Technical audit quality is a measure for the FRC as regulator. The Ethical Standard precludes contracts that contain fees that vary according to a pre-determined measure (for example specifying a date by which an audit opinion must be given).
We monitor the quality of audit services using a package of measures. We work with firms to improve matters where service has been poor, but our contractual options are limited. Our aim is to get to a position where we can replace auditors who do not meet the quality measures within our contracts and are not able to resolve the issues. However, the current shortage makes this very challenging, and is another reason for wanting to strengthen the supplier options available to us in the future.
Our audit contracts from 2023/24 contain a range of new provisions designed to improve service delivery which are summarised below, as per our webinar in March 2022 in which we explained the new features of the contract.
We are currently developing the practical arrangements for contract monitoring aligned to these strengthened provisions.
The measures in the new contract include:
- Firms will be paid when they deliver four predefined audit milestones (each attracting 25% of the scale fee), rather than on a routine quarterly basis unlinked to on the ground delivery:
- for audit year 2023/24 where the Supplier has not been the Appointed Auditor for the previous audit year not earlier than 1 October 2023, otherwise on the production of the auditor’s annual report for the previous audit year
- production of the draft audit planning report to the audited body
- 50% of the supplier’s planned hours in respect of the audited body have been completed
- 75% of the supplier’s planned hours in respect of the audited body have been completed
- We have introduced KPIs linked to the audit delivery lifecycle and a quarterly contract monitoring review process
- There is a Review Procedure through which we can require a supplier at its own cost to amend its method statement, if the current one does not satisfy their obligations under the contract
- There is a Rectification Plan process which we may invoke if:
- the supplier fails to comply with its method statement obligations and materially impacts delivery;
- there is a supplier delay or is reasonably likely to be a delay;
- the supplier fails to achieve any KPI measure; and/or
- commits a default that has or may have an adverse effect on the provision of the Services.
- Once agreed by us, the Rectification Plan creates a supplier obligation to implement it, including rectification of past failures.
The fact remains that as now, our statutory sanction of being able to remove auditors from appointments (e.g. for performance or other issues) is largely moot as there is no surplus in the local audit market. As referenced in our press release, we had to go through several procurement stages to get enough capacity to make the appointments which is far from ideal, this would be a surplus of supply and increased competition. In this context neither we nor the system can offer any guarantees on service delivery as our contract management framework is undermined by this capacity issue. What we can guarantee is that PSAA will do all we can to help the system tackle the issues. DLUHC has publicly stated that local audit will take years to fix, and no single action will solve it.