FRC urges caution on KPMG audit mix

Big Four firm KPMG has refused to say whether it will continue to promote controversial Rentokil-style audits, now under review by regulators who are yet to decide on whether they breach ethical codes.

KPMG’s low-cost external-internal audit blend ­ known as extended assurance, in use for FTSE 100 business services business Rentokil Initial ­ is under scrutiny by the UK reporting regulator, the Financial Reporting Council. KPMG declined to comment on whether it will continue to promote the package during the FRC review, citing commercial sensitivity.

Last week the FRC urged companies to use caution when considering the arrangement while it investigates whether they are in line with ethical standards. A statement said: “Paul Boyle, chief executive of the FRC, said companies should be ‘cautious’ not least because it could prove to be inconvenient and/or costly to change such arrangements should [the FRC change] the Ethical Standards”.

The news came in a week when Kevin Chidwick, FD of FTSE 100 car insurer Admiral Group, told Accountancy Age he would consider using the service. In the past KPMG itself said it was receiving interest in the package.

Debate began on the issue in July when Rentokil, announced a switch from long-term auditor PricewaterhouseCoopers to KPMG, which promised to significantly reduce audit costs by extending the external audit work to areas commonly performed by internal auditors. The arrangement raised eyebrows among the Big Four, with some concerned it could be skirting ethical guidelines.

Audit standards warn against two threats when an external auditor undertakes internal audit work. The first, known as the self-review threat, warns against an auditor reviewing its own work. The second, known as the management threat, warns against internal auditors, performing a management role.

KPMG has staunchly defended the arrangement describing it as, “perfectly feasible to do in the spirit and letter of the law”.

IN OUR VIEW

When there’s this much concern, about an issue, the regulator should examine it, if only to provide the industry with clear, unambiguous guidance. In the end KPMG might be left with egg on its face, or it could emerge as an innovator.And in this scenario it would be of no surprise to see its rivals follow their lead.