Mortgage Meltdown: Sue the Lender's Auditor

The New York Times just published an article today summarizing a detailed 580 page report showing that KPMG, the auditor for Century Financial (now defunct) expressly approved a change in accounting method that allowed the company to show a profit when under normal accounting rules the company would have shown a loss. Implicitly this shows the ever-widening complicity of third parties to loan transaction forsaking legal, professional and moral responsibility to get paid an extra fee for looking the other way. Anyone who took a loan based upon the reputation or professionalism of the lender was taken in by a ruse when they looked at the financial statements of the lender.

• Senator Obama is correct when he states that the politics of division has caused us to look suspiciously at each other when we should be looking at predatory corporations stealing our wealth while government either looks the other way or lends a helping hand.  
• Here is the article: 
• Report Takes Aim at Mortgage Lender’s Auditor

By VIKAS BAJAJ

Published: March 26, 2008

In a sweeping indictment of one of the nation’s largest accounting firms, an investigator released a report on Wednesday that said “improper and imprudent practices” by a once high-flying mortgage company were condoned and enabled by its auditors.

Related

Text of the Report (pdf)

KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the company to report profits, rather than losses, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.

The report is the most comprehensive and damning document that has been released about the failings of a mortgage business. Some of its accusations echo charges that surfaced during the collapse of Enron, the energy giant, which collapsed in accounting fraud more than six years ago.

The scathing 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006.

The profit was important because it allowed executives at the company to earn bonuses and allay concerns that the company was healthy when in fact its business was coming apart, the report contends.

The report is the result of a five-month investigation by Michael J. Missal, a lawyer and former official at the Securities and Exchange Commission hired by the United States Trustee overseeing the New Century bankruptcy. It may allow New Century, which is in bankrutpcy, to sue KPMG.

Tags: Auditor liability, borrower, Century Financial, foreclosure defense, fraud, KPMG, Lender Liability
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