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New Subprime Investigation Reveals Same Old Story
KPMG e-mails recall past scandals
Thomas Johansmeyer (tomj)     Print Article 
Published 2008-03-30 03:38 (KST)   
A United States Justice Department investigation into the failure of mortgage lender New Century Financial last year has found that accountants could be to blame.

Among the conclusion of a five-month investigation, which resulted in a 580-page report, is the fact that the lender would not have reported a profit for the second half of 2006 if it had not changed its accounting practices.

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The collapse of New Century Financial is largely accepted as the event that triggered the subprime mortgage crisis. A year later, the subprime debacle has caused more than US$100 billion in damage (according to reports by The Wall Street Journal), not to mention ancillary effects such as the recent proposed sale of Bear Stearns.

The Justice Department investigation suggests that the auditor, KPMG, allowed New Century Financial to engage in "significant improper and imprudent practices."

Contributing to KPMG's implication in the mortgage lender's collapse is a series of e-mails in which practitioners raised issues to KPMG partners. In order to preserve the relationship, the concerns were ignored.

This story is not new. The collapse of Enron followed a similar pattern. Lower level audit practitioners at Arthur Andersen identified potential problems, though the partners in charge of the account overruled them.

What followed, of course, were the decimation of company No. 7 on the Fortune 500 list (Enron) and the collapse of an accounting firm that had survived for most of the 20th century. The reason: the auditor allowed the client to engage in risky or inappropriate accounting practices that later backfired.

KPMG is no stranger to controversy. The company was forced to pay a fine of US$456 million to settle a case with the Justice Department over the sale of abusive tax shelters in 2005.

Again, e-mails were involved in the investigation, as electronic correspondence among practitioners led to the eventual settlement with the firm, not to mention the prosecution of former KPMG partners on charges ranging from conspiracy to defraud the IRS to tax evasion.
©2008 OhmyNews
Other articles by reporter Thomas Johansmeyer

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