The Financial Reporting Council (FRC) has begun an inquiry into the accounts of the beleaguered Co-operative Bank alongside a review by Sir Christopher Kelly into the bank's accounting practices and the role of auditors KPMG.

News of the inquiry follows weeks of dramatic events at the bank, which came shortly after KPMG warned of 'significant doubt on the bank's ability to continue as a going concern' in August, along with revelations of a £1.5bn hole in its accounts.

The last few weeks have seen the bank's former chairman and ex Methodist minister, Paul Flowers, resign and then arrested on the back of a 'drug supply' investigation.

But the bank sent out warning bells earlier this month in its prospectus issued on 4 November, in which it informed shareholders of inquiries from the Conduct Committee of the FRC in relation to its 2012 accounts.

In the prospectus, the Co-op said: 'These enquiries relate to the disclosure in the 2012 annual report and accounts of the bank's regulatory capital position. They also relate to the bank's loan impairment, impairment of its investment in its replacement banking IT platform, and to fair value disclosures.'

In July 2012 the Co-op emerged its purchase of Lloyds Bank's 632 branches in a £750m deal despite advice months before from the then City regulator, the Financial Services Authority, that the Co-op Group held insufficient capital for the acquisition.

Contrary to this, the bank's 2012 accounts state: 'Adequate capitalisation can be maintained at all times even under the most severe stress scenarios, including the revised FSA "anchor" stress scenario; and further that 'A capital buffer is being maintained to provide the ability to absorb capital shocks and ensure sufficient surplus capital is available at all times to cover the bank's regulatory minimum requirements'.

But the Co-op's board has now decided the statements are 'inaccurate' - in its 4 November prospectus, the board said: 'The Board has reviewed the basis for these statements and has concluded that they are inaccurate and, should they be read in isolation, these statements could be misleading, but when taken in the context of the 2012 Accounts as a whole including the disclosures on pages 18, 29 and 30 of the 2012 Accounts, a more balanced view can be formed.

'The directors believe that the 2012 Accounts would not have been required to be reissued solely on the basis of the inaccuracy KPMG has confirmed agreement with the conclusion reached by the Board on this matter.'

The board is also to come under scrutiny over its £1.5bn capital shortfall, with the announcement of a review to be chaired by Sir Christopher Kelly, which would also assess the bank's accounting practices and the role of its auditors KPMG.

'The Kelly Review will include an analysis of strategic decision- making, management structures, culture, governance and accounting practices and aspects of the role of the bank's auditors,' the Co-op said.

The bank warned that it could face additional investigations or proceedings as a result of the review, saying, 'Any of these risks, should they materialise, could have an adverse impact on the bank's operations, financial results, condition and prospects, and the confidence of the bank's customers in the bank, as well as taking a significant amount of management time and resources away from the implementation of the bank's strategy.'

The bank intends to present the findings of the Kelly Review to the Co-operative Group's members at its AGM in May 2014.

In a statement, the FRC said: 'We are making enquiries into the Co-Op's financial reporting in accordance with our normal procedures and under the terms of the Accountancy Scheme if we commence a formal investigation we will announce that via a press announcement.'