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The UK’s accounting watchdog is investigating accountancy firm MHA for its audit of failed construction group ISG, in a setback for the firm after it announced its intention to float on London’s junior stock market.

The Financial Reporting Council said on Tuesday it had begun an investigation into the firm’s audit of ISG for the year ending December 2022, after the company collapsed last year leaving more than £1bn of public sector contracts and dozens of prison projects at risk.

The investigation into MHA’s audit quality will weigh on the firm’s hopes of a £125mn public listing. On Monday the top-20 accountancy firm, the UK and Ireland arm of international network Baker Tilly, said it planned to float on Aim in the coming weeks to raise enough capital for technology and AI investments and continue the firm’s expansion.

MHA’s plans for a public listing would it make a rare example of a publicly traded accountancy firm in a sector dominated by traditional partnerships and a culture that tends to value independence over shareholder interests. It also comes as many other UK accountancy firms turn to private equity to drum up enough investment to drive expansion and increasingly crucial technology overhauls.

The firm is also “exploring” buying up other Baker Tilly firms, which operate in 143 territories internationally, it said on Monday.

ISG’s failure was the most high-profile in the construction sector since government contractor Carillion went into administration in 2018, a collapse that accelerated attempts to tighten the rigour of audits in the UK.

The collapse has disrupted government efforts to address the UK’s crowded and dilapidated prison estate.

The group was the Ministry of Justice’s main contractor on almost a fifth of the prison places it was planning to add, the National Audit Office reported in December.

ISG’s jobs included work to upgrade security and tackle drug smuggling in Manchester Prison, the Financial Times previously reported, where a recent inspection found the site was “plagued” by drones delivering illicit items due to a failing CCTV system and delays installing more secure cell windows.

Officials have since begun looking for other contractors to take over ISG’s halted projects.

MHA said: “MHA is committed to audit quality and we will be co-operating fully with the FRC as part of this investigation.”