PwC and Grant Thornton have been singled out for criticism by their regulators.

Valerie and Carillion. Patisserie Valerie and Carillion.

The Financial Reporting Council warned of "unsatisfactory" deterioration in inspection results for PwC's audits of FTSE 350 clients over the past year, only two of the audits scrutinized by the watchdog's standard of needing limited improvement. That was a steep decline from the 84 per cent which passed the threshold the previous year.

Grant Thornton, which served as the auditor for Patisserie Valerie when a multimillion-pound black hole was discovered in the cake shop last year.

Audit quality at the firm was a matter of deep concern, the FRC said. Grant Thornton now faces heightened scrutiny from the watchdog after the 50's of his audits were made to meet the FRC's standard, down from 75's in the previous round of inspections.

A spokesperson for Grant Thornton said the FRC report "makes clear that the entire profession must improve the quality of its work and Grant Thornton is no exception".

None of the seven firms surveyed – which included BDO and Mazars as well as the Big Four and Grant Thornton – with the FRC's standard for 90 per cent of their inspected audits.

The FRC examines a sample of audits for each firm. In each case where auditors had failed to make good enough in challenging management on questions of judgment.

Stephen Haddrill, chief executive of the FRC, said: "At a time when the future is audible, the latest audit quality results are not acceptable.

The FRC on Wednesday singles out Grant Thornton for extra attention. "Quality action, the watchdog said." Urgent action needed to improve the quality of its audits.

The FRC's rebuke comes only 18 months after Grant Thornton appeared poised to challenge the stranglehold of the Big Four on the top audit roles. A record from the regulator of "misconduct" has been published. A FTSE 350 audit clients.

Grant Thornton has already overhauled its management – changing its head of auditing for the second time in less than a year. It said it would commission an independent review later this year.

PwC has taken steps to boost audit quality. Last month the Big Four firm plans to spend £ 30m a year to overhaul its audit business and hire an extra 500 experienced audit professionals. Hemione Hudson, head of audit for the firm, said that while it was "disappointing" its inspection results had fallen short, the new plans would help to address the FRC's inspection findings.

KPMG, which bore the brunt of criticism last year, performed better this time under scrutiny from the FRC. Some 80 per cent of FTSE 350 audits with their standards, up from 50 per cent.

But the FRC warned that KPMG – which was heavily criticized for auditing the collapsed outsourcer Carillion – was not off the hook. Results had improved "from a low base", the watchdog said, and the firm had "more to do".

Three-quarters of Deloitte's audits were judged to have met the FRC's standard, while eight out of nine at EY were judged to have the regulator's standard.

This article has been published since then, rather than all audits

Daily newsletter

Are you interested in the latest company news? Every morning our city reporter Cat Rutter Pooley covers the biggest business stories and delivers them straight to your inbox.

Sign up here with one click