KPMG Sued

"KPMG, the world's third-biggest accounting firm, is to be sued for $1bn by the liquidators of New Century Financial [NCF], the collapsed US subprime lender, in the first big case against an auditor to emerge in the global financial crisis. In a court filing in New York yesterday, lawyers for the liquidators claim KPMG was responsible for [NCF's] collapse because it allowed the lender to understate the size of its bad loan problem--and even 'silenced' KPMG experts who raised red flags. 'KPMG did not act like a watchdog. Instead KPMG assisted in the mis-statements and certified the materially misstated financial statements,' the filing said. ... The complaint claims KPMG brushed aside questions raised by its own experts for fear of upsetting its client. ... However, John Donovan, KPMG's lead audit partner on [NCF] told [John] Klinge in an e-mail: '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.' ... A KPMG spokeswoman said the firm has not yet seen the complaint but it would 'vigorously defend' its audit work. 'Any claims that we acquiesced to client demands is unsupportable,' she said", Jennifer Hughes at the FT, 2 April 2009.

"The trustee overseeing the bankruptcy of subprime lender [NCF] filed suit against its auditor, KPMG LLP, claiming that 'reckless and grossly negligent audits' helped accelerate the firm's collapse two years ago. The lawsuits filed Wednesday said that specialists at KPMG tried to point out errors in [NCF's] financial statements but were silenced by the KPMG partner in charge of the audits 'to protect KPMG's business relationship with, and fees from, [NCF]. ... If the [NCF] trustee is sucessful, 'it may embolden others to look more closely at the possibility of bringing [accounting] firms to some level of culpability for the things that happened' that led to the credit crisis, Francine McKenna, president of McKenna Partners LLC, a corporate-governance consultancy, said in an interview. ... 'While we have not seen the complaint yet, any claim that the acquiesced to client demands is unsupportable,' KPMG spokesman Dan Ginsburg said in an emailed statement. ... The accounting issues center on provisions in the mortgages the bank sold to investors that required it to take back or make payments on the mortgages if they quickly went bad. When subprime mortgages began to sour in early 2007, [NCF] was on the hook for $8 billion in loans and collapsed soon thereafter", Donna Kardos at the WSJ, 2 April 2009.

Caving in to large clients is the Big 87654's stock in trade. How do you think they got that big? By being aggressive auditors? Well, PCAOB, where are you? Did you already review KPMG's NCF work? If not, why not? Will you provide "expert" testimony for KPMG or the plaintiffs in this matter? Or are you nowhere to be seen?

This seems to be the same issue KPMG "missed" at Citigroup, my 15 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/citigroup-comes-clean.html.