Auditors did no 'due diligence' on deal that broke Co-op
Co-operative's auditors of 30 years did no due diligence on the Britannia Building Society loan book that watchdogs say broke the bank, MPs have been told.
Those auditors also said there was "nothing" in the behaviour of Paul Flowers, the bank's former chairman, that suggested he would fall so dramatically.
Mr Flowers is on police bail having been filmed allegedly buying drugs.
It also emerged that "inappropriate but not illegal" material had been found on a laptop, sparking his resignation from Bradford Council.
Appearing before MPs on the Treasury Select Committee, KPMG partner Andrew Walker said the auditor had looked only at "specific risk areas" agreed with the bank's board.
For this and other deal-related work the accountancy firm was paid £1.3m.
Although he had not seen the crucial loan book, Mr Walker said in one report that the bank's capital position "should not be compromised" by the deal and told committee chairman Andrew Tyrie that he did not regret saying that.
"We could see that the bank was in excess of its capital requirements and so our report was referring to that. The bank remained above its headlines."
But he said this was not a statement of the robustness of the deal.
"That was for management to make."
He also defended the bank's board.
"The board was asking the right questions in terms of the risks," said Mr Walker.
His colleague, Jonathan Hurst, later said that there was "nothing that made me particularly concerned" about either the board's behaviour or its decision making.
He said there was no indication in Mr Flowers behaviour that such lurid allegations would arise.
Mr Walker said colleagues had subsequently assessed their work: "We have looked back. We considered the due diligence carefully and we concluded it was a thorough piece of work."
The committee heard from the audit firm as part of its inquiry into the collapse of Co-op Bank's attempt to buy Verde from Lloyds Banking Group. That business will now be floated as TSB.
Mr Walker defended his signing off of the accounts in 2012 shortly before regulators identified a £1.5bn capital shortfall.
Members also took evidence from JP Morgan, the investment bank, which it emerged had received a £7m fee for working on the deal, including a £5m success payment.
The bank gave a fairness opinion on the transaction but said it was for the board to make a "commercial judgment" on it.
It admitted that the fee was "significant" but said "that is the way that the industry works".
Tim Wise, managing director of UK investment banking at JP Morgan, agreed with KPMG over the controversial loan book, arguing that it was the Co-op's board and management team that had the "real expertise in this area".
He defended the "strategic logic" of the tie-up even though it had fallen apart economically.
The amount regulators identified as a capital shortfall after the deal