KPMG will not now be taking over the audit role of Schroders - held for over 50 years by incumbent PwC - after admitting it did 'not meet the regulatory requirements for independence for all relevant group companies'.
The global fund manager will instead re-hire PwC as its external auditor.
The events follow Schroders' announcement in January that it would be recommend KPMG to take over its external audit, at its AGM in May.
A Schroders spokesman said: 'Prior to finalising our recommendation to shareholders, KPMG advised Schroders that it did not meet the regulatory requirements for independence for all our Group Companies.
'PwC has performed very well as auditors and have confirmed that they remain independent. The Board therefore proposes that PwC is reappointed at the 2013 AGM.'
In its annual report published late last week, Schroders said: 'The tender process was extremely competitive and tightly contested. The (Audit & Risk) committee had anticipated recommending KPMG as external auditor for the group with respect to the 2013 audit.
'KPMG already provided a number of services to the group and since the conclusion of the tender process KPMG advised the company that it did not meet the regulatory requirements for independence for all relevant group companies. Independence is a pre-requisite for any audit appointment and consequently the Board is proposing to re-appoint PwC.'
The company also detailed the three-stage tender process - which involved 28 interviews for each of the four firms that participated in the tender including the chairman, executive directors, audit and risk committee members; written proposal and a presentation to the audit and risk committee, the chief executive, CFO, general counsel, head of financial reporting and the company secretary.
Amid recommendations from the Financial Reporting Council that companies retender their audits once in 10 years, Schroders indicated intentions to put its external audit out to tender in its 2011 accounts, saying that while the quality of PwC's work as auditors supported their reappointment for the 2012 audit contract, regulatory changes could require compulsory tendering and/or rotation of auditors.
PwC's total fees amounted to £5.9m (2011: £4.7m) of which £2.7m (2011: £2.9m) was for the audit, £0.3m (2011: £0.4m) was audit-related and £2.9m (2011: £1.4m) was for non-audit related work, including the preparation of the internal controls report and other non-audit services including tax, compliance and regulatory opinions for group subsidiaries.
The percentage of non-audit to audit fees to total fees was 51% (2011: 70%).
Schroders recently appointed Richard Keers as its new CFO. Keers, who was in charge of the Schroders audit for PwC between 2006 to 2010, will take over from current CFO Kevin Parry in May.
KPMG declined to comment.
The news also follows HSBC's recently announcement that it plans to review its current auditor as incumbent KPMG has handled the audit for 22 years 'to meet with the new Financial Reporting Council (FRC) Governance Code recommendations on reviewing audit contracts'.
Earlier this month, it emerged that companies may have to prepare themselves to retender their external audits every seven years if proposals - voted on by politicians at the European Parliament's Economics and Monetary Affairs Committee (ECON) - make it into the rule books.
The EU move, follows the UK Competition Commission's (CC's) provisional report into the FTSE 350 audit market which found that restrictions on competition made it difficult for companies to switch auditors.