UK energy companies urged to have internal auditors – What would it mean?
Allie Westwood 
Date published: Jul 21, 23
In November 2022, The Office of Gas and Electricity Markets (Ofgem) were urged to oblige all UK Energy suppliers to have internal audit functions in an attempt to limit the risks of insolvency. What would this mean for energy providers should Ofgem impose such requirements?
The Chartered Institute of Internal Auditors (CIIA) wrote in an open letter to Ofgem, that energy providers “are systemically important and need a robust audit and governance framework, in much the same way that we have for major financial providers.”
Since the start of 2020, there have been 35 different energy companies in the UK that have gone bust, with over four and a half million customers being affected in that time.
How could internal auditors address the issue the industry is facing?
We saw unprecedented rises in the wholesale costs of energy throughout 2021, which has continued through to 2023. Ofgem was widely criticized for failing to help companies earlier, but there has also been several instances of poor management throughout these now defunct companies.
As wholesale prices for energy soared, companies couldn’t raise their prices to match inflation due in part to the energy price cap imposed by regulators. The nationwide limit dictates the maximum energy suppliers can charge customers on standard variable tariffs per unit of gas and electricity.
The cap on prices was designed to protect customers from being overcharged for their energy, with Ofgem reassessing the cap twice per year – in April and October. However, as wholesale prices rose, it became apparent that the cap was causing systematic problems that were previously unclear.
Many energy suppliers were having to pay substantially more than they could sell energy for, causing major financial losses – leading to so many energy firms collapsing. Utility Point ceased trading in late 2021. The energy provider had 220,000 customers at the time. In a statement, they claimed the energy price cap was “set more than £200 below the costs of supplying energy”, causing the energy market to become so ‘unsustainable’.
Some argued that many companies collapsed as a direct result of poor management. The now closed-down energy company, Bulb, accused the biggest players on the market of squeezing customers. Some of their competitors, including SSE (now part of OVO Energy) called it “irresponsible to undercharge for energy” in an effort to attract new customers, which when combined with the dramatic price rises of energy itself, created an unsustainable business model, that ultimately led to more companies folding.
“As far as we can tell, none of the energy suppliers that have recently gone into administration had any internal audit capability,”
John Wood, chief executive of the CIIA
In his open letter to Ofgem, the chief executive of the CIIA, John Wood, wrote: “As far as we can tell, none of the energy suppliers that have recently gone into administration had any internal audit capability,” adding that it was likely that many of these companies that have now gone into administration “…were not sufficiently and effectively getting independent assurance on their business-critical risks, including energy market exposures, financial and liquidity risks”.
As defined by the CIIA, the role of an internal auditor is “to provide independent assurance that an organization's risk management, governance and internal control processes are operating effectively.”
John Wood’s letter ends in saying “We believe making internal audit mandatory for energy suppliers will help to reduce the risk of failure and support your ambition of stronger and financially stable energy suppliers that are better equipped to weather economic shocks in the future, which will help to ensure that energy suppliers are identifying, managing and mitigating their risks effectively.”
What are the benefits of energy suppliers undertaking internal audits?
By making internal audit mandatory, it would add a new level of security to energy suppliers, whilst simultaneously helping to make them more risk-aligned. As an internal audit team inspects an organization and their operations, they are required to publish their findings in a report addressing issues and areas of the organization that require improvement.
Through their analysis of an organization and its subsequent report, internal audits provide useful insights and assurances to senior management that supports business-critical decision making.
The use of internal audit software, such as Ideagen Internal Audit, can help improve performance, ensure rigorous compliance with regulatory requirements and helps to enhance the agility of audit teams.
In this ever-changing risk climate, internal audit has never been more integral to effective governance. As many energy suppliers in the UK battle against the risk of insolvency, introducing internal audit into these organizations would be a beneficial means to gain oversight and improve operational resilience.
