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Accountancy firm Grant Thornton (GT), has been fined £2.3m and severely reprimanded by the Financial Reporting Council (FRC) over failings in its audit of a company called AssetCo.

The regulator said GT, and its partner Robert Napper, had admitted a "lack of professional competence and due care".

This had allowed AssetCo to falsely inflate its value and its share price.

Mr Napper was fined £130,000 and banned from auditing for three years, while GT paid £200,000 in additional costs.

The FRC said that the auditors , a fire engine manufacturer once owned by British Gas.

But the auditors had been at fault by failing to employ the required level of "professional scepticism".

Gareth Rees QC, executive counsel to the FRC, said: "The respondents have admitted widespread and significant failings in their audit work, and GT specifically has accepted there were serious failings in the execution of certain aspects of the firm's quality control procedures."

"This misconduct is rightly reflected in the seriousness of the sanctions, such as the exclusion of Mr Napper from membership of the ICAEW (Institute of Chartered Accountants of England and Wales) and the fines on both respondents."

The FRC said that the failings of GT, and the now-retired Mr Napper, in the audit of AssetCo's accounts were not deliberate or reckless and did not amount to dishonesty.

Even so, the AssetCo audits were so poor that the accountants' behaviour "fell significantly short of the standards reasonable expected of them", and showed a "widespread lack of professional competence and due care in the performance of the audits."

The FRC said that GT - the UK's fifth largest accountancy firm - and Mr Napper, who had had 23 years experience, were deliberately misled by AssetCo's management.

But if they had been more sceptical of the financial information being given to them they would have uncovered the dishonesty.

The inflated value of AssetCo, whose main customers were the London and Lincolnshire fire services, and which had a listing on the Alternative Investment Market, had been achieved by the exaggeration of its assets and by inventing sources of income.

That in turn meant that the firm's shareholders suffered large losses when the value of the shares fell from £6 each in 2009 to just £1 each in 2011.

AssetCo subsequently teetered on the verge of insolvency and the FRC is currently taking action against three of the firm's former executives.

Based in Monmouthshire, the firm now operates only in the Middle East.

A GT spokeswoman said the firm regretted its failings.

"Our audit quality processes have evolved significantly since these audits were performed in 2009 and 2010 and we are determined in our efforts to ensure our work is of the highest quality.

"Given the FRC's ongoing proceedings against three former executives of AssetCo, in which the FRC alleges, amongst other things, that they acted dishonestly or recklessly, we are unable to comment further," she added.