KPMG, the accounting firm that signed off the books in the years leading up to Carillion’s collapse, has been singled out by the industry regulator in a report that says the overall quality of the audit profession is in decline.

The Financial Reporting Council, the watchdog for the UK’s accountants, said the profession had demonstrated a “failure to challenge management and show appropriate scepticism across their audits”.

There have been calls for the “big four” accountants – KPMG, PricewaterhouseCoopers, EY and Deloitte – to be broken up to spur competition and improve standards.

All four gave Carillion financial advice before the construction and outsourcing company failed. MPs accused the four of “feasting” on Carillion, whose finances proved far less healthy than directors had suggested.

The FRC reported a decline in the quality of the work of all four, with KPMG performing the worst. The watchdog is already investigating KPMG over its role in the collapse of Carillion and it said on Monday there had been an “unacceptable deterioration” in the quality of its work.

The FRC cited figures that showed half of KPMG’s audits of firms in the FTSE350 index had required “more than just limited” improvements, up from 35% in the previous year.

“The overall quality of the audits inspected in the year, and indeed the decline in quality over the past five years, is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of frontline teams,” the regulator said.

“Our key concern is the extent of challenge of management and exercise of professional scepticism by audit teams, both being critical attributes of an effective audit, and more generally the inconsistent execution of audits within the firm.”

It added: “[KPMG] agrees that its efforts in recent years have not been sufficient; the FRC will hold KPMG’s new leadership to account for the success of their work to improve audit quality.”

Stephen Haddrill, the chief executive of the regulator, said: “At a time when public trust in business and in audit is in the spotlight, the big four must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits.

“We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.”

Michelle Hinchliffe, the head of audit at KPMG, said the firm was disappointed with its audit quality score, adding: “We are taking action to resolve this ... we cannot and will not be satisfied with these results and, as a firm, we are already working to put this right.”

The FRC was heavily criticised in a report by MPs on two select committees investigating the collapse of Carillion. The report said the FRC was “far too passive” in monitoring Carillion and called for a change in culture at the regulator.

The FRC said it would now scrutinise KPMG more closely as a result of its findings. It will inspect 25% more KPMG audits than before and monitor the firm’s plans to improve the quality of its work.

In the FRC’s overall assessment of eight accountants, it found that 72% of audits of all firms, including those outside the FTSE350, required no more than limited improvement, down from 78% last year. While only half of KPMG’s FTSE350 audits were deemed satisfactory, rivals scored far higher, although all showed declines and fell short of the FRC’s target of 90%.

Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%. The four firms immediately below the big four – BDO, Mazars, GT and Moore Stephens – were told that the quality of their audits had generally improved.