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The Financial Reporting Council (FRC), the UK's accountancy watchdog, says it has begun an investigation into the auditing of BT's financial statements.

The investigation covers the years 2015 to 2017 and relates to the scandal in the telecoms giant's Italian division.

The auditor responsible, PwC, was replaced in June with rival accounting firm KPMG.

In January, BT wrote down the value of its Italian unit by £530m after years of "inappropriate behaviour".

It has warned the scandal will affect its results for the next two years.

The FRC said that "following completion of initial inquiries", it would be carrying out an investigation under its Audit Enforcement Procedure into PwC's audits.

Allegations of "inappropriate behaviour" at BT's Italian operation first emerged last summer. The company began conducting its own internal investigation in October 2016.

Analysis: Katie Prescott, Today business presenter

The question the regulator will be weighing up is: where does the fault lie for this? With the company itself or the accountant responsible for checking its books?

BT is furious that it took a whistleblower to pick up on the scandal in Italy, rather than the company's own auditor PwC - the accountant that had been in place for over 30 years.

On the other side, PwC could argue that their auditors might have been misled and could point to BT filing a criminal complaint in Italy against former BT employees.

BT found evidence of improper accounting practices and "a complex set of improper sales, purchase, factoring and leasing transactions".

It said these activities had resulted in "the overstatement of earnings in our Italian business over a number of years".

The head of BT Europe, Corrado Sciolla, and BT Italy chief executive Gianluca Cimini are among senior managers who have lost their jobs over the scandal.

PwC said: "We will continue to co-operate fully with the FRC in its inquiries. The regulator has a duty to investigate where they believe there is a public interest, in order to give confidence to the financial markets.

"Audit quality is of paramount importance to the firm."