Liquidators sue KPMG for $1bn over collapse of subprime lender
2 Apr 09
KPMG, the world's third biggest accounting firm, is being sued for $1bn (£692m) by the liquidators of New Century Financial, the collapsed US subprime lender, in the first big case against an auditor to emerge in the global financial crisis
In a court filing in New York yesterday, lawyers for the liquidators claim KPMG was responsible for New Century's collapse because it allowed the lender to understate the size of its bad loan problem - and even "silenced" KPMG experts who raised red flags.
"KPMG did not act like a watchdog. Instead KPMG assisted in the misstatements and certified the materially misstated financial statements," the filing said.
Steven Thomas of Thomas, Alexander and Forrester, lawyer for the liquidating trust, told the Financial Times: "If the financial statements were accurate and its reserves correct, New Century could not have got the loans to expand as it did."
The complaint claims KPMG brushed aside questions raised by its own experts for fear of upsetting its client.
The complaint also alleges that in 2006, KPMG came under pressure from New Century management to sign off its audit and did so - even though it knew it had not fully completed its work and that its staff were still waiting on documentation from the client.
A KPMG spokeswoman said the firm had not yet seen the complaint but that it would "vigorously defend" its audit work. "Any claim that we acquiesced to client demands is unsupportable," she said. "Any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis. This was a business failure not an accounting issue."
New Century's collapse exactly two years ago today has been considered a harbinger of the economic crisis.
The lender, which grew rapidly in the boom years, made home loans then sold them on but ran into trouble over a spike in problem loans that led to it struggling with funding.