The accuracy of KPMG’s Australian auditors has been placed under the spotlight in recent months following the share price collapses of Allco, MFS and City Pacific. In all instances, KPMG completed a large amount of non-audit services and in the case of City Pacific’s CP1, KPMG failed to detect a basic arithmetic error in a financial report.

However, KPMG’s woes in Australia are far less of a concern for the firm than the accusations it is facing over its auditing of US sub-prime lender, New Century Financial. Until slipping into chapter 11 bankruptcy last April, New Century was the second largest sub-prime lender in the US (originating more than US$60 billion of loans in 2006). The company was valued by the market at more than US$1 billion in February 2007 but fell “precipitously” after restating earnings.

The US Justice Department has recommended that creditors take legal action against KPMG for “professional negligence and negligent misrepresentation” after the firm “contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the company’s departure from applicable accounting standards.”

The report also noted that: “KPMG failed to question or test certain important assumptions in a rigorous manner [and] acquiesced in New Century’s departures from prescribed accounting methodologies and often resisted or ignored valid recommendations.”

This sounds eerily like the actions of Arthur Anderson in relation to its auditing of Enron.

A KPMG spokesperson stated that the firm “strongly disagree[s] with the report’s allegations [and] believe that an objective review of the facts and circumstances will affirm our position.” One wonders exactly what facts and circumstances KPMG will be relying on, given New Century is now bankrupt, and the financial statements approved by KMPG were completely wrong (and restated by the company).

According to the report, one of the reasons for KPMG’s apparent gross failure to adequately undertake its responsibilities was due to it being intimidated by the forceful nature of New Century’s financial controller, Dave Kenneally. Kenneally, who was described as ”difficult, condescending and quick tempered” just happened to be previously employed by KPMG.

Crikey readers will remember that MFS, Allco and City Pacific all had former KPMG auditors at very senior levels in their organizations. Meanwhile, KPMG were happily signing off financial reports which appear to have been incorrect.

Sarbanes-Oxley was meant to put any end to the specter of accounting conflicts, ending the widespread practice of firms earning significant revenues from audit and non-audit practices.

Unfortunately, the good folk at KPMG haven’t been paying too much attention.

Get more Crikey, for less

It’s more than a newsletter. It’s where readers expect more – fearless journalism from a truly independent perspective. We don’t pander to anyone’s party biases. We question everything, explore the uncomfortable and dig deeper.

Join us this week for 50% off a year of Crikey.

Peter Fray
Peter Fray
Editor-in-chief of Crikey
50% off