Accounting watchdog’s KPMG decision sparks questions over conflicts of interest

According to The Times, investment group Sarasin & Partners has pointed to the make-up of the FRC as leaving it vulnerable to potential conflicts of interest and therefore at serious risk of regulatory capture.

At present, more than 40 present and former Big Four partners sit on the FRC’s main board or other key committees.

On Tuesday, the watchdog’s Executive Counsel said it had closed the case on KPMG’s 2007 HBOS audit having carried out a “detailed investigation” before concluding “there is not a realistic prospect that a Tribunal would make an Adverse Finding against KPMG in respect of the matters within the scope of the investigation”.

The watchdog said that the firm’s work “did not fall significantly short of the standards reasonably to be expected of the audit”, the test that a Tribunal would apply.

Shortly after the audit, HBOS went on to require £29 billion of rescue capital from taxpayers alongside HBOS and Lloyds shareholders.

Individual’s cited in the report as examples representing potential conflicts of interests are Brendan Nelson, who was the head of banking audits at KPMG at the time of the banking crisis and responsible for the HBOS audit, as well as that of its fellow crisis casualty Bradford & Bingley.

He is now a member of the financial reporting review panel.

Another is former KPMG partner Paul George who is now the FRC’s executive director and sits on the board, as well as the codes and standards committee.

Others include Sean Collins, who sits on the conduct and case management committees, and Stephen Oxley, who is on the regulator’s audit council.

Another four committee members qualified at the accounting firm, it was pointed out.

There are other potentially conflicted people, too, such as Jim Coyle, the former HBOS chief accountant, who is a member of the audit quality review committee. Geoffrey Green, who chairs the reporting review committee, which is responsible for opening inquiries and appointing review groups, is a consultant to Ashurst, the law firm that represents HBOS board members.

Natasha Landell-Mills, head of governance at Sarasin & Partners, an investment group, said: “There are material conflicts of interest both at board level and in operational committees. There is a real risk of regulatory capture.”

European law requires that no auditors within three years of practice can sit on regulatory decision-taking boards and responding to the concerns over conflicts of interest, the FRC said that its current compliment complies with the rules.

It also stressed that two thirds of its executive committee were non-accountants and conduct committee members played no part in decisions where there could be conflicts.

It also said that available on the FRC website were interests declared Board members and which were recorded in minutes.

While members of committees below board level also had to declare conflicts, at present the watchdog does not make these public.