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November 26, 2009

FRC advises on non-audit services

The UK Financial Reporting Council (FRC) has advised larger audit firms to be cautious before entering agreements that might stretch the internal/external audit boundary.

The advice relates to a consultation on non-audit services being undertaken by the Auditing Practices Board (APB) and public concern over extended assurance services, which some firms provide in conjunction with an audit.

Former FRC chief executive Paul Boyle, who ended his tenure at the regulator this month, said the council thinks it is important audit firms and clients are aware of the steps being taken by the APB.

Recently, KPMG found its contract with pest control company Rentokil under scrutiny after it emerged that Rentokil employed the Big Four firm both as external auditor and to carry out some internal audit services.

At the time, the Institute of Internal Auditors chief executive Richard Chambers said even if allowed by law or statute, this practice creates a perceived impairment of independence and erodes public trust.

The steps the APB intends to take are:

• Work with the Audit Inspection Unit and the profession to understand the precise scope of those engagements that involve the provision of additional services in conjunction with an audit;

• Seek the views of stakeholders on the implications of auditors providing such services to their audit clients;

• Use the information obtained to determine whether such engagements, or similarly constructed packages of services, comply with the principles underlying the APB’s current Ethical Standards; and

• Consider whether the principles of Ethical Standards relating to such matters require reinforcement and, if so, in what way standards need to be amended.

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