Ted Baker goods are displayed in a store in London, Britain in this October 6, 2015 file photo. REUTERS/Neil Hall/Files GLOBAL BUSINESS WEEK AHEAD PACKAGE - SEARCH
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KPMG is being investigated for possible breaches of professional ethics over outside work it did for Ted Baker serving as auditor of the UK fashion retailer.

The Financial Reporting Council, the British accounting industry’s disciplinary watchdog, said in a statement on Monday that it was looking into the provision of so-called non-audit services by the professional services company.

KPMG said one of its partners acted as an expert witness to help Ted Baker in a court case involving the theft of stock from one of its warehouses.

After the Enron and WorldCom financial scandals in the early 2000s raised issues about whether outside auditors were truly independent, the accounting industry tightened up the rules on providing non-audit services to auditing clients. The fear was that auditors might be less probing if they were concerned about losing other business from the companies they were examining.

The FRC said it was investigating whether KPMG had complied “with ethical standards in connection with the provision of non-audit services during their audit of the financial statements of Ted Baker”. It added that no employees of Ted Baker are under investigation.

There are prohibitions on auditors conducting due diligence and other advisory work on financial transactions done by audit clients. Firms are also barred from getting involved in designing internal control systems. Provision of tax services has also become more restrictive.

The European Union has adopted new rules requiring companies to put their audit out to tender every decade and change auditors every 20 years. It is about to publish the technical standards for what other services can be provided by an auditor compromising its independence.

KPMG said in a statement it always sought to ensure the non-audit services provided to audit clients “are consistent with both the letter and the spirit of prevailing requirements”.

It added that, “the application of principles requires the exercise of professional judgment and, in this instance, the FRC’s view may differ from our own”.

Among the Big Four accounting firms, KPMG has attracted particular scrutiny from the FRC in recent years.

The FRC already has three live investigations into KPMG, looking at audit work done for Co-operative Bank, Bank of New York Mellon, and Quindell, the controversial insurance company.

In its annual “ audit quality inspection” published last month, the FRC said of 22 individual KPMG audits the watchdog reviewed in 2015-16, two required “significant improvements”.

It was the only one of the six firms surveyed whose audits required significant improvements.

KPMG conducts about 500 audits in the UK each year, including nearly 200 involving listed companies and more than 20 FTSE 100 companies.

In a statement on Monday, the FRC said its investigation covered Ted Baker and significant affiliates for the periods ended January 26 2013 and January 25 2014.

In addition to the Ted Baker probe, the FRC’s annual audit quality check of KPMG said the watchdog was looking at two audits where tax services were “provided on a contingent fee basis to listed audited entities”.

Last year KPMG was fined a total of £390,000 by the regulator.

One case involved the failure to require one of its partners to sell shares in Cable & Wireless, when KPMG was auditing the telecoms company. The company was fined £227,500, with the partner fined £39,000 — both fines reduced to reflect the level of co-operation offered to the FRC.

The other case involved Pendragon and whether KPMG should have resigned as auditors when one of its partners became a non-executive director of the car dealership company. KPMG was fined £162,000, the partner received a reprimand, and KPMG also agreed to pay FRC’s costs.

In January the FRC said it was investigating the accountants’ role in the 2008 collapse of HBOS, and whether the firm had appropriately decided in 2007 to assume that the bank was a going concern.

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