PracticeAuditFRC urges caution on KPMG audit mix

FRC urges caution on KPMG audit mix

External and internal audit blend could breach guidelines, regulator says

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.

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