British accounting watchdog investigates KPMG over Rolls-Royce audits

By Kirstin Ridley and Huw Jones

LONDON (Reuters) - Britain's accounting watchdog has opened an investigation into how KPMG checked the books of Rolls-Royce, the aero-engine group that agreed in January to pay 671 million pounds ($862.8 million) to settle a transatlantic bribery probe.

The Financial Reporting Council, which regulates auditing in Britain, said on Thursday it was looking into KPMG's audit of Rolls-Royce Group's financial statements for the year to Dec. 31, 2010 and those of Rolls-Royce Holdings for the years to end December 2011 to 2013.

Rolls-Royce and Britain's Serious Fraud Office (SFO) in January reached a Deferred Prosecution Agreement (DPA) in a deal that allowed the company to avoid prosecution in relation to accusations by prosecutors of persistent criminal conduct over three decades.

Rolls-Royce, which has apologised unreservedly, also struck deals in the U.S. and Brazil.

KPMG said in a statement: "We are confident in the quality of all the audit work we have completed for Rolls-Royce, including the 2010-2013 period the FRC is considering."

The firm, one of the world's top four global auditors and professional services businesses, said it was important that regulators acting in the public interest should review high profile cases.

"We will co-operate fully with the FRC's investigation, which follows the SFO's investigations into Rolls-Royce," it said in the statement.

KPMG will stand down as Rolls-Royce's auditor this year after 26 years, a KPMG spokesman said. Under new rules, overseen by the FRC, companies are requested to consider changing their auditor every 10 years.

The FRC, which has powers to fine accountants and ban them from practicing, is expected to now start gathering evidence before drafting any formal complaint, an FRC spokeswoman said.

The regulator declined to comment about whether its investigation would include individuals at KPMG.

The SFO has also not charged individuals in the case, although it says its case remains open.

($1 = 0.7759 pounds)

(Editing by Jane Merriman)