Debate rages on over KPMG’s cut-price Rentokil audit deal

When KPMG won the audit of business services firm Rentokil it sent ripples
through the Big Four audit firms.

Not only had the firm won the contract against industry heavy weight
PricewaterhouseCoopers (PwC), but it seemed to be promoting a new audit package
which promised to cut costs and integrate internal and external audit functions.

And, what’s more, KPMG said it was fielding interest from potential clients.

‘Unequivocally we have found interest,’ says Oliver Tant, KPMG’s UK head of
audit. ‘We will be discussing it with more people, undoubtedly as will other
competitors.’

Any major audit win these days is bound to set tongues wagging in the offices
of the Big Four, but this was particularly galling.

Audit firms have been having a tough time of it lately, facing what could be
the greatest slow down in growth for six years at a time when retendering is at
its highest level in a decade. Competition is fierce.

Meanwhile, budget conscious clients are putting pressure on their auditors to
cut costs.

KPMG’s arrangement was able to shave 30% from Rentokil’s audit, but it was
the manner in which the firm brought about the cost saving that raised eyebrows.

Audit guidelines warn against two threats when an external auditor takes on
internal audit work. 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.

Some felt that KPMG was at best skirting and at worst testing these
guidelines.

More surprising, the structure was being promoted by the international audit
company which knew full well that the arrangement would be illegal in the US and
possibly in France where independence criteria is much more strict.

Tant says 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.

PwC, would not be drawn on its opinion on the Rentokil audit, citing its
policy not to comment on clients, but did say: ‘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.’

Paul George, director of auditing at the Professional Oversight Board, hinted
he was also keeping an eye on the new arrangement.

‘Obviously, when there are particularly topical issues we will have regard to
those when planning our work,’ he said.