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The Chartered Institute of Internal Auditors (Chartered IIA) has urged the UK Government to address what it sees as a significant governance gap in the water sector, warning that the lack of any regulatory requirement for internal audit in England and Wales is contributing to ongoing operational failures. 

In a letter to Water Minister Emma Hardy, Anne Kiem OBE, Chief Executive of the Chartered IIA, raised concerns that water companies are not required to establish or maintain an internal audit function, despite the essential nature of water services and their role as part of the UK’s critical national infrastructure.

Highlighting South East Water as a case study, the letter notes that the company continues to operate without an internal audit function, despite repeated supply failures that have left tens of thousands of households and businesses across Kent and Sussex without water for extended periods. The Chartered IIA confirmed that it first raised concerns with Ofwat and Defra in early 2024, yet South East Water’s 2025 Annual Report shows that no internal audit function has since been put in place. 

While positively reacting to the recent Government initiatives to strengthen governance in the sector, including the Independent Water Commission’s recommendations and Defra’s White Paper A New Vision for Water, the Chartered IIA notes that proposals relating specifically to internal audit remain absent. It warns that without independent assurance, company boards may lack sufficient oversight of risk management, operational resilience, business continuity and internal controls. 

The IIA letter suggest earlier intervention may have helped prevent recent service failures and “an appropriately positioned and resourced internal audit function could have alerted the Board to key risks and enabled action sooner”. 

The correspondence also highlights that Ofwat and the Drinking Water Inspectorate are currently investigating the company’s operational resilience, governance arrangements and compliance with licence conditions, and critiques Minister Hardy’s description of the situation at South East Water as “outrageous” and “unacceptable”. The Chartered IIA says it finds it “deeply troubling” that governance weaknesses persist nearly two years after concerns were first raised. 

The Chartered IIA points out that internal audit is already treated as a core governance requirement for many other regulated sectors. Energy regulator Ofgem expects suppliers to report on their internal audit arrangements in line with principles similar to the UK Corporate Governance Code, while the Financial Conduct Authority and Prudential Regulation Authority mandate internal audit for regulated financial services firms. Significantly, internal audit is mandatory for Scottish Water and Northern Ireland Water due to their public ownership, thus raising questions as to why there is no equivalent requirement for water companies in England and Wales. 

The Chartered IIA is urging the Government to require Ofwat to make internal audit a regulatory requirement for all water companies, or at the very least to issue clear guidance. It also suggests that such a requirement could be incorporated into future legislation. In the meantime, it calls for urgent action to address the absence of internal audit at South East Water. 

The Chartered IIA has invited the Minister to meet to discuss the issue further, arguing that stronger internal governance will be essential to improving resilience, accountability and public confidence in the water sector. 

The Chartered IIA has confirmed it has written separately to South East Water’s Chief Executive, David Hinton, offering support and guidance on establishing an appropriate internal audit function.