LONDON, Aug 25 (Reuters) - Britain"s accounting watchdog said on Wednesday it had fined EY 3.5 million pounds ($4.8 million) for failing to challenge financial statements in its audit of transport group Stagecoach Group"s (SGC.L) in 2017. The Financial Reporting Council (FRC) said Mark Harvey, the auditing engagement partner, had also been sanctioned and fined 100,000 pounds. EY"s fine was cut to 2.2 million pounds for admitting to the failings, with Harvey"s fine reduced to 70,000 pounds for the same reason. There were admissions to failings in specific areas of the Stagecoach audit, including provisions for insurance claims relating to accidents, defined benefit pension scheme obligations, and an onerous contract provision relating to the East Coast Mainline railway franchise, according to the FRC. "Whilst it is not alleged that the Financial Statements were in fact misstated, in several material instances the Respondents failed to obtain sufficient appropriate audit evidence," the regulator said. The FRC said EY will be required to report to the watchdog for a year in respect of audit work in relation to onerous contract provisions. EY said it regrettably fell short of the standards it set for itself, adding that no findings were raised in the FRC"s review of auditor"s most recent audit of Stagecoach for the year-end 2020. It said it had continued to make significant investments in audit quality. "These will support our focus on delivering the highest levels of audit quality by building a culture of challenge and providing independent oversight of our UK audit practice." Harvey could not be immediately reached for comment. Britain has said it wants to reform the audit market and replace the FRC with a more powerful watchdog after a series of company collapses, but the government has yet to put legislation to parliament to implement any change. ($1 = 0.7290 pounds)