Nine major construction firms could be missing crucial internal audit functions that are key to identifying financial risks to firms and the industry itself, a leading auditing body has said.
Of the top 30 firms in the UK construction sector, nine “may be operating without internal audit capabilities”, the chief executive of the Chartered Institute of Internal Auditors (CIIA) has warned in a letter to the business secretary Jonathan Reynolds.
The firms all carry out public sector work including schools, hospitals, roads, water infrastructure, utilities, fire stations, train/bus stations, and council buildings/leisure centres, the letter said.
That should raise “sector-wide concerns”, and be “alarming to taxpayers and the government”, CIIA chief Anne Kiem said in her letter to Reynolds, which was also sent to Liam Byrne, the chair of Parliament’s business and trade committee.
“Even for those that have internal audit functions, these may not be appropriately positioned or adequately resourced to address the risks their businesses face,” she added.
In particular, Kiem pointed to firms that do not have internal audit committees. These are not a legal requirement in the private sector, but Kiem said they were crucial in “identifying, managing, and mitigating major risks effectively”.
Collapses in the sector have a “ripple effect” across the industry, costing people their jobs, deterring investors and hitting firms across the supply chain, she said.
“It is therefore vital that major companies have robust audit, governance, internal control, and risk management frameworks, including an appropriately positioned and resourced internal audit function, to support boards and senior management in identifying, managing, and mitigating major risks effectively.”
The claims from the CIIA have emerged from a probe into the construction sector launched following the collapse of ISG last month.
ISG – which went under owing hundreds of millions of pounds to its supply chain – could have benefitted from additional controls that could have helped it identify its financial struggles earlier, she said in her letter.
But she stopped short of saying such controls would have prevented ISG’s collapse, saying they “may have been able to help identify the issues early enough to have given the executive and the board time to prevent the eventual collapse”.
CIIA has now called for the introduction of a new requirement on all “public interest entities” – meaning they would need to establish and maintain an internal audit function by law.
“We believe that a proper third-line independent internal audit function, reporting to an audit committee, should be a mandatory requirement for all major government contractors, particularly those responsible for constructing and maintaining significant public infrastructure projects.”
The public sector already needs to produce an internal audit by law, and the CIIA said it “doesn’t see why” that should not be the case for private contractors working directly for the government.
