Stay informed with free updates
Simply sign up to the Utilities myFT Digest — delivered directly to your inbox.
South East Water, the utility that left tens of thousands of customers without water for several days, still has no internal audit function nearly two years after an industry body warned regulators that this could lead to service and financial failures.
The Chartered Institute of Internal Auditors told Emma Hardy, the minister for water and flooding, that it was “deeply troubling” that no action had been taken to force the utility to appoint an internal function, despite the body flagging concerns in February 2024.
Unlike other regulated sectors, such as banking or energy, there is no requirement for English water companies to have an internal audit function. This is despite the high-profile failings at Thames Water, the UK’s biggest water company, which is struggling under a £20bn debt pile and is trying to avert renationalisation through a controversial rescue plan from creditors.
South East Water is also on regulator Ofwat’s watchlist of financially at-risk companies.
“The ongoing failures at South East Water, which have caused significant disruption to customers, demonstrate why this gap in the governance framework can no longer be ignored,” Anne Kiem, chief executive of the Chartered Institute of Internal Auditors, wrote in the letter dated last week and seen by the FT.
She added: “It is deeply troubling that nearly two years after we first flagged issues, South East Water continues to operate without internal audit […] and is now experiencing the sort of failures robust internal audit can help prevent.”
The complaint comes after about 30,000 South East customers, including hospitals, schools and care homes in Tunbridge Wells, were hit by water outages for two weeks before Christmas, with many losing water again for several days last month.
The company, which serves about 2.2mn water customers in Kent and surrounding areas, has a £1.3bn debt pile and paid out £1.2bn in interest and dividends between 2011 and 2025.
This is almost as much as the £1.5bn it spent on its capital investment — including pipe networks and storage capacity — during that 15-year period. South East Water has previously said that no external dividends have been paid since 2019 and that “interest payments are a normal cost of doing business”.
The company is owned by the Utilities Trust of Australia, which has a 50 per cent share, Canadian financial group Desjardins, with 25 per cent, and the NatWest Group Pension Fund, with 25 per cent.
South East Water said it “commissions a number of internal audits each year which are undertaken by an outsourced internal audit provider”.
It added: “These reports are reviewed by the audit and risk committee, which is chaired by an independent non-executive director.”
The CIIA urged Ofwat to make internal audit a regulatory requirement for all water companies. An internal audit would provide the utilities with independent assurance over risk management, operational resilience and business continuity, the CIIA said. It also claimed that had South East Water had such a function, it would have alerted its board to key risks so that action could have been taken more quickly.
Publicly owned Scottish Water and Northern Ireland Water have an internal audit requirement, the CIIA added. “Yet despite the critical nature of water supply, no equivalent requirement applies to water companies in England and Wales.”
Ofwat confirmed that it had not introduced a requirement for internal auditors at water companies.
It said: “All water companies are required to have an appropriate system of internal controls and to report their governance frameworks, including their leadership, audit and risk control.”
