UK watchdog says was too slow to probe HBOS audit

* FRC calls for more powers

* Says should have been more proactive

* To appear before parliamentary committee in New Year (Adds accounting body's reaction)

By Huw Jones

LONDON, Nov 30 (Reuters) - Britain's accounting watchdog said on Thursday it should have been faster to investigate why KPMG gave HBOS's accounts the green light just seven months before the bank had to be rescued by Lloyds during the global financial crisis.

The Financial Reporting Council (FRC) said in September it was closing its investigation into the audit, saying it had found that KPMG's work for HBOS "did not fall significantly short of the standards reasonably to be expected".

But on Thursday the FRC called on parliament to make it easier to bring cases against accountants wherever they work. It also promised to be more open about its work after it was accused of being too weak and opaque.

"We should have adopted a more proactive approach to our early enquiry in relation to HBOS rather than a heavy reliance on other regulators," FRC Chief Executive Stephen Haddrill said in a letter to Nicky Morgan, chair of parliament's Treasury Select Committee.

KPMG said on Thursday it has maintained that its work met the applicable audit standards of the time, and that it had considered the risks facing HBOS.

Morgan (Other OTC: MGHL - news) said the FRC would be called before the committee in the New Year to discuss whether its conclusions went far enough.

"This long-awaited report rightly acknowledges that the FRC should have been more ‘proactive’ in investigating KMPG's audit of HBOS," she said in a statement. "It was only through pressure from the Treasury Committee that the FRC decided to act."

The FRC said it wanted to make it easier to take action against accountants who are members of professional bodies for breaches of relevant rules.

LEGISLATION, IF NECESSARY

Following a reform last year, the FRC can pursue accountants who work for an audit company for breaches, with a lower legal hurdle than the previous test of having to show misconduct.

The old test, however, remains when it comes to investigating professional accountants working for companies like HBOS and who prepare accounts for external auditing.

Haddrill said he wanted the same breaches rule for all accountants, wherever they work.

The backing of professional bodies is needed to make the change, but Haddrill said there were other options and called on Morgan to support its efforts and "if necessary, legislation".

The ICAEW, one of the main professional bodies, said not just accountants but all professionals working in public interest roles should be held to a higher level of accountability.

"We would support an even bolder approach ... towards improving the public's trust in business," ICAEW Chief Executive Michael Izza said.

In a rare move, the FRC published a report setting out why it closed the KPMG case, saying it could not prove misconduct as at the time the audit was done there was "good evidence" that the possibility of HBOS failing was "remote".

"As the FRC's report notes, the intensification of the financial crisis in late 2008 was not forseen by market participants," KPMG said, adding that the Bank of England continued to forecast positive GDP growth until August 2008.

The FRC said it was taking the lead in responding to and investigating audits and has expanded its enforcement division.

It also said it would publish a summary of its reasons for closing an investigation, following criticism that it does not sufficiently explain its actions. (Additional reporting by Kirstin Ridley Editing by Alexander Smith, Greg Mahlich)