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The Chartered Institute of Internal Auditors (Chartered IIA) has raised concerns about audit weaknesses at several major water suppliers.
Chartered IIA said that Ofwat has “so far failed to put in place any requirement for water suppliers to have internal audit capability”, which would help them self-identify weaknesses. This is despite several firms that operate without internal audit, being found by the water regulator to be facing serious financial and operational challenges.
The Chartered IIA, which represents over 10,000 internal audit professionals in the UK and Ireland, is urging Ofwat to follow a similar approach to other regulators, for example the Prudential Regulation Authority and Financial Conduct Authority, and make it a mandatory requirement for water suppliers to have internal audit capability.
The letter points out that despite water suppliers providing an essential service for everyday life, there currently appears to be “no regulatory requirement for these providers to have internal audit”. This means water suppliers without internal audit capability may not be getting adequate independent assurance and assessments on their operational resilience, business continuity, corporate reputation, climate change and environmental, operating technology, financial, liquidity and other business-critical risks.
It added that research by the Chartered IIA also found that all three of the water suppliers it has found to be without internal audit capability have in recent years been placed by the regulator in the ‘action required’ category in Ofwat’s ‘Monitoring Financial Resilience’ report, which tracks the financial health of water suppliers.
This includes Portsmouth Water, South East Water and Sutton and East Surrey Water. Meanwhile, Ofwat has revealed in its latest Water Company Performance Report that South East Water is “lagging behind” and has initiated a separate investigation into the company’s supply resilience.
In the open letter to Ofwat’s chief executive David Black, the Chartered IIA’s chief executive Anne Kiem OBE said: “Despite water suppliers providing a service essential for everyday life, we are concerned that there appears to be no regulatory requirement for these providers to have internal audit. This is particularly concerning when the three water-only providers we have identified, are serving around 3.7 million customers, but are operating without internal audit. This represents a significant weakness in their audit and corporate governance framework, which we believe should be addressed by Ofwat.
“We want to see an efficient, sustainable, and secure water sector in the UK, where critical national infrastructure, consumers, businesses, and suppliers are safeguarded by reducing risks. Thus, we are keen to work with Ofwat in enhancing the audit and governance framework within the water sector.”
