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UK regulator Ofwat should ensure all water companies have internal auditors given concerns over the financial stability of several big suppliers, an industry body has said.
Three water companies — South East Water, Sutton and East Surrey Water and Portsmouth Water — all lack internal audit functions, the Chartered Institute of Internal Auditors said in a letter to Ofwat chief executive David Black, placing them at greater risk of breaching their statutory duties.
“This is concerning given the complex operational and financial landscape these companies navigate, involving the management of critical national infrastructure and environmental responsibilities,” the CIIA said.
The lack of internal auditors within water companies “represents a significant weakness in their audit and corporate governance framework, which we believe should be addressed by Ofwat”, it added.
The letter comes amid growing concerns about the financial stability of several water suppliers, including the largest, Thames Water, which is under threat of being put into special administration by the regulator.
Two of the companies identified as lacking internal audit functions — South East Water and Sutton and East Surrey Water — are already on Ofwat’s watchlist of financially at-risk companies, while Portsmouth has only recently been moved out of the high-priority category. Together, the three companies supply water to 3.7mn people across south-east England.
South East Water, which is under investigation by Ofwat for service failures, declined to comment on the letter. The company spent more on dividends and interest payments than on infrastructure in the two years to March 2022. Accounts filed in January showed its parent company, HDF Holdings, lent a Luxembourg-based unit of the utility £150mn to replace third-party debt that was due to be repaid in December
SES Water, which has £291mn net debt and is in the process of being bought by Pennon for £380mn, said it “fundamentally” disagreed with the CIIA’s conclusions and that it had a “robust governance framework”.
“Our quality and compliance department conducts thorough environmental, quality and other internal audits, throughout the year,” the company said.
The CIIA said that “based on the evidence presented in their annual report and accounts, we do not regard SES to have any internal audit capability or internal audit function”.
Portsmouth Water declined to comment.
Internal auditors are hired by companies to identify business risks — from financial to cyber security and other operational risks — and independently assess how those risks are managed.
Other regulators, including Ofgem, the Financial Conduct Authority and the Prudential Regulation Authority, have internal audit capability requirements, the CIIA said in its letter.
Internal audit could help support “Ofwat’s duty to ensure that water companies can finance the proper carrying out of their statutory duties, as well as support the duty to secure the long-term operational resilience of water companies’ water supply and wastewater systems”, it added.
Ofwat said: “We have increased regulatory challenge, scrutiny and monitoring of companies that require action to improve their financial resilience . . . water companies need to make sure they have the right structure, skills and capabilities in place.”
