Cut-price Rentokil-KPMG deal raises ethical questions for auditors

Authorities are keeping a close eye on a new tailor-made audit package, which cost less but raise ethical questions.

KPMG said it is receiving interest in its cut-price audit package after successfully winning a bid to take on the audit of Rentokil Initial from Big Four rival PricewaterhouseCoopers.

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.

KPMG’s pitch last week shaved 30% from Rentokil’s audit costs.

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.

The arrangement has led some to re-examine audit’s ethical code which highlights two main risks when external auditors also provide internal audit services.

The first threat, known as the self-review threat, warns against the external auditor relying heavily on its own internal audit work. The second threat, known as the management threat, warns against the internal auditors assuming the role of management.

Richard Sexton, PwC’s audit chief, said it was important auditors were not seen to act as part of management infrastructure. ‘The UK ethics model relies on a risk and safeguard analysis. It is vital that we maintain our independence from – and in no way are seen to act as part of – management infrastructure,’ he said.

‘Internal audit can often be regarded as acting as part of that infrastructure.’

KPMG said it has investigated and addressed both risks. Oliver Tant, the company’s UK head of audit, said he consulted widely before taking on the job. ‘We are comfortable that this is perfectly feasible to do in the spirit and letter of the law,’ he said.

‘We genuinely believe it will play to improved external audit quality.’

Jon Grant, executive director on the Auditing Practices Board, said it was hard to pass judgment without looking at the details of the contract.

‘Like so many things in life, the devil is in the detail,’ he said.

‘We write the ethical standards, we don’t monitor how they apply in standards.’

Paul George, director of auditing at the Professional Oversight Board, is tasked with monitoring the standards. He said: ‘Obviously, when there are particularly topical issues we will have regard to those when planning our work.’ He declined to comment on whether the Rentokil case would be inspected.

Meanwhile, companies are being tempted by the low-cost audits, according to Tant. ‘We have found interest and we will be discussing it with more people, undoubtedly as will our competitors,’ he said.

According to Tant, Rentokil was so keen on the new arrangement that it asked its existing auditor, PwC, to pitch on the same basis. Rentokil said the decision was a tight one and was finally swayed by the non-executive directors.

Tant said the new audit package was attractive to companies trying to reign in costs.

‘There is a view that the existing system is not always the most efficient in these slightly more financially difficult times,’ he said.