Co-op due diligence 'needed more work', says KPMG

by Calum Fuller

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04 Dec 2013

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AUDITORS FROM KPMG insisted before the Treasury Select Committee that they saw nothing to suggest the Co-operative Bank's board was not up to the job of conducting a successful acquisition of the Britannia bank.

The Big Four firm - which has audited the bank for more than 30 years - was represented by partners Warren Mead, Andrew Walker and Jonathan Hurst, who told committee chair Andrew Tyrie (pictured) and his cross-party colleagues there was "nothing... particularly concerning about their [the Co-op Bank's board] behaviour or decision-making".

The claim comes in light of the £550m black hole created by the acquisition and recent allegations of heavy drug use and various other improprieties by its chairman Reverend Paul Flowers. Only three directors who started 2013 with the bank remain in post today. The root of the shortfall was Britannia's commercial properties and non-standard mortgages.

That said, it is hardly in the auditor's terms of engagement to look out for signs of personal idiosyncrasy, and besides, their priority is to ensure the bank is in a fit state and flag up any signs of trouble. It is this element, then, that is most pertinent.

Crucially, the auditors carried out due diligence on the Co-op itself, for which KPMG reportedly received around £1.3m. They were not, however, permitted access to Britannia's books, although they recommended that work be carried out, which Co-op went on to do itself.

One key moment of interest came when committee member Andrea Leadsom asked Walker whether "if it was [his] money on the table, and [he] was personally buying Britannia, would [he] have gone ahead with it on the basis of the analysis that you had done?".

"Well I only did a very small part of the analysis, so I couldn't make that decision based on the information I had available to me. If it was my money, I wouldn't make that decision on part information," he replied.

"So you're not willing to say as far as you'd got to that you're minded to say yes or minded to say no?" Leadsom pressed. "Would you have been firmly on the fence saying ‘I need more information', would you have thought ‘this is an absolute steal', or would you have thought ‘I'm not going to touch this with a barge pole'?"

"It would be that the board should take in the information I have given to them. As part of that I pointed out other areas to be done. My advice would be that they should not go ahead with the transaction without completing the additional work I recommended," Walker said.

They were satisfied, though, that "the board was asking the right questions in terms of the risks. The risks they asked us to look at were the right ones. They had the right level of information to make an informed decision".

Of course, the committee may recall the auditors to further examine their role in the transaction, but given the comparatively placid nature of the hearing - especially next to the Public Accounts Committee, for example - it is difficult to gauge Tyrie & Co's take on the evidence until their report is released.

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