Sanctions in relation to the 2009 audit of The Co-operative Bank plc

News types: Company Specific, Investigations

Published: 8 May 2019

The Financial Reporting Council (FRC) has imposed sanctions against KPMG Audit Plc (KPMG) and its audit partner Andrew Walker, following their admission of Misconduct in relation to the audit of the financial statements of The Co-operative Bank plc (Co-op Bank) for the year ended 31 December 2009.
  • KPMG has been fined £5 million (discounted for settlement to £4 million) and severely reprimanded. 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 (Britannia).  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:
  1. the audit of Fair Value Adjustments (FVAs) in relation to loans within the commercial loan book acquired from Britannia; and
  2. 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.  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.

A link to the Settlement Agreement can be found here (pdf). 
A link to the Particulars of Fact and Acts of Misconduct (PFAM) can be viewed here (pdf). Notes to editors:
  1. The FRC’s mission is to promote transparency and integrity in business.  The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
  2. The FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest. In brief, the stages of the disciplinary process under the Accountancy Scheme are:
  • Decision to investigate
  • Investigation
  • Decision whether to bring enforcement proceedings against Member Firm or Member and, if so decided, referral to Disciplinary Tribunal
  • Tribunal hearing
  • Determination and imposition of sanction and/or costs orders
Under the Accountancy Scheme the FRC can start a disciplinary investigation in one of two ways: (i) the professional bodies can refer cases to the FRC; and (ii) the FRC may decide of its own accord to investigate a matter. The Conduct Committee will consider each case identified or referred to it and decide whether or not the criteria for an investigation are met.

The criteria are specified in paragraph 5(1) of the Accountancy Scheme. A Member or Member Firm shall be liable to investigation under this Scheme only where, in the opinion of the Conduct Committee the matter raises or appears to raise important issues affecting the public interest in the United Kingdom and there are reasonable grounds to suspect that there may have been Misconduct or it appears that the Member or Member Firm has failed to comply with any of his or its obligations under paragraphs 14(1) or 14(2) of the Scheme.

Investigations are conducted by Executive Counsel and the Enforcement division.

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