LONDON (Reuters) - Britain's accounting regulator said on Thursday it would investigate audits by PricewaterhouseCoopers LLP (PwC) of BT Group (>> BT Group) after a scandal was uncovered this year at the Italian operations of the British telecoms group.

BT lost a fifth of its value in January after a 530 million pound writedown, partly due to financial irregularities found at the Italian division.

The Financial Reporting Council (FRC), which can fine auditing firms and accountants and ban individuals from the accountancy profession in England and Wales, said it would investigate PwC's audits from 2015 to 2017. FRC is now expected to gather evidence before drafting any formal complaint.

FRC has open investigations into each of the "Big Four" global accounting firms, which include PwC. The four firms audit more than 95 percent of the biggest 350 London-listed companies, despite efforts to draw in new competitors.

BT filed a criminal complaint in Italy in April that accused several former executives and other staff of unlawful conduct. Current and former staff said efforts to hide the Italian unit's performance had gone on since at least 2013.

BT said this month it would drop PwC, its auditors since 1984, after an evaluation found "areas for improvement". It said it would move to KPMG, another one of the "Big Four".

PwC said it would continue to cooperate with the FRC, saying the regulator had a duty to investigate where it believed there was public interest and to give confidence to financial markets.

"The FRC's annual reviews of our audit work, policies and procedures show a continued trend of improvement in our work and we use the FRC's insights, together with our own reviews, to continuously improve how we deliver high quality audits," a PwC spokesman said.

The regulator said it would conduct the inquiry in a "timely and robust manner" but declined to comment whether it would investigate individual auditors, accountants or actuaries employed by either PwC or BT alongside PwC itself.

Such inquiries investigate how audits are planned and structured, whether auditors sufficiently challenged management and policies, whether significant risks were identified and if audits complied with international standards.

The Serious Fraud Office (SFO), which investigates and prosecutes complex and often multinational fraud and corruption, declined to comment whether it planned a criminal investigation into BT. PwC was also auditor of Tesco (>> Tesco), the British grocer that agreed a 129 million pound deferred prosecution deal with the SFO in April over a 2014 scandal. The SFO has charged three former Tesco directors with fraud and false accounting.

But PwC escaped sanction by the FRC, which this month ended an inquiry into the auditor because it said there was no realistic prospect of a tribunal deciding a sanction.

The FRC closed its inquiry into Tesco's former chief financial officer Laurie McIlwee last year, but said this month that "certain other members of the accountancy bodies" remained under investigation.

(Additional reporting by Kirstin Ridley; Editing by Kate Holton, David Evans and Edmund Blair)

By Paul Sandle

Stocks treated in this article : Tesco, BT Group