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.’