By Huw Jones
LONDON (Reuters) - Britain's accounting standards watchdog said on Thursday it would undertake a preliminary investigation into how KPMG [KPMG.UL] and its staff audited the books of HBOS before the UK bank collapsed during the financial crisis in 2008.
The Financial Reporting Council (FRC) said its Conduct Committee had reviewed the full report into the HBOS collapse that was published by banking regulators last year.
As a result, it had asked its executive counsel to undertake preliminary enquiries under its disciplinary scheme that would focus on the extent to which KPMG considered whether management made appropriate assumptions about the risks to HBOS's business when preparing financial statements for the 2007 financial year.
Counsel will also look at the extent to which KPMG "considered whether there were material uncertainties about the entity's ability to continue as a going concern that HBOS needed to disclose in the financial statements".
"The Executive Counsel will present his findings to the Conduct Committee which will then decide whether KPMG or any member are liable to investigation," the FRC said.
HBOS, which traded under the brands Halifax and Bank of Scotland, had to be rescued in a government-engineered takeover by Lloyds (L:LLOY), which as a result subsequently needed a 20 billion pound ($28 billion) taxpayer bailout of its own.
The report by Britain's two banking watchdogs, the Bank of England's Prudential (L:PRU) Regulation Authority (PRA), and the Financial Conduct Authority (FCA), largely blamed HBOS management for the bank's failure.
KPMG said on Thursday a thorough review was in the interests of the audit profession, shareholders and society as a whole.
"We were pleased that the PRA and FCA's report issued last November recognised that KPMG provided robust challenge and delivered clear warnings to HBOS and that this resulted in a more prudent approach to provisioning than would otherwise have been adopted," KPMG said.
"We will continue to co-operate with the FRC as it makes its preliminary enquiries. In the interests of everyone, it is now important that final conclusions are reached in a timely fashion," KPMG added.
Lawmaker Andrew Tyrie, chairman of the parliament's Treasury Select Committee, said last month the FRC had made a serious mistake in refusing to open a formal investigation into KPMG, which audited HBOS's books before the collapse.
"A great deal depends on the quality of audited accounts. They were found wanting during the financial crisis. It is essential that everybody fully understands why. That is why this investigation is so important," Tyrie said on Thursday.
Until now, the FRC had said it had found no reasonable grounds to suspect misconduct in its review of HBOS audits at the time of the BoE and FCA investigations, but that it would study the final report on HBOS that was published in December.