FRC to hit KPMG with £4 million fine over Co-op Bank audit

The Financial Reporting Council is reportedly preparing to fine KPMG around £4 million for its work supervising the accounts of the Co-operative Bank. The news will see a five-year probe end, but comes as the watchdog announced its investigation into KPMG’s role at Carillion would be extended for a second time.

The Big Four firms have been the subject of a rising number of prominent investigations of their auditing work in recent years. One in particular saw such a spike in scrutiny, that the UK’s accounting watchdog, the Financial Reporting Council (FRC), even took the unprecedented step of monitoring its auditing work. Citing a decline in the quality of audits by the Big Four as a whole, the FRC singled KPMG out in particular for closer scrutiny, and would therefore inspect a quarter of all audits by KPMG for the remaining financial year.

Now, the FRC is reportedly sizing up a penalty of roughly £4 million for KPMG’s UK wing following its auditing of the embattled Co-op Bank. According to Sky News, sources in the City of London said that an announcement about the fine could be made in the next few weeks, although the precise timing and size is still to be finalised.

The proposed fine comes at the end of a near five-year examination of KPMG’s role at Co-op Bank, where it supervised company accounts before a £1.5 billion capital shortfall was found, resulting in the near collapse of Co-op. That period relates only to the work that KPMG undertook on the Co-op Bank in 2009, representing a far narrower scope than the FRC initially planned for when it opened its investigation in 2014.

The sanction sits just below the middle of the range of fines available to the FRC, which has come under mounting pressure in recent months as numerous critics have questioned its effectiveness as a watchdog. The entity is expected to be dismantled and replaced with a new statutory regulator in the near future, following a government-commissioned probe into its role, so the fine it imposes on KPMG could prove to be something of a parting shot.

In the meantime, the accountancy watchdog has also announced it will expand its probe into KPMG’s audit of Carillion – for the second time. KPMG audited Carillion since 1999 and signed off on its accounts in March 2017 — four months before the business issued a catastrophic profit warning triggered by an £845 million write-down, and nine months before the company collapsed. The regulator declined to comment on why the investigation had been extended once more, or when it expected to conclude the probe.

In the last year, the firm has settled with the FRC in relation to a number of other audits. These include its auditing of fashion retailer Ted Baker, and insurance technology firm Quindell. The litany of cases prompted Bill Michael, KPMG's UK Chairman, to make a continued effort to resolve the situation, including a self-imposed ban on non-audit work for its FTSE 350 clients.