Accounting firm KPMG International didn’t exactly cover itself in honour in its work for New Century Financial Corp. At least that’s the conclusion of a 580-page report commissioned by the court overseeing the subprime lender’s bankruptcy.
The report alleges that KPMG condoned New Century’s “improper and imprudent practices”—over the protests of its own in-house experts—for fear of annoying or losing the client.
If the accounting industry finds itself in the legal cross-hairs over its role in the subprime meltdown, KPMG will bear a lot of the responsibility. In the world since the Enron, Parmalat and WorldCom scandals, accountants above all should know the value of dealing strictly with troubled clients.
The report says KPMG contributed to New Century’s failings by acquiescing in the company’s departures from standard accounting practices. When one internal specialist objected to a particular practice—one the company later had to change—on the eve of a financial filing, the accountant in charge of the relationship wrote an email saying, “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.”
KPMG officials disagree with the conclusions. But if they’re even partially true, the firm deserves opprobrium. First, in the wake of the scandals that brought down Arthur Andersen, the remaining firms should be fully aware that cutting corners on behalf of even a lucrative client jeopardizes their franchise.
Firing your accountant, or having a public disagreement, quickly highlights your own troubles. AIG discovered this last month, when PricewaterhouseCoopers questioned how the insurer valued its credit derivatives portfolio. Shareholders immediately whacked 11% off AIG’s stock. Finally, the “Big Four” accountants are just that—four in number. That doesn’t give companies much choice.
Granted, New Century’s downfall was of its own making. But the report raises disturbing questions about KPMG’s willingness to kowtow. Companies can play lawyers off lawyers and bankers off bankers, dangling lucrative assignments and freezing out those who don’t toe the line. It’s much harder to do that with accountants. More should be expected of them.