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UK watchdog probes Deloitte's auditing of Mitie accounts

* Deloitte faces scrutiny over Mitie auditing

* New Mitie bosses had already restated accounts

* UK service companies facing margin pressure (Adds background, context, shares)

By Esha Vaish

July 31 (Reuters) - Britain's accounting watchdog is investigating Deloitte's auditing of Mitie Group (Other OTC: MITFF - news) , the outsourcing company that issued a string of profit warnings last year.

The provider of pest control, cleaning, security and healthcare services had already written down the value of its business after a new management team found the company had been too aggressive in the way it booked revenue and costs on long-term contracts.

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The Financial Reporting Council said the investigation would look at whether there have been any breaches in the audits of Mitie's consolidated financial statements for the years ended March 31, 2015 and 2016.

Its shares were down 1 percent in early trading.

"We take this investigation very seriously and will cooperate fully with the Financial Reporting Council," Deloitte said in a statement.

British outsourcing companies such as Mitie, Capita (Taiwan OTC: T1614Y.TWO - news) and Carillion (Frankfurt: 924047 - news) have been hit this year by rising labour costs or costs related to unplanned changes on contracts which were taken on during the financial downturn, often with paper-thin margins.

A failure by some clients to renew or commission new contracts has compounded the problem.

British outsourcing and construction companies take multi-year contracts where profits are booked as the work is steadily completed. With (Other OTC: WWTH - news) margins tight, escalating costs can cause them to become loss making.

NEW MANAGEMENT

Liberum analyst Joe Brent said the review would most likely be related to how the auditor evaluated the amount of revenues booked each year on long-running contracts, and the amount owed by clients.

"This clearly relates to the period prior to the current management. It is about attribution of blame for the sins of the past and has nothing to do with the outlook," he told Reuters.

Mitie, which employs 53,000 people to work with central government, the national health service and across the transport network, warned on profits three times last year, blaming uncertainty around Britain's decision to leave the European Union and the higher costs.

It appointed Phil Bentley, formerly of British Gas, as chief executive in October last year and the new management team commissioned KPMG to review its accounts. The company has said it will launch a tender process to find a new external auditor.

Mitie has since predicted a return to modest growth in underlying profit, citing new contracts and cost cuts. Its shares were up by a third in the last six months, giving it a market value of 980 million pounds before Monday's statement.

The FRC review will look at Deloitte's conduct during the auditing process. If any wrongdoing is found the auditor could be referred to an independent tribunal where fines can be imposed.

The FRC said in July that accounting firms were still not always challenging properly what they are told by companies whose books they check. In the last financial year it handed down 12.5 million pounds ($16.36 million) in sanctions against auditors.

(Writing by Kate Holton in London; Reporting by Esha Vaish in Bengaluru; Editing by Keith Weir)