KPMG sued over Westpoint

The corporate watchdog has launched a $200 million legal attack on accountancy giant KPMG over the collapse of property group Westpoint. The Australian Securities and Investment Commission said it would have shut Westpoint down or stopped investors pumping in more money if it had been made aware of its problems by KPMGs audits.

In a 350-page statement of claim filed in the Supreme Court yesterday, ASIC alleged KPMG had been negligent, misleading and deceptive when auditing the books of Westpoint group companies between 2002 and 2004. ASICs latest action takes its total legal claims against parties involved in Westpoints collapse to almost $550 million compared with the $300 million owed to investors at the time of its failure in 2005. It is believed to be the first time ASIC has pursued an accounting firm using Section 50 of the ASIC Act.

KPMG spokeswomen Rebecca Cook said the accountancy was disappointed by the action ASIC has announced and would defend itself vigorously. KPMG has co-operated fully with ASIC during its investigation into the Westpoint collapse since December 2005, she said. Ms Cook said KPMG accepted investors had lost substantial amounts of money which they were keen to recover. KPMG does not believe that the conduct of its audits of Westpoint entities caused or contributed to the collapse of the Westpoint group or to losses suffered by investors, she said. ASIC has taken the action in the name of eight companies in the Westpoint group that raised money for use in property development.

The watchdog says the money was then pooled in another company, Westpoint Corporation, which also guaranteed investors funds. ASIC alleges that because of the link KPMG should have taken Westpoint Corporations financial state into consideration when auditing the eight companies. KPMG also audited Westpoint Corporation. ASIC alleged KPMG engaged in misleading or deceptive conduct by giving the companies a clean bill of health instead of qualifying their accounts.

It alleged KPMG breached the Corporations Act in 2002 by not informing on Westpoints own Corporation Act breaches. Had KPMG made the notification or notifications to ASIC ASIC would have taken steps to cause (Westpoint company) Market Street to cease raising further funds from the public, ASIC said. ASIC said that by 2004, a reasonable and competent auditor in KPMGs position would have suspected some Westpoint company directors were dishonestly permitting that company to incur debts when he or she suspected that the company was insolvent. A directions hearing is to be held on November 7.

Required:

What issues should KPMG considered during the risk assessment of Westpoint? (refer to article please).