IIA warns audit firms of 'conflict of interest'

Audit firms risk becoming mired in ‘serious conflicts of interest’ if they fuse internal and external audit roles, an industry body has warned.

The Institute of Internal Auditors has weighed into an industry debate sparked off by KPMG’s successful bid for the Rentokil contract using a low-cost package which combined internal and external audit roles.

Debate has been raging in industry circles since news of the win, with many fearing KPMG may be skirting ethical boundaries by using the controversial arrangement which would be prohibited under US laws and could be challenged in France.

Now the IIA has entered the fray with its chief executive Dr Ian Peters, warning: ‘Internal auditors answer to management and the non-executive directors… external audit reports to shareholders. Merging these two important functions has the potential to cause serious conflicts of interest and reduce the effectiveness of internal controls and the management of risk.’

KPMG has said it consulted widely before taking on the Rentokil job and believes the audit package, ‘is perfectly feasible to do in the spirit and letter of the law’.

Paul George, director of auditing at the Professional Oversight Board, said: ‘When there are particularly topical issues we will have regard to those when planning our work.’

In the past, PwC has raised concern about the packaging of internal and external audit functions commenting: ‘It is vital that we maintain our independence from ­ and in no way are seen to act as part of ­ management infrastructure. Internal audit can often be regarded as acting as part of that infrastructure.’