The Financial Reporting Council (FRC) has imposed sanctions against KPMG Audit Plc and its audit partner Andrew Walker, following their admission of misconduct in relation to the audit of the financial statements of the Co-op Bank.
KPMG has been fined £5m (discounted for settlement to £4m) and severely reprimanded over its handling of the audit for the year ended 31 December 2009. The firm will also pay £500,000 towards the FRC’s costs.
Mr Walker has been fined £125,000 (discounted for settlement to £100,000) and severely reprimanded.
In addition, 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.
The misconduct occurred shortly after the Co-op Bank’s merger with the Britannia Building Society. 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 in two areas:
- the audit of Fair Value Adjustments (FVAs) in relation to loans within the commercial loan book acquired from Britannia
- 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.
The FRC has also separately considered the conduct of the chief financial officer of the Co-op Bank, Barry Tootell. 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.