The UK’s Financial Reporting Council (FRC) has fined KPMG UK £5m ($6.5m), discounted for settlement to £4m, in relation to the audit of the financial statements of The Co-operative Bank (Co-op Bank) for the year ended 31 December 2009.
KPMG audit partner Andrew Walker has also been fined for £125,000, discounted for settlement to £100,000) and severely reprimanded.
In addition to the fine, all KPMG’s audit engagements with credit institutions for audits in 2019, 2020 and 2021, will be subjected to an additional review by a separate KPMG Audit Quality team.
KPMG’s misconduct occurred shortly after Co-op Bank’s merger with the Britannia Building Society (Britannia).
Both KPMG and Walker admitted their misconduct fell short of the standards relating to the audit of Fair Value Adjustments (FVAs) in relation to loans (Leek Notes) within the commercial loan book acquired from Britannia and the audit of FVAs and liabilities under a series of loan notes.
The misconduct in these two areas arose from failure to obtain sufficient appropriate audit evidence, failure to exercise sufficient professional scepticism and failure to inform Co-op Bank that the disclosure of the Leek Notes in the financial statements was not adequate.
The CFO of the Co-op Bank was also considered by the FRC, as he has previously admitted misconduct and was excluded from membership of the ICAEW for six years.
The tribunal approved the terms of settlement agreed by the FRC’s Executive Counsel.
A spokesperson for KPMG 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.”
Last week, KPMG UK was fined £6m by the FRC in relation to its audits of Lloyd’s of London based firm Lloyd’s Syndicate 218.