KPMG has been singled out by regulators over an “unacceptable” failure to meet required standards in its banking audits for a third consecutive year.

The Big Four firm was criticised by the Financial Reporting Council (FRC) in a damning report that found nearly a third of audits of British companies last year needed improvement or significant improvement, despite years of efforts to make the industry up its game.

In an unusually frank assessment, the watchdog said KPMG, whose major banking clients include Barclays, needs to “urgently and comprehensively address the continuing deficiencies” in the quality of its audit work on lenders and similar financial companies.

It added that the importance of the financial system means that high quality work is particularly important in banking.

Regulators said: "Given the systemic importance of banks to the UK economy, the FRC will be closely monitoring KPMG’s actions to ensure findings are addressed in a timely manner."

The report will make uncomfortable reading for KPMG's new boss Jon Holt, who ran the firm's audit division during the period in question.

It also piles further pressure on ministers to introduce sweeping reforms to improve audit quality following high-profile corporate collapses at BHS, Carillion and Patisserie Valerie.

The FRC said it found "significant weaknesses" in KPMG's audit of expected credit losses, valuation of financial instruments, settlement and clearing accounts at UK banks.

Cath Burnet, head of audit at KPMG UK, admitted that action taken to improve banking audits had not yet led to consistently high standards.

She added: “While we know we have more to do to improve the inspection outcomes, our banking audits are robust and the findings do not call into question our audit opinions – and we are confident that the steps we have taken to date will result in improvements in future banking audit inspections."

KPMG is also facing a hefty fine from the FRC for its auditing of collapsed construction giant Carillion.

The report, which reviewed audit quality at the UK’s top seven accounting firms, also criticised KPMG's smaller rivals BDO and Mazars. It said BDO needed to urgently improve the quality”of its audit of revenue, as well as the audit teams’ understanding of significant fraud risks.

Scott Knight, head of audit at BDO, said the firm was very disappointed with the findings and added that it is working hard to address specific issues.

The FRC inspected 103 audits across the seven firms and said 29pc required improvement or significant improvement.

Sir Jon Thompson, chief executive of the FRC, said: "While these results show some improvement on last year's results, this improvement is marginal and significant change still needs to happen to meaningfully improve audit quality."

Certain government proposals to overhaul the corporate governance and audit market were met with hostility earlier this month from business groups and accountants. Critics said a plan to force the Big Four to share FTSE 350 audits with challenger firms could undermine audit quality.