The auditor for several of the funds managed by failed alternative fund manager Bridging Finance Inc. is facing allegations that it breached securities law by failing to properly scrutinize the funds’ holdings, particularly when it came to valuing their loans — failures that the Ontario Securities Commission (OSC) alleges harmed investors.
In an application for an enforcement proceeding filed Tuesday by the OSC, the regulator levelled allegations at KPMG LLP, charging that its audits of four Bridging funds in 2019 and 2020 were deficient, as they weren’t carried out in accordance with Canadian generally accepted auditing standards.
While the funds weren’t required to be audited, the OSC said Bridging hired the firm to provide independent audits on four of its funds — including the firm’s flagship fund, the Bridging Income Fund LP, along with three other funds — “to build trust with actual and potential investors, to attract and retain investment, and give unitholders the confidence to reasonably assume they had a true and fair view of the four funds’ financial position.”
However, those audits turned out to be flawed, the OSC alleged — and, as a result, it said investors ended up buying fund units at inflated prices.
Now, the regulator is alleging that the deficient fund audits amounted to breaches of securities law.
“By falsely stating in each of the eight auditor’s reports that it had conducted the audit in accordance with GAAS, KPMG breached … the Securities Act eight times,” the OSC alleged.
Among other things, the OSC alleged that “KPMG failed to perform fundamental audit procedures over the most critical aspect of the financial statements — the valuation of the loans held within each of the funds,” the regulator said in its application, adding that the auditor failed to apply enough “professional skepticism by failing to consistently challenge and validate audit evidence it gathered.”
“KPMG failed to consider, adequately or at all, the audit implications of evidence that methodologies used by Bridging Finance to value the loans in its portfolio were unreliable and that the collective value of the loans could be materially overstated,” the OSC also said.
And when the firm did find loans that appeared to be overvalued, the OSC alleged that “KPMG inappropriately assumed that those findings were isolated to those loans, without considering whether those findings were in fact indicators of material overstatements of the overall balance of the loans contained within the funds.”
Ultimately, KPMG withdrew the audits, after Bridging was placed into a court-ordered receivership at the request of the OSC in April 2021.
At the time of the receivership, it was believed that the funds had $2.1 billion in assets under management. But the receiver has since estimated that investors can only expect to recover between 34% and 42% of those assets.
Last year, $321 million was distributed to retail investors in the funds. It’s expected that investors will see some further recovery, pending the outcome of an array of litigation, and the receiver’s ongoing asset recovery efforts.
In 2024, the Ontario Capital Markets Tribunal found that several Bridging executives engaged in fraud, breached securities rules and obstructed the OSC’s investigation of the firm. The tribunal ordered $27 million in disgorgement, penalties and costs against them, along with market bans.
Those rulings are being appealed in court.
The OSC’s allegations against KPMG have not been proven.
In a statement, KPMG said that it, “firmly disagrees with the OSC’s allegations.”
“These are allegations, not findings, and KPMG will vigorously defend our work throughout this process,” said Roula Meditskos, senior manager national communications and media relations at KPMG, in an emailed statement.
“KPMG takes its role and responsibilities as auditor seriously and remains committed to the highest standards of audit quality and professionalism. We stand behind our work as auditor of the Bridging funds,” she added.
The regulator indicated that the first hearing in the case will take place on May 5.