In a sweeping accusation against one of the country’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.

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 lender to report a profit, rather than a loss, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.

The result of a five-month investigation, the report is the most comprehensive and damning document that has been released about the failings of a mortgage business. Some accusations echoed claims that surfaced about the accounting firm Arthur Andersen during the collapse of Enron, the energy giant, more than six years ago.

The 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 company first acknowledged that its accounting was wrong in February 2007 and sought bankruptcy protection less than two months later as its lenders stopped doing business with it.

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Filed under: * Economics, Politics • Economy • Housing/Real Estate Market

1. Daniel wrote: If this is true, as stated, the KPMG partner should go to jail.  This kind of stuff disgusts me, and I am a conservative Republican CPA.  I know that partners are under tremendous pressure not to lose clients and keep fees up, but this is so wrong on so many levels.  A CPA’s independence and objectivity should be his or her most cherished possessions.  The public places their trust in the profession to safeguard investors from exactly what it looks like happened here.  I hope this incident doesn’t turn the “Big 4” into the Big 3.” March 27, 7:03 pm | [comment link]

2. Br. Michael wrote: I once put an insurance company into receivership after Price Waterhouse gave them a clean opinion.  The company lied to them, but they should have cought it.  You can lie about assets, but you can’t lie about cash. March 27, 7:14 pm | [comment link]

3. Irenaeus wrote: Having only 4 large accounting firms reduces competition among them—-and helps take away any incentive for one of the four to distinguish itself by its thoroughness and integrity. March 27, 8:20 pm | [comment link]

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