(Adds KPMG, accounting body and lawyer reaction)
LONDON, Nov 21 (Reuters) - Misdeeds by the world's "Big Four" accounting firms should be punished with much bigger fines, Britain's accounting watchdog was advised in a report released on Tuesday.
"Fines greater than those that have heretofore been imposed may be appropriate in really serious cases," former judge Christopher Clarke said in the study published by the Financial Reporting Council (FRC).
The Big Four check the books of nearly all big, listed companies and the FRC has faced criticism for not going harder on them, given they are richer than many of their clients.
PwC, one of the big four, was hit with a record 5.1 million pound ($6.8 million) misconduct fine in August for the way it audited collapsed accounting firm RMS Tenon.
A much heftier fine could be justified in cases of seriously poor audit work by a "Big Four" accounting firm, a reference to PwC, KPMG, EY and Deloitte, the report said.
"If one of the Big 4 firms was guilty of seriously bad incompetence, in respect of the audit of a major public company... a financial penalty of ten million pounds or more before any discount could be appropriate," the report said.
This would still be a fraction of what other regulators like the Financial Conduct Authority have imposed on banks for trying to rig interest rate benchmarks.
The ICAEW, a professional body for accountants, said there is a very real danger that the urge to exact retribution leads to fines so large that they harm the marketplace.
"Fines that are too demanding substantially change the risk profile of an accounting firm, and the insurability of its trading," Duncan Wiggetts, ICAEW executive director for professional standards, said.
"This raises the possibility of a larger audit firm choosing to exit what is already a narrow market if the risk becomes too high," Wiggetts said.
But Hannah Laming, a lawyer at Peters & Peters, said bigger fines and a lower threshold for demonstrating misconduct will give the FRC greater credibility.
KPMG said it was important to take time to consider the recommendations more fully.
The FRC has faced repeated criticism for being too slow and too easy on the Big Four, with some of the high profile cases opened against then closed without any action taken, even when other agencies have issued fines.
When the FRC brings a case, it argues the fine that should be imposed before an independent tribunal. The report said tribunals should not consider previous record fines as a benchmark for future penalties.
The report also recommends offering discounts of up to 35 percent on fines for a bit longer in the legal process to encourage more early settlements.
Accountants that have been found to be dishonest should be banned from a professional accounting body for at least 10 years, it said, longer than many of the bans imposed so far.
The FRC said it will now decide which recommendations to adopt to ensure that sanctions imposed continue to be fair, effective and in the public interest. ($1 = 0.7552 pounds) (Reporting by Huw Jones; editing by Alexander Smith)