Auditor allowed mortgage company to conduct “improper and imprudent practices” during housing boom

This is damning. From The New York Times:

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.

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 almost seven 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.

Just as how Arther Anderson had allowed Enron to hide losses and fabricated earnings through offshore partnerships, creating the huge scandal in the energy trading market, now we have KPMG allowing New Century Financial to change their own accounting principles to report losses as profits, thus allowing company executives to earn big bonuses at the expense of shareholders. KPMG never learned the lessons of the Enron scandal in 2001--they ignored honesty and accountability for the desire of excessive greed and profit. And I bet that the New Century executives knew this in possibly demanding that KPMG allow these accounting changes to take place, or New Century will go to another of the Big Four accounting firms. And since KPMG probably didn't want to lose New Century's business, they would have accepted the changes. In a sense, the system is corrupt.

You can read the text of the report here.