South Korea's financial watchdog is stepping up its probe into Daewoo Engineering & Construction Co.'s alleged accounting fraud and may expand its inspection into its largest shareholder, the Korea Development Bank (KDB), depending on the outcomes, industry sources said Friday.   

Daewoo Engineering has been under an audit review by the Financial Supervisory Service (FSS) on accounting fraud charges based on a tip-off it received last year.

The builder was originally affiliated with the now-defunct conglomerate Daewoo Group, which went belly-up following the Asian financial crisis in the late 1990s. The FSS did not rule out the possibility of expanding the probe further into a special investigation once the audit review is completed. 

In December of last year, the FSS said it may carry out an inspection into the KDB to see if it had any prior knowledge on an allegation that the country's third-largest builder cooked its books to hide losses estimated at 1 trillion won ($942 million).

The state-run KDB took over a 50.7 percent stake in Daewoo Engineering in 2010, when the ailing firm was struggling to find a buyer. 

Daewoo Engineering's accounting fraud allegation has been drawing keen attention because the firm has been under a separate probe by the prosecution on suspicion of creating slush funds involving the Four Rivers project, a 22-trillion-won, highly controversial refurbishment plan pushed by former President Lee Myung-bak as his trademark pledge.

Daewoo Engineering reported a loss of 628 billion won on sales of 8.84 trillion won last year.  (Yonhap)