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August 30, 2009

Questions raised over internal and external audit divide

The scope of an external auditor has
come under scrutiny after a UK listed company employed its external
auditor to carry out internal audit work.

Rentokil, a pest control company, slashed
nearly a third off its audit fees by contracting KPMG UK to provide
both external audit and “some work undertaken by internal
audit”.

Rentokil reported the arrangement in its
interim report for the six months to 30 June 2009. A Rentokil
spokesperson confirmed KPMG has been appointed to carry out its
2009 audit and that it will be a more “integrated and synergised”
financial assurance process, extending its external audit remit to
cover some financial controls effectiveness reviews currently
undertaken by the company’s internal audit team.

“Rentokil’s initial internal audit team will
continue to provide total support to the business for all elements
of corporate governance, including our group controls framework,
risk management, fraud management and operational reviews,” the
spokesperson said.

“In addition, the new process of reviewing
financial controls will be assessed and reviewed by our internal
audit department. This will ensure that all of the audit work
carried out is totally objective.”

The spokesperson said Rentokil had invited its
existing auditors PricewaterhouseCoopers and KPMG to submit
proposals to carry out this work.

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“KPMG was appointed and by combining internal
and external audit, costs will reduce by approximately 30 percent,”
the spokesperson explained.

Internal and external audit services should
not be provided to a company by the same accounting firm because it
impairs the independence of the external auditor, according to the
Institute of Internal Auditors (IIA), a professional body that
trains internal auditors and promotes the profession.

IIA president and chief executive Richard
Chambers said the Securities and Exchange Commission prohibits this
practice in the US.

“The IIA believes that even if allowed by law
or statute, this practice, at a minimum, creates a perceived
impairment of independence and erodes public trust,” Chambers
said.

However, Institute of Chartered Accountants in
England and Wales head of integrity and markets Tony Bromell said
whether or not independence has been impaired depends on exactly
what internal audit services a firm is providing.

UK auditor independence rules are laid out by
the Auditing Practices Board, which operates under the Financial
Reporting Council (FRC).

Bromell believes the rules in the US follow
the same principle as the rules in the UK.

“The basic rule is an auditor cannot provide
internal audit services if that work would then be relied upon
again by the auditor in terms of doing his own audit – it is a self
review issue,” Bromell said.

A KPMG UK spokesperson said that the firm
would not comment specifically on their client.

“Talking aside from Rentokil we have a wider
assurance offering at KPMG where we are using auditing skills to
provide a range of assurance services and it may well be that some
of those services that we can offer clients are internal audit
services. This is wider assurance using the skills of external
auditors,” the spokesperson said. “We do not think the wider
assurance services we offer pose any professional ethical dilemma
or else we would not be doing them.”

Bromell said that if a formal complaint was
made to the FRC’s Audit Inspection Unit, the regulator would
investigate. If not, it would be presumed no rules had been
breached.

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