Accountancy regulators are to investigate KPMG and its role as auditor to parts of Bank of New York Mellon (BNY Mellon) raising further questions over the accountancy firm’s track record in auditing banks.
The investigation may prove an embarrassing development for one of London’s top financial regulators, Financial Conduct Authority chairman John Griffith-Jones. He served as chairman of KPMG Europe from 2007 to 2012, part of 37 years spent working at the firm.
The Financial Reporting Council, which has powers to fine and strike off accountants, on Tuesday said it was examining the conduct of KPMG’s work for BNY Mellon. It comes two months after Griffith-Jones’ FCA fined two units of the bank — a London branch and a subsidiary called BNY Mellon International — for failing to properly segregate client assets from assets belonging to the bank between 2007 and 2013.
Together, these units had formed one of the largest “custody banks” in the City, performing a “systemically important” role, the FCA said. As early as 2008, the collapse of Lehman Brothers had revealed similar failures, prompting regulators to issue repeated warnings to the industry and to fine a handful of rivals. Still, failures continued at BNY Mellon, the FCA found — and KPMG audits did not pick these up.
The FRC is examining KPMG’s conduct in relation to both the London branch and BNY Mellon International for the years 2007 to 2011. In particular, it is look at the audit firm’s responsibility for reporting to the regulator compliance with client asset rules at the bank.
“We are committed to setting the highest standards in our work and will cooperate fully with the FRC in its enquiries,” a KPMG spokesman said.
Griffith-Jones is not thought to have had involvement in KPMG’s BNY Mellon audit responsibilities. Asked if the FCA chairman had been aware, in his previous role at KPMG, of the risk to bank audit responsibilities from client asset segregation failures, a spokesman for the FCA declined to comment.
Questions were raised about Griffith-Jones’ suitability for the senior regulatory role as long ago as 2013, nine months after his appointment. In particular, there were concerns that he had headed KPMG at a time when it had been auditing HBOS, signing off controversial valuations in the ill-fated bank’s loan book.
This was seen by some as leaving Griffith-Jones unable to properly oversee the FCA’s highly sensitive report into the collapse of HBOS. That report is only to be made public after pressure from parliament, and its publication has been much delayed.
Accountancy regulators from the FRC have made clear they are working closely with City regulators reviewing the past affairs of HBOS, though in 2009 they told the House of Lords economic affairs committee that, at that point, inquiries had “shown no evidence of audit failure”. An investigation into the audits of HBOS has not yet been ruled out. A final decision will follow after reports on the near-collapse from regulators.
Since then, separate controversies have surfaced from KPMG’s past. The firm was the auditor to the Co-op bank prior to its dramatic profits warning and near collapse two years ago. The FRC last year confirmed it was officially probing KPMG audits of the Co-op bank.
Earlier this year, KPMG was fined £390,000 by the FRC for breaches in standards designed to guard against conflicts of interest concerning audit client Cable & Wireless Worldwide, where the accountancy firm’s chief operating officer James Marsh had worked previously. Breaches took place in 2010 and 2011, when Griffith-Jones led KPMG.
This article was written by Simon Bowers, for theguardian.com on Tuesday 23rd June 2015 20.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010