Tuesday, May 5, 2009

KPMG Might Need to Change Their Shorts

Breaking news from Dealbreaker: The SEC has filed a complaint against the operators of the Reserve Primary Fund charging them with, wait for it....fraud.

For those of you unfamiliar, this is the money market fund that "broke the buck" when Lehman imploded in September. Again, for those of you unfamiliar, money market funds are not supposed to break the buck. Does not happen. Should not happen.

It happened.

The Radio Station performs the audit for the Reserve Fund. What does this mean? Well, let's wildly speculate for a moment, shall we?

In the complaint, "a representative from KPMG LLP" (i.e. big shot partner) was in the board meetings (there were three) held on September 15, 2008, the day that Lehman filed for bankruptcy and the day before the buck breaking occurred.

It's hardly believable that the partner in charge of this engagement was clueless of the exposure that the Reserve Fund had to Lehman (although you'd be surprised). And, unless that partner was living under a rock for the six months prior to these meetings, he/she knew the pressure on Lehman was, shall we say, intense.

All this being said, what did this partner know as it relates to the complaint filed by the SEC? On an engagement of this size, partners are in contact with management constantly. If Reserve Management Company Inc. (RMCI) was not giving investors and rating agencies all the information regarding the value of the Lehman securities as the complaint alleges, are we to believe that the auditor was being lied to as well?

This had to be a HUGE issue on the engagement team at that time. Valuation is a huge risk area so it's not like the auditors weren't thinking about it. Also, if the valuation was so indeterminable, it's likely that the auditors would have been consulting with valuation specialists to determine the fair value of the securities.

New Century and now this? Radio Station might have just jumped a notch on the endangered auditing species list.

Complaint here.

Updates to come.

Breaking: Fraud Everywhere! [Dealbreaker] Sphere: Related Content

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