UK watchdog bans internal, external auditor links

LONDON, June 19 Wed Jun 19, 2013 10:36am EDT

LONDON, June 19 (Reuters) - A British watchdog has banned accountants from asking customers' internal auditors directly for help in checking the books in a bid to bolster their independence.

The Financial Reporting Council, which polices accountants and auditors, said on Wednesday the ban creates a clearer division of responsibility between internal and external audit.

Internal auditors are employees of a company and one of its "three lines of defence", the other two being the compliance and risk officers.

External auditors are from outside the company and check on the financial reports of listed companies. Some use internal auditors directly on their teams, which the FRC has raised as a clear conflict of interest.

"Prohibiting direct assistance supports stakeholders' expectations that external auditors should be free from threats to their independence," FRC board member Nick Land said in a statement.

The ban, which goes beyond current international auditing standards, will apply for audits of company statements for periods ending on or after 15 June 2014.

Accounting firms have been criticised for giving banks a clean bill of health just before many had to be rescued by taxpayers in the 2007-09 financial crisis. The UK Competition Commission has said accountants can be too cosy with clients.

Hywel Ball, head of assurance at Ernst & Young, one of the world's "Big Four" accounting firms, said some assistance from internal auditors does not present a real threat to independence of the outside accountants.

"Introducing this prohibition now will add complexity to the planning of multi-location audits," Ball said.

Internal auditors at banks have also been slammed as being ineffective.

Britain's parliamentary commission on banking standards published a report on Wednesday which said heads of internal audit at banks should report directly to the board as they have lacked the status to challenge front-line staff properly.

A board member should be responsible for ensuring an internal auditor's independence, the report said, to make sure that they are willing and able to speak out when necessary.

The Chartered Institute of Internal Auditors said an independent committee will shortly report on a new code of practice for internal audits in banks and address the parliamentary recommendations.