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August 27, 2009

Rentokil raises conflict questions

Internal and external audit services should not be provided to a company by the same accounting firm because it impairs the independence of the external auditor, according to the Institute of Internal Auditors (IIA).

The global institute spoke out following the news that UK public company Rentokil cut its combined internal and external audit fees by 30 percent by contracting KPMG UK to provide both external audit and “some work undertaken by internal audit”.

Rentokil reported the arrangement in its interim report for the six months ended 30 June 2009.

IIA president and chief executive Richard Chambers said the Securities and Exchange Commission prohibits this practice by companies listed in the US.

“The IIA believes that even if allowed by law or statute, this practice, at a minimum, creates a perceived impairment of independence and erodes public trust,” Chambers said.

However, Institute of Chartered Accountants in England and Wales head of integrity and markets Tony Bromell said that whether or not independence has been impaired depends on exactly what internal audit services a firm is providing.

UK auditor independence rules are set by the Auditing Practices Board, which operates under the Financial Reporting Council (FRC).

“The basic rule is an auditor cannot provide internal audit services if that work would then be relied upon again by the auditor in terms of doing his own audit – it is a self review issue,” Bromell said.

Rentokil has not disclosed what type of internal audit work KPMG has been engaged in.

Bromell said that if a formal complaint was made to the FRC’s Audit Inspection Unit, the regulator would investigate. If not, it would be presumed no rules had been breached.

Bromell added that his impression of the rules in the US was that they follow the same principle as the rules in the UK – an audit firm should not perform internal audit work if they will end up relying on that information for external audit.

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