The Financial Reporting Council (FRC) said on Wednesday it was investigating how Grant Thornton audited and accounted for interest rate swap arrangements in Manchester Building Society's accounts, prompting a financial adjustment last year.

The inquiry is the watchdog's fifth this year as it cracks down on the quality of audits. Investigations can take around a year and, if breaches are found, lead to a series of sanctions including a fine or, in extremis, licence suspension.

The FRC, which on Tuesday announced an investigation into the independence of Grant Thornton's audit of drinks group Nichols, said it had received information from the Prudential Regulation Authority regulator about the auditor's conduct while appointed by Manchester Building Society.

The FRC declined to give any further information about its investigation.

Grant Thornton, a mid-ranked assurance, tax and advisory firm, said in an email it had alerted the regulator "as soon as we became aware of a potential issue" and would fully cooperate with any investigation.

A spokeswoman declined to comment further.

Grant Thornton's name was dragged into the spotlight by Tchenguiz, who brought a 300 million pound damages claim with his brother Robert against the SFO over an investigation into circumstances surrounding the collapse of Icelandic bank Kaupthing in 2008.

Lawyers for Tchenguiz have alleged that Grant Thornton partner Stephen Akers and Mark MacDonald, a director - who together acted as liquidators for Kaupthing - provided "misleading and inaccurate" information to the SFO during the investigation, costing them more than 2.5 billion pounds.

Akers and MacDonald are appealing against a judgment published last month that they should release confidential reports which the Tchenguiz brothers say will prove their arrests in 2011 were groundless. Akers and MacDonald say the reports are subject to legal privilege.

(editing by Elizabeth Piper)

By Kirstin Ridley