Rentokil-KPMG deal seen to threaten independence
The news that KPMG has snapped up the audit of Rentokil Initial from rival PwC brings with it renewed concerns around the independence of firms providing additional services as well as opining on financial statements.
Under the arrangement KPMG would undertake all the statutory responsibilities associated with an external audit, while also ‘delving deeper’ and offering advice on internal audit issues.
Not only that, but the audit will cost 30% less than what PwC was charging. I wonder if the company will end up losing more than they’ve saved if the market punishes them for the perception of having a less independent opinion. The director of the Professional Oversight Board, the UK body responsible for monitoring the UK’s ethical standards, declined to state whether the deal would be investigated. For their part, KPMG says they are confident they can address the threats to their independence.
Some observers say the arrangement would not be a viable option for companies with a dual listing in the US, owing to strict independence guidelines or ‘bright lines’ set down by the Securities and Exchange Commission.
It may not help shave costs during a time of economic difficulty, but I firmly believe keeping internal audit service providers separate from external auditors is critical to preserving the independence required for a financial statement opinion and is just best practice in general. I would’ve thought 7 years after SOX we’d have this down pat.
This may be due to my lack of knowledge, but at the end of day both functions [ IA and EA ] do the same thing…make sure the numbers “add up” — to put it roughly.
So what difference does it make if they are independent or not?
It has more to do with who the auditors “work for”. External auditors report to shareholders on the financial statements (most often — sometimes there are special reports on the functioning of controls related to the statements) whereas internal auditors report to management (and the audit committee) on a wide range of operational, financial, compliance and (if they’re lucky) strategic risks and controls.
See my follow-up post from this morning on how the Institute of Internal Auditors (of UK and Ireland) feels about the deal: IIA: Keep internal and external audit separate