3. General principles
3.1 This section covers the requirements relating to the general principles with which all auditors should comply, including:
- Integrity, objectivity and independence.
- Rotation of key staff.
- Non-Code work.
- Restrictions on relationships with audited bodies.
- Confidentiality.
- Engagements that may involve commenting on other auditors.
- Political activity.
- Gifts and hospitality.
- Publicity and media enquiries.
Integrity, objectivity and independence
3.2 The Code requires auditors to carry out their work in accordance with the ethical framework applicable to local audit, including the requirements set out in the FRC’s Ethical Standard and the NAO’s General Guidance to Auditors contained in AGN01.
3.3 PSAA has in place specific policies to guard against particular threats to the integrity, objectivity and independence of its contracted Firms.
3.4 Firms must have procedures in place to promptly identify and address actual and potential breaches, and ensure that all staff involved in local audit work:
- Are familiar with these requirements.
- Do not hold any interest or relationship that breaches, or could reasonably be perceived to breach, independence standards.
- Are familiar with procedures to promptly identify and address potential breaches.
3.5 Firms must report to PSAA where it identifies an actual or potential independence issue as soon as practically possible and at the same time as it is communicated to the body. This is irrespective of whether:
- Safeguards are being implemented, following consultation with the Firm’s Ethics department; or
- No appropriate safeguards can be put in place.
Rotation of key staff
3.6 PSAA imposes clear limits on the tenure of involvement by key audit staff with any individual body.
3.7 At Firm level, PSAA’s general policy is that a Firm will not be appointed to an individual body beyond a tenure of twenty years. In practice, PSAA favours shorter tenures.
3.8 A Firm may request an extension to audit key staff role beyond its initial term in the year that the initial term is due to end by confirming in writing that there are no independence issues which would preclude an extension and provide plans for future rotation. Tenure and maximum extensions are detailed under 3.10.
3.9 To approve an extension beyond a role’s initial term PSAA will require written assurance that there are no considerations such that an objective, reasonable and informed third party would conclude that an auditor’s integrity, objectivity or independence was or could be perceived to be compromised together with details of any mitigations.
3.10 The maximum total tenure of each role is set out below whether continuous or in aggregate. Once an individual has completed the maximum total term in a particular role, a mandatory break period of five years is required, during which time they must have no direct involvement with the body. The tenure period will be reset to zero following a full five-year break.
- For a KAP or an Engagement Quality Reviewer (EQR), the initial term is five audit opinions (typically years), which may be extended with PSAA’s written approval for up to a further two (so up to seven in total).
- For an Audit Manager (AM) the initial term is seven audit opinions (typically years), which may be extended with PSAA’s written approval for up to a further three (so up to ten in total).
- Where an EQR becomes a KAP (or vice versa) at a body for a combined period of service in these positions, their tenure must not exceed seven audit opinions (typically years) whether continuously or in aggregate.
3.11 Firms are responsible for ensuring compliance with the tenure and rotation requirements of KAPs, EQRs, and AMs at each body so must carefully monitor their appointments.
3.12 PSAA will review with Firms the tenure of KAPs and AMs annually in January of each year for the forthcoming audit year of accounts (e.g. January 2025 for the 2025/26 audit year), to proactively identify where rotations or extension requests may be required.
3.13 In exceptional circumstances, PSAA may approve either a shorter break period or a limited extension to the maximum term. Approval would be dependent on assurance that there are no considerations such that an objective, reasonable and informed third party would conclude that an auditor’s integrity, objectivity or independence was or could be perceived to be compromised. A possible example may be in the final year before a body ceases to exist due to local government reorganisation.
Non-Code work
3.14 PSAA recognises that the auditor may be well placed to carry out certain types of non-Code work for the audited body cost effectively, typically audit related services as defined by the FRC in the Ethical Standard (referenced in NAO guidance note AGN01).
3.15 We define non-Code as work other than that required to meet the requirements of the Code. AGN01 specifies a cap on non-Code work at 70% of the total fees for such services to the audited entity and its controlled entities in any one year.
3.16 In undertaking non-Code work Firms must comply with the requirements of the Ethical Standard and AGN01 (Annex 1 specifies those services which can be provided by the auditor which are explicitly excluded for the purposes of applying the 70% cap and in the consideration of paragraphs 3.17 and 3.18).
3.17 PSAA has set the de minimis amount for notifiable non-Code work as the higher of 20% of the scale audit fee or £18,000 (subject to the absolute AGN01 cap of 70%). The de minimis level specified by PSAA is a threshold for reporting purposes only. The auditor must exercise professional judgement as to whether carrying out the work, irrespective of its value, would, or could reasonably be perceived to, compromise the integrity, objectivity or independence of the Firm.
3.18 Where the value of non-Code work, individually or in total, for a body in any financial year would exceed or would cause the total value on non-audit services provided to exceed the de minimis amount, the auditor should obtain confirmation from PSAA that in its view the nature of the work does not compromise the Firm’s integrity, objectivity or independence before agreeing to carry out the work.
3.19 Where non-Code work is phased in a way that the amount does not meet the de minimis level in any one year but would do so in aggregate over the life of the piece of work, then the view of PSAA must be sought before work is accepted.
3.20 Non-Code work can be undertaken, without prior consideration from PSAA, if a Firm is satisfied that:
- It is not a prohibited non-audit service under either the Ethical Standard or AGN01.
- Performance of such additional work will not compromise the Firm’s independence in relation to any aspect of the Code’s requirements nor be reasonably perceived to do so by an objective, reasonable and informed third party.
- The value of the work in total, in any audit year, does not exceed a de minimis amount.
3.21 Whilst each case will be considered on its merits, PSAA expects non-Code work that does not comply with the Ethical Standard and AGN01 will generally be perceived to compromise the integrity, objectivity or independence of the Firm. The percentage cap is calculated on the scale audit fee (and approved variations) set for the financial year to which the non-Code work relates.
3.22 In accordance with AGN01 paragraph 64 in the exceptional circumstances that an auditor considers that there are objective, proper and legitimate reasons why it would not be possible to follow the guidance on non-audit services, they must obtain confirmation from PSAA that in its view the nature of the work does not compromise the Firm’s integrity, objectivity or independence before agreeing to carry out the work. The Firm must provide the agreement of the Firm’s ethics partner to the departure from the guidance along with details of the safeguards that will be implemented to prevent perceived or actual threats to the Firm’s integrity, objectivity or independence, as part of its application to PSAA.
3.23 Applications to PSAA must be made at least ten working days before the proposed start of the work and provide the following information:
- The nature and scope of the proposed work requested by the body.
- The reasoning for concluding why the work would not compromise the Firm’s independence, specifically addressing each of the six main threats to integrity, objectivity and independence recognised by the FRC Ethical Standard: self-interest, self-review, management, advocacy, familiarity, and intimidation (considering the requirements of both the FRC’s Ethical Standard and AGN01).
- Where potentially prohibited non-audit services are to be provided under the derogation arrangements set out in the Annex to AGN01 why these have an inconsequential effect on the financial statements, or arrangements to secure value for money.
- The estimated timescale and fee.
3.24 PSAA will not consider applications that do not meet the requirements set out above.
3.25 PSAA will consider in its review whether:
- The work involves the design or implementation of systems or processes that an auditor might subsequently be required to review.
- The subject matter may be subject to review as part of future audit work or may be the subject of public challenge.
3.26 If PSAA is satisfied that the proposed work will not compromise the integrity, objectivity or independence of the Firm, it will allow the non-Code work but may specify conditions. PSAA reserves its position on such matters including whether it may be necessary to appoint a different auditor to undertake any review of the work carried out.
Restrictions on relationships with audited bodies
3.27 Firms must comply with the Ethical Standard and AGN01 concerning financial, business, employment, and personal relationships, which apply to all local public audits.
3.28 PSAA will not appoint a Firm to a body where the appointment would contravene the requirements of the Ethical Standard or AGN01 guidance (relating to financial, business, employment and personal relationships).
3.29 PSAA will not appoint a Firm to a body where a member or employee of the Firm has accepted, holds or has held a role whether elected or appointed (paid or unpaid) within that body, including those linked through a strategic partnership. In the case of past roles, the individual must have no direct relationship with, or involvement in, audit work relating to that body for a period of at least three years.
3.30 Where it appears to the Firm that an employee, not connected to the audit, has a low-risk role which they consider poses a minimal threat to independence and that the position is allowable by the Ethical Standard and AGN01 (for example a Youth Offender Panel Member or foster carer), they must inform PSAA who will consider whether the role may compromise the Firm’s integrity, objectivity or independence.
3.31 KAPs at a body, and their local audit team must not serve as a governor of any school funded from the body’s budget.
3.32 Firms may have other business relationships with audited bodies or members of those bodies, or with third parties providing services to those bodies, for example, through the payment of business rates. In such cases, Firms are expected to comply with the requirements of the Ethical Standard and AGN01.
Positive actions to assure independence
3.33 Certain staff changes or appointments require positive action to assure independence. These events and the action required are detailed in the table below. The rules apply to:
- Secondments of staff to and from audited bodies and other organisations providing services to audited bodies.
- Members of staff returning from secondment to audited bodies and other organisations providing services to audited bodies.
- Members of staff being employed by and joining from audited bodies.
| Scenario | Required Actions |
|---|---|
| A Firm hires someone currently or recently (within the last three years) employed by the body or a related service provider. | The individual must not have any direct involvement with audit work at that body for three years. The Ethics Partner must determine whether any further safeguards are required. |
| A spouse, partner, or close family member of a member of the audit team holds a senior or influential role at the audited body. | The affected auditor must be rotated off the audit. They must not return to audit work at that body until three years have passed since the family member’s role ended. The Ethics Partner must review and apply any additional safeguards. |
| A senior Firm staff member (currently or within the last two years) who has overseen or delivered local audit work is appointed to a senior or influential role at the body. | If the person was in the auditor’s management chain, the Firm must resign. If not, the Ethics Partner must determine whether appropriate safeguards can be implemented locally. |
Confidentiality
3.34 Firms must have arrangements in place to ensure that all audit staff delivering local audits under the contracts:
- Are aware of and understand the confidentiality requirements set out in legislation and in clause 32 of the contract.
- Understand the expectations and restrictions relating to political activity, gifts and hospitality, and interactions with other auditors.
- Are subject to appropriate internal processes to identify, monitor, and respond to any potential breaches in these areas.
3.35 Notification to PSAA of a potential or actual confidentiality incident, such as a data breach, must be reported as soon as it is practicable to do so (clause 34.3 of the contract) with the following information to enable it to consider the matter:
- The incident or potential incident and how it occurred.
- Actions that the Firm has already taken or proposing to take.
- Details of consideration by the Firm’s information security/data protection function (e.g. decision on whether there is the need to report to ICO).
- Any communications with the audited body(ies).
Engagements that may involve commenting on other auditors
3.36 Firms must not accept engagements that involve, or could reasonably be perceived to involve, commenting on the opinions or performance of other appointed auditors engaged in local audit work commissioned by PSAA.
3.37 This restriction applies to both current and historical contracts, engagements, or activities.
3.38 Firms must notify PSAA of any incident that may involve or has involved commenting on other auditors as soon as it is practicable to do so to enable PSAA to consider the matter.
3.39 Where an incoming auditor is considering a prior period adjustment to the financial statements, they should consider whether it would be helpful to consult the outgoing auditor.
Political activity
3.40 AGN01 specifies restrictions on political activity. Partners and employees of Firms who are directly involved in the management, supervision or delivery of local audit related work must not take part in political activity where it relates directly to the functions of local government or to a particular local government body. For example: canvassing or standing for office or acting as a spokesperson, on behalf of a political party or special interest group.
3.41 Notification to PSAA of a potential or actual incident must be reported as soon as it is practicable to do so with the following information to enable it to consider the matter:
- Description of the situation.
- Actions that the Firm has already taken or proposing to take.
- How it occurred if you are reporting retrospectively.
Gifts and hospitality
3.42 Audit Partners and their staff should not accept or offer any gift or hospitality, if it may compromise or reasonably be perceived to compromise their integrity, objectivity and independence.
3.43 Notification to PSAA of a potential or actual incident must be reported as soon as it is practicable to do so with the following information to enable it to consider the matter:
- Description of the situation.
- Actions that the Firm has already taken or proposing to take.
- How it occurred if you are reporting retrospectively.
- Details of any communications with the audited body(ies), if any.
Publicity and media enquiries
3.44 Firms must not make any press announcements or publicise the Contract or any part thereof in any way without the prior written consent of PSAA, except:
- Where it is required by Law to publicise the Contract or any part thereof.
- That it may disclose its appointment as appointed auditor to the relevant body.
3.45 The Supplier shall use reasonable endeavours to procure that the provisions of Clause 35.1 are observed by the Staff and the Supplier’s professional advisors and consultants.
3.46 To request PSAA’s written consent to make any press announcement or publicise any part of the Contract, please provide a copy of the proposed content and your rationale for its issue.