KPMG fined £5m over 2009 audit of Co-op Bank

The FRC said KPMG’s bad auditing came in the wake of Co-operative Bank’s merger with building society Britannia.

The FRC’s fines relate to the aftermath of Co-op Bank’s merger with Britannia. Four years later, the bank entered a bid for 632 branches being sold by Lloyds Bank.

The deal collapsed after the discovery of a £1.5bn black hole in the Co-op Bank’s balance sheet.

The audit regulator said the hole was not identified due to KPMG’s deficiencies, which included “failures to exercise sufficient professional scepticism”.

KPMG said it regretted that some of its audit work “did not meet the appropriate standards”.

The accountancy giant had also failed to tell Co-op Bank that a number of loans it acquired through the Britannia merger were riskier than thought and failed “to obtain sufficient appropriate audit evidence”, the FRC said.

KPMG will pay £4m after agreeing to a settlement.

Audit partner Andrew Walker was also fined, and will pay £100,000. The accountancy firm will also pay the regulator’s costs of £500,000.

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.

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 in two areas:

1. the audit of Fair Value Adjustments (FVAs) in relation to loans within the commercial loan book acquired from Britannia; and
2. the audit of FVAs and liabilities under a series of loan notes, (Leek Notes), which were also acquired from Britannia.

The FRC has also separately considered the conduct of the Chief Financial Officer of the Co-op Bank.

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

Following the discovery of the black hole in its accounts, Co-op Bank was subsequently taken over by a group of US hedge funds in a rescue deal in 2013.

In 2017, the bank required another, £700m rescue package from investors to stop it from collapsing.