Corporate governance watchdogs have reignited calls for Britain's biggest companies to be prevented from paying millions in consultancy fees to their independent auditors for non-audit services.
PIRC, the advisory body for institutional investors, has urged a ban on the non-audit activity because of fears that it compromises auditors' independence and discourages them from confronting directors on difficult issues.
The Auditing Practices Board, part of the Financial Reporting Council (FRC), is to begin a consultation on non-audit fees in the next few weeks. Earlier this year MPs on the Treasury committee suggested a blanket ban on auditors selling consultancy services to their banking clients.
The FRC said the level of fees paid to auditors in the FTSE 100 for non-audit work dropped from 191% of audit fees in 2002 - almost double their traditional income - to 71% last year.
However, research by Manifest, the voting advisory service, for The Sunday Times shows a significant number of blue-chip companies last year shelled out more in non-audit fees to their auditors than for the cost of core audit work. The firms included Pennon, Experian and SAB Miller.
Advertisement
PIRC research found that many smaller companies in the FTSE All-Share paid hefty multiples of auditors' fees for their non-audit work. The biggest spenders in the 2008-9 financial year included Salamander Energy, Ashmore Group, Berkeley Group, William Hill and Premier Foods, as well as Land Securities, the FTSE 100 property company.
Auditors have long been subject to a code of ethical standards in the UK. PIRC believes this is insufficient to counter public and regulatory concern.
Sarah Wilson, chief executive of Manifest, said: "There remains a hard core of major companies that persist in paying out a high level of non-audit fees which risks undermining the independence of the audit. People have got to be seen to be beyond reproach."
Watchdogs and regulators are also concerned about new low-cost services offered by the big accountants to provide combined internal and external audit facilities.
Rentokil Initial has hired KPMG to carry out external and internal audit work. Accountancy Age magazine said that debate had been raging in the industry about the arrangement, which would be prohibited under US law and could be challenged in France.
Advertisement
Rentokil claimed the move would generate cost savings while improving the quality of the audit. Oliver Tant at KPMG, said the firm agreed the deal only after a rigorous review by its own risk department.
Ian Peters, chief executive of the Institute of Internal Auditors, said: "Internal auditors answer to management and the non-executive directors ... external audit reports to shareholders. Merging these two functions has the potential to cause serious conflicts of interest and reduce the effectiveness of internal controls and the management of risk."