The UK's accountancy watchdog has launched a formal investigation into the role of Ernst & Young as auditors for the troubled life assurance firm Equitable Life.

The Institute of Chartered Accountants (ICA) will examine whether Ernst & Young, who now no longer act as auditors for Equitable Life, preformed a competent service.

At issue is Ernst & Young's analysis of Equitable's financial statements before it was forced to close to new business last year because of a huge hole in its finances.

Ernst & Young, who were Equitable's auditors for decades, have denied any wrongdoing.

"We will cooperate fully with the inquiry," said a Ernst & Young spokesman.

Regulatory concerns

The watchdog will investigate the roles of all senior Ernst & Young accountants and also the conduct of two senior Equitable employees who are qualified accountants.

Peter Davis, a former non-executive director, and Equitable's former chief accountant, Julian Hirst, will be questioned, said Christopher Dickson, the independent counsel leading the investigation.

"Equitable will cooperate fully with this and with any other inquiry," a spokesman for the mutual said.

The watchdog's investigation is the latest in a series of inquires into Equitable, which have challenged the effectiveness of the regulatory standards in the life insurance industry.

Unlimited fine

Ernst & Young, one of the big four global accountancy firms, has been criticised by policyholders for not identifying the possibility of a �1.5bn ($2.1bn) shortfall from guaranteed annuities which caused Equitable's problems.

If Ernst & Young is found to have failed to meet the industry's professional standards, it could face an unlimited fine and be reprimanded. Individuals could be fined and dismissed from the profession.

Equitable put itself up for sale last year after the House of Lords ruled it must pay guaranteed bonuses to 90,000 policyholders written in the 1970s and 1980s when interest rates were high.

The judgment surprised Equitable and left it with a devastating liability.

After failing to find a buyer, Equitable closed its life fund to new business and in February sold its operating units to Halifax, the UK's largest mortgage bank.