By Huw Jones
LONDON (Reuters) - Britain's accounting watchdog is scrutinising financial reports from Co-operative Bank but has yet to open a formal investigation, it said on Friday.
The move comes after allegations relating to the bank's former chairman Paul Flowers which have increased the pressure on a bank which promotes itself as an ethical alternative to the biggest lenders.
"We are making enquiries into the Co-op's financial reporting in accordance with our normal procedures... and if we commence a formal investigation we will announce that via a press announcement," the Financial Reporting Council (FRC) said in a statement.
The bank has been audited by KPMG, one of the world's "Big Four" accountancy firms. "KPMG's audit of Co-op Bank and Co-op Group (the bank's parent) have been robust and met all relevant professional standards," a KPMG spokesman said.
KPMG said the bank's 2012 accounts highlighted the challenges the lender faced and a "going concern" warning was included in the interim 2013 accounts.
Earlier this month, Co-op Bank said in a prospectus as part of a restructuring that the FRC was examining disclosures in the 2012 annual report and accounts of the bank's regulatory capital position.
Mark Garnier, a legislator belonging to the ruling Conservative party and a member of the parliamentary Treasury Select Committee, told Reuters there was a consensus on the committee to bring KPMG before it for questioning on the bank, along with the Prudential Regulation Authority (PRA) at the Bank of England, which supervises the safety and soundness of banks.
The FRC was also looking at areas including the bank's disclosures on its loan impairments.
It is the second time a KPMG banking client has come under the spotlight, since it audited the books of HBOS, the bank that had to be rescued by rival Lloyds in 2008 during the financial crisis.
The former head of KPMG in Britain, John Griffith-Jones, left the accountancy firm during 2012 to become a non-executive director of the Financial Services Authority. He became non-executive chairman of the Financial Conduct Authority, which replaced the FSA, in April this year.
Griffith-Jones has already had to step aside from any involvement in a report by regulators into HBOS, which is yet to be published.
The FCA, which had no comment on its chairman, said this week it was considering enforcement action against Co-op Bank.
Prime Minister David Cameron has questioned why Paul Flowers, a one-time local Labour politician and Methodist preacher with no banking qualifications, was judged suitable for the role of chairman of the bank.
Flowers has been arrested as part of an investigation into the supply of illegal drugs after a newspaper published a video allegedly showing him arranging to buy crack cocaine and crystal meth.
The government is expected to spell out the terms of an independent inquiry into the bank shortly.
The PRA was discussing Co-op Bank at its regular fortnightly meeting on Friday. The PRA had no comment.
(Additional reporting by William James; Editing by Matt Scuffham and David Holmes)