By Noor Zainab Hussain
(Reuters) - Britain's accounting watchdog is investigating KPMG's audit of drinks firm Conviviality's financial statements, weeks after highlighting an "unacceptable deterioration" in the auditor's work with top British firms.
KPMG denied any shortcomings in its audit of Conviviality, which entered administration in April. The Financial Reporting Council (FRC) is probing Conviviality's financial statements for the year ended April 2017.
"We believe we conducted our audit appropriately and will co-operate fully with the investigation," a spokeswoman for KPMG said in a statement emailed to Reuters on Tuesday.
The FRC also said it was looking into the preparation and approval of Conviviality's financial statements and other financial information.
Conviviality was Britain's largest franchised off-licence and convenience chain, operating stores under the Bargain Booze and Wine Rack brands.
The company had experienced margin weakness at the start of 2018 and failed to allow for a 30 million pounds tax bill in its cash flow forecast, the KPMG spokeswoman said.
It subsequently failed to raise 125 million pounds in an emergency cash call.
"Our audit of the company's financial statements for the year ended 30 April 2018 had not yet commenced at the point which administrators were appointed," KPMG said.
FRC said last month that KPMG, one of the world's "Big Four" accounting firms, had shown an "unacceptable deterioration" in how it audits top British firms and will be the first to undergo special supervision.
Fifty percent of KPMG's FTSE 350 audits required more than just limited improvements, compared to 35 percent in the previous year, the FRC said.
The watchdog also said that increased scrutiny of KPMG would involve a probe into 25 percent more audits conducted by the firm in the 2018/19 financial year, the first time the FRC has taken such action.
PwC, EY and Deloitte have also caught the attention of the FRC in recent weeks, as shock corporate failures including Carillion <CLLN.L> and Poundworld raised questions over standards in the auditing industry.
Last month the watchdog began an investigation into Deloitte LLP's audit of two annual financial statements of SIG Plc <SHI.L>, while KPMG is also being investigated over Carillion.
The FRC also fined PricewaterhouseCoopers 6.5 million pounds ($8.55 million) and former partner Steve Denison 325,000 pounds over the audit of now-collapsed retail chain BHS.
(Reporting by Noor Zainab Hussain in Bengaluru; editing by Carolyn Cohn/Sinead Cruise/Alexander Smith)