KPMG is to cease auditing a quarter of Britain's building societies as it seeks to reduce its exposure to a financial services sector that has been the source of millions of pounds in fines imposed on the firm.

Sky News has learnt that the big four accountancy firm is relinquishing audit work for roughly a dozen mutuals in the financial sector - equivalent to about half of its share of the market - and a number of small banks.

City sources said that some of KPMG's building society audits were reaching a mandatory conclusion because of a requirement to rotate auditors every 20 years.

However, executives at the firm have also decided to resign audit work for about half a dozen smaller mutuals because of the rising cost of compliance and reputational risks, according to insiders.

Among those that KPMG will stop auditing over the next year is Stafford Railway Building Society, which was founded in 1877.


Sources said the auditor was imposing substantial fee hikes on a number of its small building society audit clients, reflecting the greater scrutiny on auditors.

On Wednesday, the Financial Times reported that KPMG had been fined £5m for its auditing of BNY Mellon, the giant US-based bank, following an inquiry by the Financial Reporting Council.

KPMG was also hit with a £4m penalty this year for its work on the audit of the Co-operative Bank.

A KPMG insider said the firm wanted to reduce its audit market share from more than half of the UK's building societies to approximately 25%.

The decision underlines the huge pressure on auditors amid a fundamental shake-up of the profession's regulation.

Greg Clark, who stepped down as business secretary on Wednesday, paved the way for the creation of a new watchdog to replace the discredited FRC.

The government has yet to decide whether to fully implement recommendations by the Competition and Markets Authority to impose joint audits on the UK's biggest companies.

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The collapse of big employers including BHS and Carillion was among the factors in persuading Mr Clark to outline plans to replace the FRC with the Audit, Regulatory and Governance Authority.

‎In the last fortnight, a chair and chief executive have been appointed to run the new body.

Sir Donald Brydon, the former London Stock Exchange Group chairman, is leading a separate government-commissioned review of the future of auditing, while MPs on the business select committee have called for a full break-up of the big four firms.

KPMG has been the fastest mover among the profession's leading quartet, telling its 625 partners last November that it would phase out the vast majority of non-audit work for the 90 FTSE-350 companies where it serves as the auditor.

As the auditor to Carillion, KPMG has been facing intense scrutiny for its oversight of the construction giant, which went bust in January last year with debts of more than £5bn.

It is now exploring a sale of its pensions advisory business, which it believes could fetch up to £200m, as part of efforts to simplify its business and eliminate potential conflicts of interest.

KPMG refused to disclose which building societies and small banks it was resigning as the auditor of.

A source close to the financial mutuals sector said the audit mandates being relinquished by KPMG were in the process of being awarded to other firms.