"aren't KPMG just admitting that they're incompetent?"
According to other reports, KPMG reportedly advised HP's board that they needed more time to complete due diligence after 2-3 days. i.e. "didn't flag up anything" could mean "hasn't had a chance to look at this yet because of time constraints".
And given that HPE are chasing Autonomy and not KPMG or Deloitte, it appears that the auditors are in the clear. Maybe not innocent, but in the clear...