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Carillion auditor KPMG and rivals in turmoil over FRC verdict

Britain's big four accountancy firms ‎will be plunged further into the quagmire this week when their regulator highlights a decline in the quality of their audit work during the last year.

Sky News has learnt that the Financial Reporting Council's (FRC) annual audit quality review will single out KPMG, the firm which audited Carillion (Frankfurt: 924047 - news) before its collapse, for an "unacceptable deterioration" in work undertaken for the UK's largest listed companies.

The FRC rushed out an embargoed version of an announcement late on Monday afternoon following a telephone enquiry to its press office by Sky News about the conclusions of the review.

A spokesman for the regulator had earlier said that the details would not be released until Tuesday morning.

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According to an announcement that will be formally made by the watchdog on Wednesday, half of KPMG's audits for FTSE-350 clients required more ‎than limited improvements in 2017-18.

That was up from 35% the year before, and has prompted the FRC to demand greater scrutiny of KPMG's audit work, including closer inspection of 25% more of the firm's audit mandates over the next 12 months.

One source said that KPMG's audit of Carillion had initially been included in a sample of audits reviewed by the regulator and had been given a satisfactory rating, but had then been removed from the FRC's report.

The FRC's broader verdict will come as a bitter blow to KPMG's new UK leadership team at a time when it is already facing enormous pressure over its long period of service to Carillion‎ prior to the construction company's insolvency in January.

The move to place KPMG's audit practice into what one rival described‎ as "the equivalent of special measures" will raise questions about the firm's ability to transform the performance of that part of its business.

KPMG is due to take over as the auditor to BT Group (Other OTC: BTGOF - news) this year, with a shareholder vote scheduled for next month's annual meeting of the FTSE-100 company, while it has also just won the mandate to audit Rio Tinto (Hanover: CRA1.HA - news) , the miner.

The FRC's damning verdict will come amid questions about its own future, with the former Treasury mandarin Sir John Kingman undertaking a Government-commissioned review of the regulator's future.

Since that inquiry was announced, the FRC has made some notably tough enforcement decisions, including the announcement - revealed by Sky News last week - that it was imposing record fines on PricewaterhouseCoopers and its audit partner responsible for scrutinising the accounts of BHS, the department store chain.

Taveta Investments, the company headed by Sir Philip Green, the ‎former owner of BHS, is mounting a legal challenge to the FRC's final report on the issue.

KPMG's rivals will not‎ emerge unscathed from this week's audit quality review.

The FRC is understood to have concluded that the decline in quality across at least one of the other big four auditors - the remainder being Deloitte, EY, PwC - was also unacceptable.