KPMG cleared of wrongdoing in HBOS audit probe

Accountancy firm KPMG will face no further action over allegations that its audit of HBOS in 2007 fell short of expected standards.

HBOS was rescued from crashing by Lloyds Banking Group in the midst of the 2008 financial crisis – months after KPMG performed an audit on the lender.

But the Financial Reporting Council (FRC) said its investigation had found KPMG's work "did not fall significantly short of the standards reasonably to be expected of the audit".

The accountancy regulator had been under pressure from MPs to investigate KPMG after a report co-authored by two regulatory bodies released in November 2015 explored the reasons behind the demise of HBOS.

HBOS prepared its financial statements for the 2007 calendar year on a "going concern" basis.

The banking and insurance firm did not expect market conditions to worsen and judged that it would be able to fund itself, the FRC said. KPMG considered and accepted this conclusion in 2007.

"The evidence of market conditions at that time did not show this decision of HBOS or the auditor's assessment of it to be unreasonable at the time," the FRC said in a statement.

"The extreme funding conditions which arose in October 2008 were not anticipated."

KPMG said it was pleased with the FRC's findings.

"We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time," the accountancy firm was reported as saying by the Guardian newspaper.

"The collapse of HBOS and other examples of corporate failure and fraud in the last decade have highlighted a gap between what society expects of an audit and what an audit has been designed to do," it added.

"Since 2008, whilst we recognise that there is more to be done, we have worked hard to contribute positively to this debate and have explored ways to close the expectation gap, for example, by offering extended audit opinions which give a view on corporate risks."