KPMG and Rentokil: an alternative perspective

by admin on August 3, 2009

in Tax and Ethics

The FT reported that Rentokil has decided to consolidate its internal and external audit functions under one roof: that of KPMG:

Rentokil Initial has struck a cheaper, streamlined form of audit deal with KPMG that could be adopted by other companies but has raised eyebrows in the corporate governance world.

Rentokil has shaved £1m, or almost a third, off its annual payments to its external and internal auditors, it disclosed in its interim statement on Friday.

It agreed that KPMG, its new external auditors, would take on internal audit work alongside Rentokil’s own internal team. Previously, PwC did the external work while Deloitte handled much of the internal audit. PwC will now continue only with non-audit services.

Such practices are outlawed in the US where internal auditors are seen as acting for management while external auditors act for investors. Adn regarldess of the way this is phrased, you can bet the internal team will be doing exactly what the KPMG contractors tell them. I’ve been there, I know what happens. The conflict of interest should be obvious. KPMG think they can get away with this in the UK. If so and despite raised eyebrows, here’s an alternative scenario:

Companies pig sick with Sarbanes-Oxley and fed up with taking a beating in the US courts could decamp to the UK and so avoid a lot of what they see as unnecessary interference. In the process, they’d reason that cost saving is a legitimate excuse for doing so. Of course the tax haven industry would have a field day but it would represent a major coup for UK capital markets. How likely is that to happen?

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Asterix

I am somewhat surprised at the conclusion about the UK scenario. Don't the Smith Report and other similar documents on best practice corporate governance have any clout? Although not in law these reports from Cadbury and onwards seemed to carry a fair amount of weight with respect to listed companies and their corporate governance best practices. In the Smith Report it refers to the International Standards for the Professional Practice of Internal Audit and the IIA's Code of Ethics and this framework does not support the combination of external and internal audit work by one firm.Perhaps somewhere somehow it needs to be definitively stated that these two functions cannot be carried out by one entity. I further support the view that for large companies their should be an internally housed internal audit department.I think that it would be a pity if this retrograde step is allowed and if it is allowed then I think that the public will lose any sympathy it may have had for external auditors who claim they have been duped by nefarious management. You cannot have it both ways! Let internal audit be funded internally and adequately. Encourage management to hire competent personnel to run it and also the external auditors should be encouraging management and the board to acknowledge and understand the role of the internal audit function as opposed to undermining its effect so that you can get more fees.

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Asterix

I am somewhat surprised at the conclusion about the UK scenario. Don't the Smith Report and other similar documents on best practice corporate governance have any clout? Although not in law these reports from Cadbury and onwards seemed to carry a fair amount of weight with respect to listed companies and their corporate governance best practices. In the Smith Report it refers to the International Standards for the Professional Practice of Internal Audit and the IIA's Code of Ethics and this framework does not support the combination of external and internal audit work by one firm.Perhaps somewhere somehow it needs to be definitively stated that these two functions cannot be carried out by one entity. I further support the view that for large companies their should be an internally housed internal audit department.I think that it would be a pity if this retrograde step is allowed and if it is allowed then I think that the public will lose any sympathy it may have had for external auditors who claim they have been duped by nefarious management. You cannot have it both ways! Let internal audit be funded internally and adequately. Encourage management to hire competent personnel to run it and also the external auditors should be encouraging management and the board to acknowledge and understand the role of the internal audit function as opposed to undermining its effect so that you can get more fees.

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Asterix

I am somewhat surprised at the conclusion about the UK scenario. Don't the Smith Report and other similar documents on best practice corporate governance have any clout? Although not in law these reports from Cadbury and onwards seemed to carry a fair amount of weight with respect to listed companies and their corporate governance best practices. In the Smith Report it refers to the International Standards for the Professional Practice of Internal Audit and the IIA's Code of Ethics and this framework does not support the combination of external and internal audit work by one firm.

Perhaps somewhere somehow it needs to be definitively stated that these two functions cannot be carried out by one entity. I further support the view that for large companies their should be an internally housed internal audit department.

I think that it would be a pity if this retrograde step is allowed and if it is allowed then I think that the public will lose any sympathy it may have had for external auditors who claim they have been duped by nefarious management. You cannot have it both ways! Let internal audit be funded internally and adequately.

Encourage management to hire competent personnel to run it and also the external auditors should be encouraging management and the board to acknowledge and understand the role of the internal audit function as opposed to undermining its effect so that you can get more fees.

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Richard Murphy

Dennis

This is a classic case of the UK acting as a secrecy jurisidiction: which are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction.

Now in this case there's not a lot secret going it (although it's hardly transparent either) but the regulatory degradation is a key feature of what you suggest is on offer.

And it's the Big 4 doing the degrading - as ever

Richard

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