One of the mysteries not adequately researched in the recently report into the demise of HBOS was the failure to examine the audits of the company that took place. The Financial Reporting Council (FRC) decided two years ago not to look into the audits of the bank by KPMG prior to its collapse and acquisition by Lloyds in 2008. But the Parliamentary Treasury Select Committee has now been looking into this further.
Andrew Tyrie, the Committee Chairman, has already suggested the FRC should reconsider its decision and called it a “serious mistake”.
This is what Tim Bush of PIRC has said on this matter: “In evidence to the Treasury Select Committee (‘TSC’) in December 2015, Andrew Bailey, Chief Executive of the Prudential Regulatory authority, revealed that the taking out of expected losses from accounting standards [IFRS in 2003] caused the assumptions unpinning the Basle I capital adequacy regime to fail.
The manifestation of this in the specific case of HBOS is still under investigation by the TSC. The TSC has extracted that KPMG, HBOS auditors, was debating IFRS provisions of the order of £1-1.5bn, when the outcome was actually £53bn. Andrew Bailey confirmed that the true losses were in excess of shareholder funds and ‘bail-in capital’ (i.e. subordinated debt), in other words HBOS was bust before being taken over by Lloyds and bailed out by the UK taxpayer.”
In other words the defective accounting standard did not provide a “true and fair view” of the financial position of the company as required by law (see the last ShareSoc Newsletter for more background on this). The use of IFRS caused KPMG to grossly underestimate the impairments that HBOS would suffer and this contributed to the collapse.