The accounting regulator has filed a formal complaint against the Big Four firm Ernst & Young over its auditing of the Christmas club and hamper group Farepak, which collapsed into administration in 2006.
More than 110,000 savers, the bulk of whom were low-income women, were left owed a combined more than £37m, about £325 each, and only received cheques for less than half that amount in August. The Government's Insolvency Service took nine former directors to the High Court earlier this year, but had to admit that its case did not stand up to scrutiny.
Instead, the lender HBOS, which is now part of Lloyds Banking Group, has been partially blamed for the collapse and made an ex gratia £8m payment to the savers. Now the Financial Reporting Council is challenging Ernst & Young's auditing of Farepak's accounts in 2005.
The FRC said Ernst & Young "fell short of the standards" required by the Institute of Chartered Accountants in England and Wales. In particular, they are accused of failing to consider material changes to Farepak's accounts on what are referred to as "post-balance sheet events". This means any material changes to the business that took place between the dates they were prepared to and when they were actually released. The accounts would then not have presented an accurate picture of Farepak's prospects.
Ernst & Young said that it takes "these matters extremely seriously".
The largest fine imposed by a tribunal was £1.4m on PricewaterhouseCoopers in January over its auditing of JP Morgan's accounts.