MILAN (Reuters) - The U.S. accounting watchdog is investigating accounting firm PricewaterhouseCoopers's [PWC.UL] audits of British telecoms group BT's BT.L Italian business, which has been hit by a book-keeping scandal, a source close to the matter said.

The logo of BT is seen outside the headquarters in Milan, Italy January 24, 2017. REUTERS/ Stefano Rellandini

The PwC audit of the Italian business is coming under increasing scrutiny worldwide after a similar investigation launched in Britain last week.

PwC said in an emailed statement it was not the company’s policy to comment on client issues.

BT lost a fifth of its market value in January after revealing a 530 million-pound ($685 million) black hole in BT Italia’s accounts as a result of “improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions”.

In April the U.S. Public Company Accounting Oversight Board (PCAOB) asked Italian market watchdog Consob to send it documentation regarding the audits carried out by PwC on BT in the period 2014-2017, the source said.

Consob provided the data after getting the go-ahead from the Milan prosecutors office which is carrying out a criminal probe into alleged false accounting and embezzlement.

BT filed a criminal complaint in Italy in April accusing several former executives and other staff of unlawful conduct.

Current and former staff told Reuters efforts to hide the Italian unit’s performance had gone on since at least 2013.

A spokeswoman for PCAOB, which has the powers to fine or bar accounting firms or their individual associates, said the regulator did not confirm or comment on inspections as required by the Sarbanes-Oxley Act.

Under the act the PCAOB is required to supervise and inspect all accounting firms that regularly audit companies whose securities trade in the United States.

While BT’s main listing is in London, its shares are also quoted on the New York Stock Exchange in the form of American Depositary Shares.

Consob declined to comment, but a source close to the watchdog said the “regulator was giving its attention to the PwC issue”.

Last week Britain’s accounting regulator, the Financial Reporting Council (FRC), said it would investigate PwC audits of BT Group after the BT Italia scandal emerged.

Reuters could not immediately confirm whether the FRC and the PCAOB were collaborating on the PwC issue, although a spokesman for the FRC said the British watchdog maintained close contact with its counterparts in other countries to improve audit quality.

BT said last month it would drop PwC, its auditors since 1984, after an evaluation found “areas for improvement”. It said it would move to KPMG [KPMG.UL], another one of the “Big Four” accounting firms.

Since the scandal erupted, various BT shareholders in the United States have launched class action cases, accusing the telecoms group of not informing the market and shareholders soon enough of the financial irregularities at its Italian unit.

In March a Reuters investigation found allegations that a network of people in BT Italia had exaggerated revenues, faked contract renewals and invoices and invented bogus supplier transactions in order to meet bonus targets and disguise the unit’s true financial performance.

A source also told Reuters in March that he and two other employees at BT Italia had warned their Madrid-based supervisor about possible accounting problems at the business in November 2015, nearly a year before BT announced that it had found accounting irregularities at the Italian company.