The financial reporting regulator has urged caution if companies are considering taking on Rentokil-style internal/external audit arrangement which are being investigated by ethical standard setters.

Paul Boyle, chief executive of the Financial Reporting Council, said companies should not rush into controversial audit arrangements which have the potential to blur the line between internal and external audit services.

The controversial service hit the headlines after FTSE 100 firm Rentokil boasted of a 30% cut in audit cost after switching to big four auditor KPMG which promoted a new low cost external audit package which provided some services which usually undertaken by an internal audit.

The arrangement would be forbidden in the US and possibly in France where authorities prohibit external auditors undertaking internal audit work.

Boyle said the FRC would examine the scheme, and possibly alter ethical guidelines if needed.

“The FRC believes it is important that audit firms and their clients should be aware of the steps being taken and may want to be cautious before entering into arrangements which stretch the internal/external audit boundary, not least because it could prove to be inconvenient and/or costly to change such arrangements should the outcome of the FRC’s work be that the Ethical Standards are changed in a way that affects the provision of such services,” Boyle said.

In this week’s Accountancy Age Kevin Chidwick, Admiral Group’s FD said he was interested in the arrangement and had contacted KPMG to find out more.

“If they can add value to what we’re doing and overall it somehow [can be] combined to keep down external audit costs, I’m all for it,” he said.

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