Accountancy giant fined £5m over 2009 Co-op bank audit

Accountancy firm KPMG has been hit with a fine of £5m and severely reprimanded for its audit of the Co-op bank a decade ago.

The Financial Reporting Council fined KPMG Audit Plc and its audit partner Andrew Walker, following their admission of misconduct in relation to the audit of the financial statements of the Manchester bank in 2009.

The sanctions are linked to the discovery of a £1.5bn capital black hole after the Co-op Bank’s 2009 acquisition of Britannia Building Society.

The Financial Reporting Council (FRC) launched its investigation in 2014 – a year after the bank’s near-collapse following its ill-fated merger with the Britannia Building Society.

The FRC said the audit of Brittania’s commercial loan book and a series of securities which were acquired from Brittania, fell below the standards expected.

The accountancy firm was fined £5m, discounted for settlement to £4m and severely reprimanded. The firm will also pay £500,000 towards the FRC’s costs.

Mr Walker, who has worked at KPMG for 30 years, has been fined £125,000  – discounted for settlement to £100,000 – and severely reprimanded.

In addition, all KPMG’s audit engagements with credit institutions for audits with 2019, 2020 and 2021 year ends will be subjected to an additional review by a separate KPMG Audit Quality team, who will provide reports to the FRC.

The misconduct occurred shortly after the Co-op Bank’s merger with the Britannia Building Society.

KPMG and Mr Walker both admitted that their conduct fell significantly short of the standards reasonably to be expected of an audit firm and an audit partner.

The misconduct included failure to obtain sufficient appropriate audit evidence; failures to exercise sufficient professional scepticism and a failure to inform Co-op Bank that the disclosure of the expected lives of the leek notes in the financial statements was not adequate.

The FRC had already punished Barry Tootell, the former Co-op Bank chief executive and chief financial officer, banning him from membership of the UK accountancy body for six years from October 2016.

He has previously admitted misconduct and was excluded from membership of the ICAEW for six years.

The terms of settlement have been agreed by the FRC’s Executive Counsel and approved by a legal member of the independent Tribunal Panel.

A KPMG spokesperson said: “We note the FRC’s announcement regarding our audit of the Coop Bank for the year ended 31 December 2009.

“We regret that some of our audit work around specific elements of the Bank’s Fair Value Adjustments did not meet the appropriate standards.

“The work in question was conducted almost a decade ago and we have significantly enhanced our procedures and training around the areas in question since then.”

Meanwhile, the Co-operative Bank said it has made encouraging progress against a backdrop of economic uncertainty and a difficult market place.

The Manchester based bank issued a trading statement this morning.

The banks said there was renewed investment in its brand and advances in moving customers over to online services.

Total income increased by 2% compared to last year driven by an increase in the VISA share valuation and strong deposit margin performance partially offsetting lower mortgage margin impacts.

The was an underlying loss of £5.1m and loss before tax of £28.6m in line with expectations.

Chief Executive Andrew Bester said: “We’ve made encouraging progress in the first quarter, reaching some key milestones against a challenging UK retail banking market and uncertain economic backdrop.

“We successfully raised an additional £200m of Tier 2 capital in April in support of our MREL requirements, in line with our plan.

“Another focus area this year is to fix the basics that will provide a platform for development in future years, including concluding the separation of our IT infrastructure from the Co-op Group and we are making good headway.

“We have delivered significant improvements to our digital proposition, launching a new mobile app and migrating over 350,000 current account customers.

“We have renewed our commitment to customer service in our telephone banking teams and our branches, resulting in a positive improvement in our current account net promoter score (NPS) and regaining a top three market position in terms of NPS.

“Our brand heritage is a real asset at a time when consumers are increasingly seeking ethical choices and our co-operative values are at the forefront of our new multi-media advertising campaign which launched last month: “For People with Purpose.”

“Our values are at the heart of our bank and are important both to our loyal customers and to our future growth.”