The giant accountancy firm KPMG has been hit with another multimillion-pound fine and will be subject to additional checks by the audit watchdog after it admitted a string of failings in its work for the Co-operative Bank.
The Financial Reporting Council accused the Big Four firm of “adversely affecting” thousands of the bank’s customers and investors with its botched audit of the Co-op Bank’s 2009 accounts. It failed to spot significant bad debts that brought the bank to the brink of collapse four years later.
KPMG has been ordered to pay £4 million by the watchdog, while Andrew Walker, head of its banking audits team in Birmingham, has been fined £100,000. These penalties were reduced from £5 million and £125,000, respectively, as part of a settlement.
The accounting group also has been told that all its audits of lenders during the next three years must be a reviewed by a separate team within the organisation, which will provide reports to the regulator.
The firm is one of the Big Four accountants alongside Deloitte, PWC and EY. It audits some of Britain’s biggest banks, including Barclays and Standard Chartered, and its work for these clients now will be subject to the additional checks outlined by the Financial Reporting Council.
This is the fourth time in less than 12 months that KPMG has been fined, with the penalties totalling more than £16 million. It has been punished over its audits of Quindell, the software company, Ted Baker, the fashion brand, and Equity Red Star, a Lloyd’s of London insurer.
The firm is under an intense level of scrutiny by regulators and is battling to save its reputation after the collapse of Carillion, the government contractor that it had audited for 19 years until it went bust in 2018, and scandals in South Africa and the United States.
In a ruling published yesterday, the Financial Reporting Council accused KPMG of misconduct in its work checking the Co-op Bank accounts shortly after its disastrous merger with the Britannia Building Society in 2009. The Co-op Bank almost collapsed four years later after discovering a £1.5 billion hole in its finances — largely down to losses on commercial property loans taken on as part of the deal. It had to be rescued by a group of hedge funds and the wider Co-op group.
The crisis at the bank prompted a string of inquiries by regulators and the government, which exposed failings in its corporate governance and regulatory supervision.
The watchdog launched a formal investigation into KPMG’s role in the scandal in 2014 amid questions about how the auditors had not noticed the build-up of bad debts.
The regulator said yesterday: “There was an obvious public interest in the proper auditing of this bank, particularly in 2009, when the financial crisis had taken hold and the Co-op had concluded an ambitious merger with Britannia. The misconduct potentially adversely affected a significant number of people in the United Kingdom.”
It said that KPMG had failed properly to test whether fair value adjustments of the bank’s loan books — which had a total value of about £34 billion — were reliable after the merger. It said that KPMG had failed to comply with auditing standards and had failed to exercise professional scepticism over the accounts, which undermined confidence in financial reporting and the accounting profession.
A KPMG spokesman said: “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 since then.”