(Reuters) - KPMG and one of its partners have admitted to serious failings in compliance reports for Bank of New York Mellon BK.N, Britain's accountancy watchdog said, potentially leading to heavy fines as the auditor comes under unprecedented scrutiny.

FILE PHOTO: The KPMG logo at the accountancy firm's offices in the Canary Wharf financial district in London, Britain, March 3, 2016. REUTERS/Reinhard Krause/File Photo

The Financial Reporting Council (FRC) said on Wednesday that KPMG, one of the world’s “Big Four” accountants, and partner Richard Hinton admitted to misconduct after an investigation into 2011 reports on client assets held by BNY Mellon and its London branch.

A disciplinary tribunal will be convened to decide what sanctions should be imposed, the FRC said, adding that no client money or assets were lost as a result of the misconduct.

The accounting watchdog, which issued new so-called CASS guidance for client assets reports in 2011, has already responded to pressure to crack down on auditors and imposed larger fines for misconduct or failings.

KPMG and Hinton failed to give adequate consideration on whether the records of custody relationships maintained by BNY Mellon were compliant with certain rules, the FRC said on Wednesday.

‘REGRET’

“We accept and regret that our work did not fully reflect all aspects of this new (CASS) guidance,” KPMG said in an email.

“There has been further fundamental change in the regulatory environment and we have significantly enhanced our CASS procedures and training to reflect this.”

KPMG partner Hinton did not respond immediately to a request for comment via the LinkedIN social network.

The firm said it had cooperated with the FRC but could not agree with the watchdog on the level of appropriate sanctions. KPMG also emphasised that no clients suffered actual financial or other loss.

The FRC told Reuters that there is no upper limit to any financial penalty the tribunal might impose and that the largest fine issued under the relevant guidance scheme was 10 million pounds.

A spokeswoman for BNY Mellon, which was fined 126 million pounds ($166 million) in 2015 for failing to keep customer money safe during the financial crisis, said: “BNY Mellon is aware of the conclusions from the Financial Reporting Council’s investigation ... We have no comment to make.”

INCREASED SCRUTINY

KPMG and rivals PwC, EY and Deloitte have all caught the attention of the FRC after the collapse of large British companies such as Carillion CLLN.L and Poundworld raised questions over standards in the auditing industry.

The FRC is investigating KPMG’s audit of drinks firm Conviviality’s financial statements after highlighting an “unacceptable deterioration” in the auditor’s work with top British firms. KPMG is also being investigated over its work for construction company Carillion.

The watchdog fined KPMG 3 million pounds this year for misconduct related to auditing of British fashion retailer Ted Baker's TED.L accounts and has said that a higher than usual number of the accountant's 2018/19 audits would face FRC scrutiny.