LOS ANGELES (CN) – KPMG contributed to the collapse of New Century mortgage finance by certifying inaccurate financial statements, squelching employees who pointed out is gross negligence, and issuing an audit report before it had even completed the audit, New Century’s liquidating trustee says in a $1 billion claim in Superior Court. New Century’s reported assets grew from $300,000 in 1996 to $26 billion in 2005, due in great part to subprime lending.
“KPMG did not act like a watchdog,” the trustee says. “Instead, KPMG assisted n the misstatements and certified the materially misstated financial statements. When specialists within KPOMG tried to point out misstatements in the financial statements, they were silenced by the KPMG partner in charge of the New Century audits to protect KPMG’s business relationship with, and fees from, New Century. When a KPMG specialist, John Klinge, continued to raise questions about an incorrect accounting practice on the eve of the company’s 2005 Form 10-K filing, John Donovan, the lead KPMG audit partner told him: ‘I am very disappointed we are still discussing this. As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off.’
“KPMG then did the unthinkable for a public auditor – it issued its audit report before its audit was complete, falsely enabling New Century to file its Form 10-K.
“KPMG acted as a cheerleader for management, not the public interest. KPMG lacked the independence required by the ethical and SEC rules that govern it. Because KPMGF lacked independence, KPMG could not even issue its audit opinions, perform reviews, or audit the internal control of New Century. KPMG’s audits and reviews thus failed as a matter of law and ethics.”
The trustee says KPMH was grossly negligent, and aided and abetted breaches of fiduciary duties. He seeks compensatory damages of $1 billion, and punitive damages.
The New Century Liquidating Trust and Reorganized New Century Warehouse Corporation is represented by Steven Thomas with Thomas, Alexander and Forrester of Venice, Calif.