KPMG Blamed For Subprime Audit Failure

Big Four firm KPMG is being sued over its audits of New Century Financial Corp. by the trustee overseeing the bankruptcy of the subprime lender, in one of the first examples of an auditor being blamed for the subprime mortgage crisis.

This follows last April's independent report solicited by the United States Department of Justice that said KPMG may be liable for allowing New Century to engage “in a number of significant improper and imprudent practices related to its loan originations, operations and financial reporting."

The latest suits, filed Wednesday, claim that "reckless and grossly negligent audits" helped accelerate the firm's collapse two years ago, according to the Wall Street Journal.

The suits -- one against KPMG International and the other against KPMG LLC -- claim that specialists at KPMG identified errors in New Century's financial statements but were silenced by the KPMG partner in charge of the audits to protect a business relationship with New Century.

A KPMG spokesman disputed these allegations to the Journal in an e-mail, saying that claims that the firm bent to client demands are "unsupportable" and calling New Century's collapse a business failure -- not an accounting failure.

The complaint against KPMG asks for no less than $1 billion in compensatory and consequential damages. KPMG International is being sued as the parent company of the California-based KPMG firm that conducted the audits, over promises of independence and quality control.  

Read more news stories about these lawsuits here, here and here.

In a related aside, Chicagoan Francine McKenna, featured in a recent Trusted Professional article on CPA bloggers, was interviewed for the Wall Street Journal story.