A DAMNING report into the Co-op Bank’s failed bit to acquire hundreds of Lloyds bank branches last year has slammed the mutual’s auditors, KPMG, for failing to uncover the bank’s capital shortfall “until it was too late”.
The Treasury Committee report, which concludes a year-long investigation into the botched attempt to buy 632 Lloyds bank branches – known as Project Verde – said the £1.5bn black hole in the Co-op Bank’s accounts, which scuppered the deal, should have been discovered sooner.
“Each of the backstops – Co-op Bank itself, KPMG as its auditor, and the FSA as its regulator – failed to uncover the bank’s capital shortfall until it was too late. Each had a hand in this sorry tale,” the report said.
The accounting hole largely stemmed from the Co-op Bank’s calamitous merger with Britannia Building Society, with losses emanating from Britannia coming predominantly from its commercial loan book. According to MPs, the due diligence performed on this book “has proved to have been totally inadequate”.
“KPMG’s initial due diligence was based on incomplete information,” the committee said. The committee added that it was “surprised” that additional due diligence recommended by KPMG was allowed to be performed to such a low standard.
“KPMG should have given clear guidance to Co-op Bank about the standard required. The Committee is also surprised that, despite recommending the additional due diligence, KPMG did not scrutinise it once complete,” it said.
MPs also criticised KPMG for failing to realise that the Co-op Bank’s approach to recording its impairments in the years running up to 2013 was “looser” than the rest of the industry.
“This should have been clear to Co-op Bank’s management-to all those responsible for risk and accounting, including the board, relevant executives and committees. It should also have been apparent to Co-op Bank’s auditor-KPMG-and to the regulator-for the period in question, the FSA,” it said. “The committee is surprised that, in spite of the evidence it has heard, Co-op Bank’s former auditors, KPMG, maintain that Co-op Bank was not an outlier in terms of its impairments.”
KPMG has consistently defended its work as auditors of the Co-op Bank – a relationship that lasted 40 years until the firm was dismissed in May this year. In a statement KPMG said: “As the former auditor to the bank, we believe that we have provided robust audits which challenged the judgements and disclosures proposed by the bank’s management.
“As reported by the TSC, having conducted limited work, KPMG recommended further due diligence in relation to Britannia, which was performed by the Co-op Bank itself. KPMG was not responsible for guiding further due diligence undertaken by the Co-op Bank nor had a responsibility to scrutinise the results once complete. The scope of due diligence and the merits of a potential acquisition are matters for the board.”
The report also called on reporting and accounting watchdog the FRC, which is already investigating KPMG’s auditing of the bank’s accounts up to an including the year ended 31 December 2012, to consider the role of KPMG in relation to the late emergence of loan impairment and IT losses and that its inquiry should determine precisely how Co-op Bank’s approach to recording impairments differed to that of other banks, and why KPMG apparently failed to uncover this.
“The independent inquiry into events at Co-op Bank should also look closely at the shortcomings of the bank’s auditor, KPMG, and its apparent failure to ascertain the extent of the impairments. In so doing, the inquiry should look to see if any shortcomings are unique to the KPMG relationship with Co-op,” it said.
“The FRC has already announced an investigation into our audit and we’re co-operating fully,” KPMG said.