An overseas audit deal between Rentokil Initial and KPMG has raised eyebrows in the United States, prompting the Institute of Internal Auditors to remind capital markets of the significance of auditor independence.

Rentokil Initial is a British-based company that asked its external audit firm, PricewaterhouseCoopers, and KPMG to provide proposals for “a more integrated financial assurance process extending external audit coverage to some work undertaken by internal audit,” according to the company's most recent interim report. The company’s board of directors decided to hire KPMG for its 2009 audit, reducing internal and external audit costs by about 30 percent. PwC will continue providing “significant specialist assurance and non-audit services.”

A United Kingdom audit official for KPMG said performing internal audit work isn’t a conflict conceptually, “only if you get involved in the wider aspects such as management, which we are not,” according to a press report. “Companies are aware today of the importance of good assurance yet at the same time, they’ve got to look at costs. There are ways you can do it more efficiently and effectively.”

In the United States, auditors are subject to independence rules under both the Securities and Exchange Commission and the Public Company Accounting Oversight Board that forbid external auditors from performing internal audit work and certain other tax and consulting services for their clients. The idea is to keep external auditors at arm’s length from their audit clients so they can perform an objective audit.

The Institute of Internal Auditors published a statement to emphasize that the blending of internal and external audit services under one firm is a bad idea. “We have expressed this numerous times over the past two decades and we feel it’s important to re-emphasize this at a time in which the practice is potentially being reconsidered,” said Richard Chambers, IIA president and CEO. Even if it’s permitted in other countries, Chambers said it creates a “perceived impairment” of independence and chips away at public trust in the audit process.

“It’s not really useful for anyone for the external auditor to provide internal audit services for a client,” Chambers told Compliance Week. Acknowledging the present-day demands on internal auditors, he said it’s not uncommon for global companies to hire an outside firm to help with internal audit work, but it shouldn’t be the same firm that performs the external audit.

Topics