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U.K.’s accounting watchdog has power to recommend sanctions, refer auditor to a tribunal.

PricewaterhouseCoopers (PwC) is being investigated by the U.K.’s Financial Reporting Council (FRC) over its audits of BT’s books, following the Italian accounting scandal.

The investigation concerns audits conducted by PwC for fiscal years 2015-2017.

"The decision to investigate follows announcements by BT in relation to accounting issues in its Italian operations," the FRC said in a brief statement.

Depending what the investigation uncovers, the FRC – which is tasked with enforcing best practice when it comes to financial reporting – has the authority to recommend sanctions against PwC, or refer the case to a tribunal.

In a report by Reuters, PwC said it would cooperate fully with the FRC.

"Audit quality is of paramount importance to the firm," a spokesman said, in the report.

BT first disclosed the accounting scandal at BT Italy in October 2016, when it wrote down the business by £145 million. In January, it revealed that the malpractice was more severe than first thought, leading to the writedown being increased to £530 million.

An internal investigation uncovered evidence of improper accounting practices, and improper sales, purchase, factoring and leasing transactions, resulting in the overstatement of BT Italy’s earnings for several years.

After working with PwC for more than three decades, BT appointed KPMG as its new auditor earlier this month.

BT has also pressed charges against former staff at its Italian business, and claimed that it is the victim of any fraud that took place there.

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