Corporate Governance

DOJ Report Accuses KPMG of Enabling Bankrupt Home Lender New Century

By Jim Hodgson

Michael J. Missal, a former SEC Enforcement Division attorney, has wrapped up a five-month investigation for the Department of Justice into the failure of New Century Financial, the first large mortgage company to fold in the wake of the subprime debacle.  His conclusion?  According to an article in today?s New York Times, ?KPMG . . . endorsed a move by New Century . . . to change its accounting practices in a way that allowed the lender to report a profit, rather than a loss, at the height of the housing boom.?

Mr. Missal?s report describes how New Century lowered its reserves for loans that it was being forced to repurchase -- even as the number and magnitude of those buybacks was soaring.  Without this abrupt and undisclosed change over to such liberal accounting standards -- standards that were condoned by KPMG -- New Century would have reported a loss, rather than a profit, in the second half of 2006.

A spokesperson for KPMG has taken public issue with Mr. Missal?s findings, stating, ?[w]e strongly disagree with the report?s conclusions concerning KPMG.?  All the same, Mr. Missal concludes by likening the New Century situation to the Enron fiasco and suggesting that ?KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.?

As this report makes clear, accountants and other secondary actors often play an instrumental role when corporate managers set out to deceive investors.  Indeed, this reality is why cases like Stoneridge, concerning the reach of Section 10(b), are so important.

Full post as published by PomTalk on March 27, 2008 (boomark / email).