving KPMG goes viral. After all, it's a lot easier to push through a change of the auditor when there is a plausible reason :-)

I suppose a good motive for thinking that they may not have the book thrown at them is that "big three" is uncomfortably close to "big two", which is in turn very uncomfortable. We do need someone to sign off the accounts, just like we need the rating agencies to tell us what is safe to invest people's pensions in.

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Collapse of interbank lending finished off Northern Rock but wasn't the root cause of the later collapse of RBS and HBOS. They failed under their own weight and the problems should have already been apparent.

RBS was/is a seriously complex bank so isn't really very instructive because, quite frankly, no-one had a hope in hell of figuring out what was or wasn't wrong with their accounts. HBOS is actually much more interesting because they were a straightforward banking business - funding in one side, loans of one sort or another out the other. Other than a small retail stock brokerage and some interest rate derivatives for hedging, they didn't really do anything other than that. Whether KPMG have some major liability for what went wrong would centre around whether they did something deliberate to obscure the true state of the business or, more likely, that they showed gross negligence and missed what was in front of them. On the first point, I don't think anyone's suggesting that and, from what I've seen, the accounts they produced were accurate in the sense they correctly reported the various items on the balance sheet. What wasn't in the accounts was the fact that the riskiness of the loans on the book turned out to be far greater than HBOS were stating. I would assume that, as part of the audit process, KPMG would have looked at sample loans from the various business lines and confirmed that the credit worthiness of the counterparty had been assessed correctly according to HBOSs own processes and against industry best practises. Assuming they did that and found no material issues, then I would guess they're in the clear - they're auditors, not fortune tellers after all. If, on the other hand, it turns out they were negligent and failed to spot issues with the lending process, then they have a problem.

I think Goat is most likely right though. They may turn out to have been truly crap and get sued for a billion or so but, if there was evidence that they deliberately misreported things or helped HBOS to hide stuff (as Andersens did with Enron), it would have surfaced by now.

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If I own twenty billion of asset A and there is a market valuation ( or model valuation ) of twenty billion on date xxx them my accounts read twenty billion .

If three days later the market price or the model value cased on market observations drop to ten billion then I've lost ten billion at date xxx plus three.

We can all opine or presume that the risks were misunderstood, that the strategy was incorrect and that the market was irrational but you can't say the accounts at xxx were wrong .

Unfortunately with rules that say price assets to prevailing exit price in place then valuations are not always prudent .

It's a problem with the rules and rule setters not the auditors in such a case . Perversely , any auditor forcing a mark down based on prudent reality ( or correct vision kid future prices ) would be open to legal action for misreporting .

The rules about the concept of prudence were ditched in favour of 'fair value' based on prevailing market .

In any Ponzi scheme then irrational , ludicrous , (and with hindsight incorrect) valuation of future inflows are Always wrong but if the assets can be dumped to another mug at that time at over optimistic levels then they are theoretically correct .

Houses are a great example as are tulips in 1600's. we know they're over valued but if some mug is still willing up overpay then technically they aren't

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Bank banking sunk HBOS.

The accounting, in its current form, was useless and/or limited.

Which raises a bigger question about its value and use, and how much you should pay for it.

On a roughly similar subject, a liquidator lived over the road.

I was having a chat with him during a BBQ.

My point, which he did not disagree with, was that there is limited use for them - working capital is borrowed, building is leased, no cash, no assets.

Liquidation, in the main, has become a 'going thru the motion' process, racking up fees of course.

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Wasn't it that AA died because its other clients decided they could not stay while everyone else was busy leaving. Otherwise they would be exposed to the allegation that they could not leave for fear of another auditor finding out what was really in their accounts? If so, it's presumably very difficult to predict whether the meme of clients leaving KPMG goes viral. After all, it's a lot easier to push through a change of the auditor when there is a plausible reason :-)

I suppose a good motive for thinking that they may not have the book thrown at them is that "big three" is uncomfortably close to "big two", which is in turn very uncomfortable. We do need someone to sign off the accounts, just like we need the rating agencies to tell us what is safe to invest people's pensions in.

Andersens went because their auditing practises were a sham.

When I was doing my exams I knew people from several firms, we would sometimes talk about auditing and we were all doing similar - test 60 transactional items, rules for substantive testing - except for AA. They'd do a handful of transactions and a little bit of substantive testing and call it an auidt, charging as much as the other firms who did a proper audit. They paid their staff more and we were all jealous because they got flown to Chicago within a few months of joining (we went to Peterborough) but we were continually amazed at how minimal their audits were, an AA audit report was not a patch on one from any of the other big firms.

Enron exposed them.

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They may turn out to have been truly crap and get sued for a billion or so but, if there was evidence that they deliberately misreported things or helped HBOS to hide stuff (as Andersens did with Enron), it would have surfaced by now.

How would it have surfaced given that there has been no forensic investigation of what went wrong? We do know that 'liar loans' were endemic in the years leading up to the crisis.

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When I was doing my exams I knew people from several firms, we would sometimes talk about auditing and we were all doing similar - test 60 transactional items, rules for substantive testing - except for AA.

I am a little sceptical that the key problem with their audit of Enron really was that they didn't train their staff to check the right number of transactional items.

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How would it have surfaced given that there has been no forensic investigation of what went wrong? We do know that 'liar loans' were endemic in the years leading up to the crisis.

Because it's most certainly in the current management's interest to find it and one of the first thing Lloyd's would have done when taking it over would have been to send their own internal audit team.

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Because it's most certainly in the current management's interest to find it and one of the first thing Lloyd's would have done when taking it over would have been to send their own internal audit team.

Ordinarily yes but they were so implicated in the disastrous decision that anything that was uncovered would have just exposed their own recklessness. Even now legal action is pending so it's in their interests for certain things not to be revealed.

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So far as I am aware there is no indication that HBOS's accounts were incorrect much less that there was any complicity from the auditors.

Their mark to market valuations of portfolios were obviously wrong and bonuses paid from factitious profits apart from that they were fine

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So far as I am aware there is no indication that HBOS's accounts were incorrect much less that there was any complicity from the auditors.

That depends whether wildly optimistic estimate of NPV of loans are considered 'correct' but I do agree that it is hard to nail them under current regime.

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  • 242 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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