Why Is There A Governance Gap In The Business Water Sector?

Following half a decade of strife, turmoil, chaos and disappointment in the water sector, 2026 is set to be the year where everything changes for business water.

The UK government has proposed A New Vision For Water, with a white paper that established the new, greater powers for the industry regulator, focused on oversight, accountability and proactive change, rather than the soft touch of Ofwat.

However, whilst the changes have been widely welcomed, there have been criticisms from activists and industry bodies alike that the measures do not go far enough and leave gaps in governance that could allow the operational failures seen at Thames Water, United Utilities and South East Water to continue.

In particular, the Chartered Institute of Internal Auditors warned of a “significant governance gap” in the water sector that has not been addressed by the New Vision for Water, and could potentially cause oversight issues that could cause existing problems to continue.

What Is The Governance Gap In The Water Sector?

According to Anne Kiem OBE, in a letter to Water Minister Emma Hardy, as reported by Water Magazine, the “significant” gap in governance in the water sector is the lack of any sort of internal audit proposals in the white paper, something considered unprecedented in other highly regulated industries.

The role of internal auditing, according to the CIIA, is to serve as an independent evaluator within an organisation that assesses the potential risk to an organisation and how those risks are controlled and minimised.

The independent auditor assesses corporate governance, internal control and risk management, with the power to report to the highest executive level.

This has never been the case for the water sector, and despite concerns being raised for years by the CIIA, this governance gap remains for the water companies in England and Wales.

They have also advocated to make it a regulatory requirement in future legislation, and offer guidelines for how it can be implemented to improve transparency and outcomes.

Why Is A Lack Of Internal Auditing Unusual For The Water Industry?

Whilst internal auditing is important for all types of organisations once they reach a certain size, complexity and level of risk, they are particularly important for certain types of companies, organisational structures and industry sectors.

In some cases, internal auditing is required, such as in financial services, local government, departments of central government and the energy sector.

This makes the lack of internal auditing requirements unusual, particularly given that this arrangement is not even universal for the United Kingdom.

Whilst the privately-owned water companies in England and Wales lack an internal auditing governance structure, Scottish Water and Northern Ireland Water require one due to being publicly owned.

Has A Lack Of Internal Auditing Caused Problems?

A proactive approach to risk management has been sorely lacking in many water companies, leading to leaks, sewage discharge, pollution incidents and the financial crises that have characterised the predicaments companies such as Thames Water find themselves in.

Ms Kiem cites the problems found with South East Water, which has faced frequent issues, a drought order in November last year and two lengthy periods where thousands of people were left without water, according to reporting by the BBC, as a reason why internal auditing is necessary.

According to the CIIA, if there was an internal auditor within South East Water who had the resources, authority and independence to thoroughly ascertain the risks, action could have been taken far sooner and potentially averted the failures in the service.

A lack of internal auditing does not allow a company’s board of directors to truly know the scale of risk, how it is being managed, the resilience strategies to avoid business disruption, continuity in the case of key personnel departures and internal controls to make quick and significant changes.

The CIIA sent a separate letter, according to Water Magazine, to the chief executive of South East Water, David Hinton, to provide support on establishing internal auditing functionality for the water company.

What Other Proposals Are In The Water Industry White Paper?

The New Vision for Water does offer several promising changes that, whilst leaving the governance gap, do provide hope that water companies will be held to account more proactively.

Health checks on infrastructure will ensure that ageing, creaking pipes and pumps are not simply allowed to break, causing untold chaos to customers, whilst a Chief Engineer will manage hands-on checks of water infrastructure rather than relying on a system of self-governance.

Finally, a performance improvement regime will mandate rapid fixes to failures and ideally prevent the need for significant fines.