The UK Financial Reporting Council (FRC) is to pursue an investigation of KPMG UK’s audit work on the Co-operative (Co-op) Bank, which will focus on the preparation, approval and audit of financial statements, the accountancy regulator confirmed today.
In November 2013 the FRC started making enquiries in relation to the bank’s accounts. In particular the FRC said these enquiries related to the disclosure in the 2012 annual report of the bank’s regulatory capital position.
Those enquires also related to the bank’s loan impairment, impairment of its investment in its replacement banking IT platform, and to fair value disclosures, according to the FRC.
The investigation announced today will be carried out in accordance with the FRC’s normal procedures and under the terms of its disciplinary scheme, which operates independently of professional bodies.
Co-op Bank has been suffering losses attributable largely to its 2009 takeover of former building society Britannia and in the first six months of 2013 the bank lost £781m ($1,282m) after tax. In June 2013 emerged that the bank had a £1.5bn hole in its accounts.
KPMG UK, the bank’s auditor for 30 years, said it is understandable that there should be appropriate regulatory scrutiny, given the high media profile and public interest associated with the case.
"It is to be expected that this scrutiny should extend to the audit whilst recognising that the auditor is independent of the events which gave rise to the issues experienced by the bank," KPMG UK commented.
"As auditor to the bank we believe that we have provided, and continue to provide, robust audits which provide rigorous challenge to the judgements and disclosures proposed by the bank’s management," KPMG UK added.
On 22 November 2013 the Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) said they were studying whether or not a formal investigation should be launched.
On the same day the UK Treasury also said it would order an independent investigation "into events at the Co-operative Bank and the circumstances surrounding them".
However the Chancellor of the Exchequer said it would not start any investigation until it is clear it will not prejudice any actions the relevant regulators could take, including the potential PRA and FCA investigations.
On 6 January the PRA confirmed it is conducting an enforcement investigation with regard to "the role of former senior managers" coordinated with the Treasury.
The Co-op Bank’s case attracted additional media attention when in November 2013 its former chairman Paul Flowers, a Methodist minister and former Labour councillor in Bradford, was arrested "in connection with an ongoing drugs supply investigation," the West Yorkshire Police said.
Flowers had resigned in June 2013 after it emerged he had been claiming "lavish" expenses, according to BBC business editor Robert Peston.
Concerns were also raised regarding Flowers’ lack of finance qualifications and experience, which nonetheless it was no obstacle to qualifying him for the chairmanship at the Co-op Bank.