The predictable next phase of the subprime story.
The “Blame the Auditors” phase of the credit meltdown starts with a New York Times piece criticizing KPMG’s engagement at New Century Financial, which went bankrupt last April.
New Century and its executives are the subjects of a U.S. Justice Department investigation. Investors have filed numerous civil lawsuits against the company. Read the full article here.
KPMG responds: “We strongly disagree with the report’s conclusions concerning KPMG. We believe an objective review of the facts and circumstances will affirm our position.†KPMG said a national standards committee had approved the accounting practices in question.
Some excerpts:
- “E-mail messages show that some KPMG auditors raised red flags, but KPMG partners overseeing the audits rejected those concerns because they feared losing a client.”
- KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.
- “The report lays bare the aggressive business practices at the heart of the mortgage crisis.”
- “They acquiesced overly to the client, which in the post-Enron era seems mind-boggling.â€
MORE: New York Times columnist Floyd Norris on his blog.
FREE DOWNLOAD: Get the report (PDF, 581 pages) from law firm KLGates: “NEW CENTURY TRS HOLDINGS, INC., Chapter 11, Case No. 07-10416 (KJC). FINAL REPORT OF MICHAEL J. MISSAL, BANKRUPTCY COURT EXAMINER”
Here’s the view from D&O insurance attorney Kevin LaCroix:
While the examiner’s conclusions may (and undoubtedly will) be the subject of substantial debate, the report’s analysis of the company’s loan origination practices and accounting shortcomings is remarkably detailed. The sheer sweep and magnitude of the report and the depth of its detail could make New Century the poster child for the excesses of the subprime lending boom, evoking inevitable comparisons with Enron as the byword for an entire era. Indeed, the report suggests a number of echoes from that earlier period, including in particular the accounting firm’s supposed complicity in the company’s alleged excesses.
The fallout from the subprime meltdown will continue to accumulate in the months and years to come, but the New Century bankruptcy examiner’s report may represent the first installment on the history of the era.
