A SUSPECTED '10m property fraud blew a hole in the annual profits of one of Britain's biggest building societies, it emerged today.

Police are investigating the alleged fraud concerning a loan secured on three commercial properties, the Macclesfield-based Cheshire said.

Chief executive Karen McCormick, who succeeded Colin Whittle last July, said the matter had only come to light in the past couple of weeks, forcing a delay to publication of the society's results for 2005.

It has since had to make an exceptional provision of '10m, but remains confident of recovering most, if not all of the money.

The society said it had been advised the properties involved were worth '16m, but a new assessment had shown their true value was considerably lower.

The Cheshire is now preparing to take legal action against two firms of professional advisers who acted in relation to the loan, which was taken out some time ago and was not in arrears.

In a statement, the society added that it has begun a review of its systems and processes to see if any changes are required to prevent a repeat.

The Cheshire is the UK's 11th largest building society with 49 branches, almost 800 staff, and 450,000 members.

Profits before tax and exceptional items increased three per cent at '11.7m as total lending surged seven per cent to '4.7bn.

But the '10m hit and a one-off '3.8m cost relating to an efficiency programme left the society in the red after exceptional items.

Chairman Tom Marshall said the society had enjoyed a strong second-half and the trend had continued in the first two months of 2006.

He is stepping down next month after a five-year stint, and will be replaced by Robert Hough. David Goldie, chief operating officer at Carphone Warehouse, has joined the board as a non-executive director.