KPMG has been fined and “severely reprimanded” by the Financial Reporting Council (FRC) after admitting to failures during a 2009 audit of Co-operative Bank.
The FRC imposed a £5 million fine on KPMG and required the firm to pay £500,000 toward the watchdog’s costs. Similarly, KPMG’s partner, Andrew Walker, was also fined £125,000.
KPMG’s fine was reduced to £4 million on settlement, the FRC said, and for the next three years, its bank audits will be subject to an additional review by an “audit quality team” within the organisation which will report directly to the watchdog.
The misconduct for which both parties were fined relates to the disastrous merger between the Co-op Bank and the failed Britannia Building Society. The aftermath of the takeover saw the Co-op discover a £1.5 billion black hole in its accounts.
In 2013, the Co-op Bank was taken over by a US hedge fund group as part of a rescue deal. Four years later, the bank required an additional rescue package worth £700 million to prevent it from collapsing.
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The FRC ruled that the auditors had failed to “obtain sufficient appropriate audit evidence” and that they did not employ “sufficient professional scepticism.”
The accountancy giant also failed to inform Co-op Bank that a series of loans it had acquired through the Britannia merger were riskier than previously thought.
In a statement, the FRC said: “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,”
A spokesperson for KPMG said: “We note the FRC’s announcement regarding our audit of the Co-op Bank for the year ended 31 Dec 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.”
KPMG’s fine marks the latest in a series for the firm, which is one of the four largest auditors in the UK alongside PwC, EY and Deloitte. In April, KPMG was fined £6 million and told to undertake an internal review following its audit of insurance company Syndicate 218 in 2008 and 2009.
The accountancy firm’s audit of the collapsed government contractor, Carillion, is also under investigation by the FRC. Last year, the watchdog also highlighted an “unacceptable deterioration” of KPMG’s work and warned it would be subjected to intense scrutiny going forward.