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.

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By GlobalData

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.