KPMG US has spoken out against a report from a US Bankruptcy
Court Examiner that suggested the firm contributed to accounting
and financial reporting deficiencies at failed subprime lender New
Century Financial. KPMG US was New Century’s external auditor from
the lender’s formation in 1995 until 27 April 2007, when the Big
Four firm resigned soon after New Century filed for bankruptcy
protection.

In May 2007, New Century announced its audited 2005 financial
statements for the year ended 31 December 2005 should no longer be
relied on.

The examiner, Michael Missal, was appointed by the United States
Bankruptcy Court for the District of Delaware at the request of the
US Trustee Program, the component of the Department of Justice
charged with protecting the integrity of the bankruptcy
system.

In his 581-page report, Missal alleged the Big Four firm enabled
the deficiencies to persist at New Century and, in some instances,
precipitated the company’s departure from applicable accounting
standards.

The examiner alleged KPMG did not perform its reviews and audits in
accordance with professional standards. It is alleged KPMG’s
engagement team for New Century and their relationship with the
client increased the risk KPMG would not detect material financial
mis-statements.

The examiner also alleged KPMG failed to exercise due care by
providing erroneous advice to New Century inconsistent with US
GAAP; failed to criticise New Century’s reliance through 2006 upon
outdated and inadequate internally developed models to value
residual interests worth hundreds of millions of dollars; and
failed to plan its audits and reviews appropriately in light of the
inherent and control risks of the engagement.

The examiner concluded with the allegation that had KPMG conducted
its audits and reviews prudently and in accordance with
professional standards, the misstatements included in New Century’s
financial statements would have been detected long before February
2007. According to Missal, the earnings reported in New Century’s
2005 year-end financial statements were materially overstated in
its interim financial statements for the first three quarters of
2006 by at least $7.4 million, $75.6 million and $116.4 million,
respectively.

The Big Four firm has rejected the report’s criticism. A
spokesperson told IAB: “We strongly disagree with the
report’s allegations concerning KPMG and we believe an objective
review of the facts and circumstances will affirm our
position.”

Timeline of New Century’s corporate decline

• 1995 – New Century Financial is founded as a
Delaware corporation and employs KPMG US as its auditor

• 8 February 2007 – New Century’s share price falls 36 percent
after the company says it expects to record a net loss for the
fourth quarter of 2006

• 2 March 2007 – New Century discloses further concerns about
its 2006 financial statements, causing its share price to drop from
$14.65 to $4.56 in 24 hours

• 13 March 2007 – New York Stock Exchange files an application
with the SEC to delist New Century’s stock

• 2 April 2007 – New Century files for bankrupcy

• 27 April 2007 – KPMG resigns as New Century’s auditor

• 24 May 2007 – New Century announces its audited 2005
financial statements for the year ended 31 December 2005 should no
longer be relied on

• 29 February 2008 – Michael Missal delivers his 580 page
report on the New Century collapse