UPDATE 1-UK watchdog investigates KPMG's audit of Co-op bank

Mon Jan 20, 2014 4:46am EST

LONDON Jan 20 (Reuters) - Britain's accounting watchdog has started investigating KPMG's book-keeping at the Co-op bank, which has been hit by a capital shortfall and a drugs scandal involving it's ex-chairman.

"The Financial Reporting Council has launched an investigation ... into the preparation, approval and audit of the financial statements of the Co-operative Bank plc, up to and including the year ended 31 December 2012," the watchdog said in a statement on Monday.

The FRC, which has powers to fine and suspend accountants, said in November it was scrutinising financial reports by the bank.

KPMG said it was understandable there should be appropriate regulatory scrutiny and it would co-operate fully with the FRC.

"As auditor to the bank we believe that we have provided, and continue to provide, robust audits which provide rigorous challenge to the judgements and disclosures proposed by the bank's management." KPMG said in a statement.

The FRC's investigation comes on the heels of reviews of the bank announced by its two main regulators, the Prudential Regulation Authority and the Financial Conduct Authority.

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