The Financial Reporting Council has started investigating KPMG's auditing of the Co-op bank

The Financial Reporting Council has launched a probe into UK accountancy giant KPMG over its auditing of the embattled Co-operative Bank, which carried a £1.5bn capital black hole on its books.

The watchdog confirmed in a statement that "the FRC has launched an investigation into the preparation, approval and audit of the financial statements of the Co-operative Bank, up to and including the year ended 31 December 2012."

The FRC had said in November last year that it was "making enquiries" into the institution regarding the 2012 accounts, with the potential for a full investigation.

The Co-op Bank is one of UK's smaller lenders with 6.5 million customers and a 1.5% share of the current account market. However it is a household name in Britain, as the wider group includes supermarkets, funeral services and pharmacies.

KPMG told IBTimes UK:

"We note today's announcement by theFRC of its investigation into the preparation, approval and audit of the financial statements of Co-operative Bank Plc (the bank) for certain years up to and including the year ended 31 December 2012.

"Given the issues which the bank has experienced in recent months and in the light of the high media profile and public interest associated with these issues, it is understandable that there should be appropriate regulatory scrutiny.

"Reviews by the Treasury Select Committee, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are either underway or have been announced, and it is to be expected that this scrutiny should extend to the audit whilst recognising that the auditor is independent of the events which gave rise to the issues experienced by the bank.

"As auditor to the bank we believe that we have provided, and continue to provide, robust audits which provide rigorous challenge to the judgements and disclosures proposed by the bank's management.

"We look forward to co-operating fully with the FRC (and other regulatory authorities) in their investigations."

Long Line of Investigations

The FRC probe follows the bank's revelations that it has over a billion pounds missing from its balance sheet as well as various investigations and that its former chairman Paul Flowers is under police investigation for his alleged hard drugs and orgies scandal.

The FRC is the latest in a line of regulators to have launched investigations related to the lender's capital shortfall or Flowers' appointment.

Two months ago, the FCA and the PRA started their probes into the scandal-hit Co-operative Bank.

In tandem, Co-op's board launched an internal review into the bank's practices and how it appointed Flowers to role of Chairman, despite a previous criminal conviction.

The Internal Review

Paul Myners
Lord Myners sits on the Co-operative Group's board as an independent director and is charge of the internal review

On 16 January, the Co-op unveiled the first set of details from the review.

Lord Myners, who will receive a token £1 salary for his work as chairman of the Co-op's internal governance review, will be scrutinising the ethical organisation's democratic systems and control structures within two phases.

During the first phase, the review will focus primarily on the development of recommendations for strengthening the board structure, composition, working processes and board policies.

Meanwhile, on 20 January, the Co-op said it has cancelled plans to sell its general insurance business, which had been part of a plan to raise £1bn to bolster capital at its troubled bank arm.

"We received a significant amount of interest in the general insurance business, which reflects its potential," said Euan Sutherland, chief executive of Co-op Group, in a statement.

In the second phase of the review, expected to be completed in late 2014, recommendations will be developed for strengthening links with members, as well as with other customers of the group and its employees, in a bid to quell any concerns over the bank's stability.