A breach of accounting rules that caused Manchester Building Society to seek a capital injection earlier this year is being investigated by regulators.

The Financial Reporting Council on Wednesday announced it had launched a probe into how fixed-rate mortgages were incorrectly valued on the lender’s balance sheet.

The role of the UK arm of Grant Thornton, Manchester Building Society’s auditor, is also being examined.

The mutual had to raise £18m earlier this year to plug a hole in its capital after it emerged that its accounting did not comply with international standards.

The lender had taken out interest rate swaps – a form of derivative contract – to offset some of the risk it had incurred when it sold fixed-rate mortgages to its customers.

The discovery that this “hedging” arrangement had not been recorded properly in its financial statements forced the lender to restate its reserves and post a pre-tax loss for 2012.

The FRC, the UK’s top accountancy regulator, said it had launched an investigation after receiving information from the Prudential Regulation Authority, the new banking regulator.

Chris Gee, finance director of Manchester Building Society, said: “The society will provide the FRC with any assistance that it can in its enquiries.”

Grant Thornton said it would co-operate fully, adding that it had alerted regulators as soon as it had become aware of a potential issue. “We continue to strive to deliver quality work for our clients,” it said.

The probe is the second regulatory blow this week for Grant Thornton, which is one of the second-tier audit firms looking to poach clients from bigger rivals PwC, Deloitte, KPMG and EY.

On Tuesday, the FRC said it would investigate whether the firm had properly observed auditor independence rules when it vetted the accounts of Nichols, the drinks maker, in 2011 and 2012.

Manchester Building Society had been using so-called “hedge accounting” principles to record the value of its fixed-rate mortgages and the corresponding swap positions.

This had meant that volatility in the market value of the swaps was offset in its accounts by corresponding fair value adjustments to the mortgages.

After it emerged that these arrangements did not actually meet the criteria for hedge accounting, the lender was obliged to start valuing the mortgages at their amortised cost instead.

The subsequent restatement of its 2011 accounts meant that its retained earnings had to be cut by £29m to £10m. The accounting U-turn also led to it posting a £2.3m pre-tax loss for 2012.

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