KPMG fined £5m over Co-op Bank audit

The Financial Reporting Council (FRC) said it has imposed sanctions against KPMG Audit Plc (KPMG) and its audit partner Andrew Walker following their admission of misconduct in the 2009 audit of Manchester-based Co-operative Bank.

KPMG has been fined £5 million, discounted for settlement to £4 million, and severely reprimanded. The firm will also pay £500,000 towards the FRC’s costs.

Walker has been fined £125,000, discounted for settlement to £100,000, and severely reprimanded.

The penalties relate to a 2009 audit of the Co-op Bank shortly after its ill-fated merger with the Britannia Building Society, which pushed it to the brink of collapse.

The FRC said that in addition to there fines, 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 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 misconduct in respect of these two areas included: failures 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,” said the FRC.

“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.

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