Accountants KPMG accused of professional negligence

KPGM helps with accounting fraud!
Andrew Clark in New York
guardian.co.uk, Thursday March 27 2008 Article history
The accounting firm KPMG has been accused of professional negligence and of acquiescing to a "difficult" client as auditor to New Century Financial, an American mortgage company that collapsed under the weight of sub-prime loans.

An independent report commissioned by the US justice department has suggested that creditors could seek compensation from the European-based accountancy group for allowing and even aiding New Century to understate its liabilities.

The report says a KPMG partner, John Donovan, brushed aside concerns about contentious accounting practices in an impatient email because he feared losing New Century as a client. "I am very disappointed we are still discussing this," wrote Donovan. "As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off."

The sudden bankruptcy of New Century last April was among the early signs of the looming credit crunch brought on by defaults in the US home-loans market.

New Century was a big player in sub-prime loans, providing $60bn (£30bn) of mortgages a year. The securities and exchange commission is investigating its demise and it is the subject of class-action lawsuits by shareholders and ex-staff.

The bankruptcy examiner who compiled the report, Michael Missal, found that New Century had a "brazen obsession" with increasing the size of its loan portfolio, quadrupling its new mortgages over four years. There was little consideration over whether customers could afford repayments — instead, the firm's main criteria was whether it could sell on loans.

New Century ran into trouble when investors began to reject its loans on the secondary debt markets, sending them back as so-called "kickouts". It failed to make sufficient provision for these liabilities and, the report finds, KPMG did not exercise proper scrutiny.

"KPMG failed to question or test certain important assumptions in a rigorous manner," says the report. "The KPMG engagement team acquiesced in New Century's departures from prescribed accounting methodologies and often resisted or ignored valid recommendations."

It says KPMG's auditors were intimidated by New Century's financial controller, Dave Kenneally — a KPMG alumnus himself who the report describes as "difficult, condescending and quick tempered". But KPMG rejected the findings. It said: "We strongly disagree with the report's allegations concerning KPMG and we believe that an objective review of the facts and circumstances will affirm our position."