Now that a probe into New Century Financial Corp.'s mortgage practices has laid at least some of the blame on its independent auditor, KPMG LLP, the real question is, will more auditors be found out to have turned a blind eye to what subprime lenders were doing? In other words, are the auditors the ones to blame for the mortgage collapse? Is this case, as The New York Times suggested Thursday, akin to the Arthur Andersen "death penalty" in the Enron affair?
Continue reading below
To that latter question: probably not. The examiner's report -- all 550 pages of it -- focuses in on how New Century reserved for bad subprime mortgages, and how KPMG checked off on those reserves. Debates over reserving are a staple of banking and hinge on the kind of mark-to-market accounting that is such a hot subject right now. While these reserves may well have been fudged in such a way as to approach criminality -- the report is pretty damning -- they hardly approach the vast, off-balance-sheet scams of Enron.
Will the government want to head down that road to Andersen again? Well, we can't really afford to lose any more major accounting firms. Besides, the government was widely criticized for its heavy-handed attack on Andersen, particularly after it lost the case on appeal before the Supreme Court -- years after the firm had expired. To go after KPMG in a big way -- as opposed to targeting individual auditors or levying fines -- would raise serious questions about the validity of all those post-Enron reforms, from Sarbanes-Oxley to a chief accountant at the SEC, that were supposed to prevent this from ever happening again.
Sill, the Times' take may suggest the political spin that may be applied to this case in the ongoing search for a scapegoat who did something everyone can understand. New Century. Enron. Arthur Andersen. KPMG. It's all probably too simpleminded to get us anywhere. But that doesn't mean Congress won't try. - Robert Teitelman
See story from The New York Times
See TheDeal.com: New Century's biz practices faulted
See The Deal's coverage of the New Century bankruptcy
