Rivals brand Ernst & Young's audit split as 'knee-jerk reaction' to Enron

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A rift opened up among the top accountancy firms yesterday after Ernst & Young declared that it would split internal and external audit work in the wake of the Enron scandal.

However its rival Big Five firms KPMG and PricewaterhouseCoopers criticised the move as a knee-jerk reaction. Andersen, which was auditor to the collapsed US energy giant Enron, and Deloitte & Touche are considering following E&Y.

Later this year, firms working for US companies will be forced, by the Securities and Exchange Commission, to chose between internal and external audit work for the same client. It has been suggested that performing both types of audit for the same client raises potential conflicts of interest, as the accountancy firm is, in effect, checking up on its own work.

Internal audit reviews the financial controls, processes and systems in place at a company. It is part of a company's risk management function. There has been an increasing trend to outsource this work, which often goes to the company's retained external auditor.

Howard Martin, E&Y's managing partner of business risk services, said his firm wanted to apply the same rules in the UK as in the US. He said there had been disquiet about firms undertaking both types of audit in recent years, long before Enron, but he added that the scandal over the energy giant had sharpened focus on the issue.

"A lot of this is about perception, about the two roles crossing over from time to time. This is the right thing to do, to move ahead of regulation. The others will end up following. This is the way companies want to go," Mr Martin said.

E&Y, which provides external audit for British Airways, BP, EMI and Next, said it had around 50 per cent market share of the outsourced internal audit work for FTSE 250 companies.

Rodger Hughes, UK head of assurance and business advisory at PwC, said: "My concern is that people seem to be rushing to make offerings in an attempt to placate concern about independence, rather than considering the substance of what really causes independence problems."

KPMG said it carried out internal and external audit for several UK companies and added that its clients had "expressed their complete satisfaction with the integrity of the work we do for them".