THE CO-OPERATIVE BANK has dismissed auditors KPMG, whose audit of the bank’s accounts are under investigation by the FRC, ending a 40-year relationship with the Big Four firm.
The decision to appoint EY in KPMG’s stead was announced as a damning report into the events that led to the bank’s calamitous merger with Britannia Building Society and the subsequent discovery of a £1.5bn accounting black hole was published by Sir Christopher Kelly.
In the report, Kelly is highly critical of the Co-op Bank’s management, governance and business practices over the last few years and questions the appropriateness of the bank’s accounting judgments and its “consistent tendencies” to favour short term financial performance where accounting rules allowed it to “even if that was not fully within their spirit”.
“With hindsight, some of the accounting judgments might have proved to be inappropriate. But that does not necessarily mean they were unreasonable at the time,” Kelly said.
In January, the FRC launched an investigation into KPMG’s auditing of the Co-op Bank’s accounts up to an including the year ended 31 December 2012.
As the bank’s auditor, KPMG has faced criticism for failing to discover problems within the bank that led to the capital shortfall being revealed in June, as well as signing off on the takeover of Britannia.
Kelly’s report also found that KPMG’s due diligence on the Britannia deal was “broadly neutral, though it did warn about Britannia’s high risk profile and exposure to sub-prime specialist lending and arrears in asset backed securities”.
The Co-op Bank said the FRC investigation was one of a number of reasons that it decided to conduct a tendering process, which KPMG did not take part in. The bank said reason to change auditors included its “separation from the Cooperative Group” – for whom KPMG remain the auditors – “the ongoing FRC investigation” and “the board’s intention to adhere to the forthcoming requirements to ensure companies put their audit work out to tender at least once every ten years”.
“The Co-operative Bank would like to thank KPMG for the support they have given the new management team over the last 12 months,” it said.
In a statement KPMG said: “Given the length of time that we have served the Co-op Bank as its auditor and the difficulties which the bank has faced in recent months, the fact that the bank has tendered its audit is understandable. We believe we have provided the bank with good service and robust audits over the years.
“As mentioned in the recent Co op Group results, the board of the Co-op Group has proposed that KPMG is reappointed as auditor to the overall group due to the need for continuity given the current challenges facing the Group and our in-depth understanding and knowledge of the Group’s business operations.”