Britain's accounting watchdog said on Monday it had fined auditor PwC 1.75 million pounds ($2.12 million) after it failed to properly challenge UK telecoms group BT once a half-a-billion pound fraud was discovered in BT's Italian operations.

BT's full-year financial statement for the year ended March 31, 2017, had to be adjusted by 513 million pounds due to the fraud, the Financial Reporting Council (FRC) said.

"The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional scepticism, underscore this message and will serve as a timely reminder to the profession," Claudia Mortimore, deputy executive counsel at the FRC, said in a statement.

PwC said it was sorry that aspects of its audit of BT Group for the year ended March 31, 2017, were not of the required standard, adding the FRC had not found the accounts were misstated or that the sum of the BT Italy adjustments was wrong.

"We have made significant investment in strengthening audit quality in recent years, which has been recognised in improved quality inspection results," PwC said.

The fine would have been 2.5 million pounds had PwC not admitted to the breaches and settled early.

Richard Hughes, the partner who led the BT audit, was fined 42,000 pounds, avoiding a 60,000 pound fine after admitting to the breach, the FRC said.

PwC and Hughes also failed to have a sufficient trail of documents that would allow any experienced auditor to understand the nature, timing and extent of the audit procedures performed, the FRC said.

($1 = 0.8255 pounds)