Terms of appointment and further guidance 1 July 2021

2. General principles

2.1  This section covers the requirements relating to the general principles with which all auditors should comply, including:

      • scope;
      • integrity, objectivity and independence;
      • rotation of key staff;
      • acceptance of non-Code work;
      • applications to PSAA for approval of non-Code work;
      • membership of audited bodies;
      • other links with audited bodies;
      • secondments;
      • political activity;
      • gifts and hospitality; and
      • confidentiality.

Scope

2.2  Firms must notify PSAA immediately of any change in circumstances that could affect their ability to comply with the requirements of the audit contract, the Code or the Terms.

Integrity, objectivity and independence

2.3  The Code requires auditors to carry out their work in accordance with the ethical framework applicable to auditors, including the requirements set out in the Financial Reporting Council’s Ethical Standard and to comply with the NAO’s General Guidance to Auditors contained in AGN01. In addition, PSAA has in place specific policies to guard against particular threats to the integrity, objectivity and independence of its appointed firms.

2.4  Firms must ensure that all staff who are directly involved in local audit work are familiar with the rules set out in this section of the Terms and are not aware of any interest or relationship which is in breach of these rules or which may otherwise compromise, or reasonably be perceived to compromise, their independence. The firm should report to PSAA via [email protected] where it has identified an independence issue. This is where following consultation with the firm’s Ethics department it is putting in place safeguards which it will report to those charged with governance, or where it has identified an independence issue for which appropriate safeguards cannot be put in place. PSAA should be notified at the same time the firm communicates the matter to the audited body.

2.5  Firms are required to establish procedures to identify and address promptly any potential breaches of these requirements.

Rotation of key staff

2.6  It is PSAA’s general policy that audit firm appointments to an individual body are not expected to exceed a term of twenty years. In practice PSAA favours shorter terms.

2.7  It is PSAA’s policy that Key Audit Partners at an audited body at which a full Code audit is required should act for an initial period of five years. The individual concerned should then have no further direct relationship with or involvement in work relating to the body concerned until a further period of five years has elapsed.

2.8  PSAA may approve Key Audit Partners for an additional period of up to no more than two years, if it is provided with 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.

2.9  Firms should, before the start of the sixth year on an engagement, confirm in writing to PSAA, via [email protected], that there are no independence issues which would preclude an extension of the relevant staff appointments, and indicate plans for future rotation. For the avoidance of doubt, and based on our understanding of firm practices, we would expect this to be by the end of the calendar year preceding the financial year end (i.e. December 2021 in respect of 2021/22 audits).

2.10  PSAA will not approve any further extensions and therefore a Key Audit Partner should act for no longer than seven years (continuously or in aggregate). The individual concerned should then have no further direct relationship with or involvement in work relating to the body concerned until a further period of five years has elapsed.

2.11  In line with the policy for Key Audit Partners it is not expected that an individual should act as an EQCR at an audited body for a period longer than seven years. An individual who has acted as an EQCR at an audited body for a period of seven years, whether continuously or in aggregate, should then have no further direct relationship with or involvement in work relating to the body concerned until a further period of at least five years has elapsed.

2.12  It is PSAA’s policy that, other than in exceptional circumstances, the audit manager at an audited body should be changed at least once every seven years. PSAA will approve the appointment of an audit manager for an additional period of up to three years, provided 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. Firms should before the start of the eighth year on an engagement, confirm in writing to PSAA, via [email protected] that there are no independence issues which would preclude the extension of the relevant staff appointments and indicate plans for future rotation. The individual concerned should then have no further direct relationship with or involvement in work relating to the body concerned until a further period of at least five years has elapsed. In exceptional circumstances PSAA will approve a shorter break provided 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.  The start of an engagement is as defined in paragraph 2.9.

2.13  Where an EQCR becomes the Key Audit Partner (or vice versa) at the body concerned the combined period of service in these positions shall not exceed seven years whether continuously or in aggregate.

2.14  Where an audit manager at an audited body becomes the Key Audit Partner, and/or EQCR the combined period of service in these positions shall not exceed seven years whether continuously or in aggregate. The individual concerned should then have no further direct relationship with or involvement in work relating to the body concerned until a further period of at least five years has elapsed.

2.15  For the avoidance of doubt all time periods specified apply to both continuous involvement and aggregate involvement. Only after a period of five years has elapsed where the individual concerned has had no direct relationship with or involvement in work relating to the body will the count of years be re-set to zero.

2.16  PSAA will review with firms the length of tenure of Key Audit Partners and audit managers in January of each year for the forthcoming audit year of account (e.g. Jan 2021 for 2021/22 audit year).

Acceptance of non-Code work

2.17  It is recognised 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). We define non-Code as work other than that required to meet the requirements of the Code of Audit Practice. 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.

2.18  In undertaking non-Code work audit firms must comply with the requirements of the Ethical Standard and AGN01. (AGN01 Annex 1 specifies those services which can be provided by the auditor which are explicitly excluded for the purposes of applying the 70 per cent cap).

2.19  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 nor be reasonably perceived to do so by an objective, reasonable and informed third party; and
  • the value of the work in total, in any audit year, does not exceed a de minimis amount.

2.20  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%). If the value of the work, individually or in total, for an audited 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. 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.

Applications to PSAA to undertake non-Code work

2.21  It must be emphasised that 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.

2.22  Whilst each case will be considered on its merits, PSAA expects that 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.

2.23  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 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. In addition to the information specified in paragraph 2.27 below, the agreement of the firm’s ethics partner to the departure from the guidance will be required along with details of the safeguards that will be implemented to prevent perceived or actual threats to the firm’s integrity, objectivity or independence.

2.24  Applications should be made to [email protected] at least ten working days before the proposed start of the work, setting out:

  • the nature of the work, which must include the detailed scope of work requested by the audited body;
  • the reasoning for concluding, paying particular attention to local audit responsibilities, that 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 (taking account of the requirements of the FRC 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; and
  • the estimated timescale and fee.

2.25  Applications that do not meet the requirements set out above will not be considered by PSAA.

2.26  In reviewing requests for additional work at an audited body, PSAA will consider whether:

  • the work involves the design or implementation of systems or processes that an auditor might subsequently be required to review; and
  • the subject matter may be subject to review as part of future audit work or may be the subject of public challenge.

2.27  If satisfied that in its view the proposed work will not compromise the integrity, objectivity or independence of the firm, PSAA will notify the firm’s compliance manager. The notification will specify any particular requirements of PSAA. 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.

Membership of audited bodies

2.28  AGN01 provides guidance on the requirements of the Ethical Standard relating to ‘financial, business, employment and personal relationships’ which is applicable to audits of all local public bodies.

2.29  This section specifies PSAA’s policy on the interpretation of AGN01 for those bodies where it appoints the auditor. Where it is found that an appointment has been made in contravention of this policy then PSAA will normally expect to make a new appointment.

2.30  PSAA will not appoint a firm as auditor to a body where a member or employee of the firm has accepted or holds a role whether elected or appointed (paid or unpaid) within that audited body. This extends to related bodies, such as those linked to the audited body through a strategic partnership.

2.31  The relationship principle also applies where an employee has been an elected member or employee of an audited body. Where an individual ceases to be a member or employee they should have no direct relationship with, or involvement in, audit work relating to that body for a period of at least three years.

2.32  There may be circumstances where it appears to the firm that an employee, not connected to the audit, is taking on a role such as Youth Offender Panel Member or foster carer such that they consider the threat to independence is minimal and also that the position is allowable by the Ethical Standard and AGN01. In these circumstances the firm should contact PSAA for consideration and confirmation that in its view the nature of the role does not compromise the firm’s integrity, objectivity or independence.

2.33  Key audit partners at individual local authorities, and their local audit team should not serve as a governor of any school funded from the authority’s budget.

Positive actions to assure independence

2.34  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; and
  • members of staff being employed by and joining from audited bodies.
Event Action required
Where a member of the audit team leaves the firm and within two years of ceasing to hold that position is appointed to:

  • the post of Chief Executive or equivalent, Director of Finance/Chief Finance (s151) Officer or Monitoring Officer in the audited body; or
  • any other post, including as elected member, in which the individual concerned will have the capacity – whether actual or perceived – to influence the nature and extent, and reporting of audit work at the body.
Other members of the audit team to be replaced by individuals who had not worked directly with the individual concerned in the last three years.

The firm’s Ethics Partner should determine whether any other arrangements should be put in place locally to mitigate any remaining actual or perceived threats to the independence of the auditor and/or firm.

Where a firm employs an individual who is currently employed, or has been employed within the last three years, by an audited body or an organisation that has directly provided services to an audited body. The individuals concerned should have no direct relationship with, or involvement in, audit work relating to that body where they had previously been employed for a period of at least three years.
The firm’s Ethics Partner should determine whether any other arrangements should be put in place locally to mitigate any remaining actual or perceived threats to the independence of the auditor and/or firm.
Where the spouse, partner or other close family member of a member of the audit team is:

  • employed as Chief Executive or equivalent, Director of Finance/Chief Finance (s151) Officer or Monitoring Officer;
  • elected as a Councillor or Member; or
  • appointed to any other post, in which that individual will have the capacity – whether actual or perceived – to influence the nature and extent, and reporting of audit work at the body.
The individual concerned should be rotated away from the audited body and should have no direct relationship with, or involvement in, work relating to the body concerned until a period of at least three years has elapsed since the spouse, partner or other close family member of the individual concerned has ceased to be connected with the audited body.

The firm’s Ethics Partner should determine whether any other arrangements should be put in place locally to mitigate any remaining actual or perceived threats to the independence of the auditor and/or firm.

Where a senior member of a firm’s staff, who is, or has within the last two years been, directly involved in the management, supervision or delivery of local audit work, is appointed to:

  • the post of Chief Executive or equivalent, Director of Finance/Chief Finance (s151) Officer or Monitoring Officer at a body where the auditor is from the same firm; or
  • to any other post, including as elected member (see 2.38), in which the individual concerned will have the capacity – whether actual or perceived – to influence the nature and extent, and reporting of audit work at the body.
If the former member of staff was in the chain of auditor management command, the firm should resign as auditor.

If the former member of staff was not in the chain of command, the firm’s Ethics Partner, must satisfy him/herself that appropriate arrangements are put in place locally to mitigate any actual or perceived threats to the independence of the auditor and/or firm.

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2.35  Firms may have other business relationships with audited bodies or members of those bodies, or with third parties providing services to those bodies, including for example, payment of business rates. In such circumstances firms of appointed auditors are expected to comply with the requirements of the Ethical Standard and AGN01. These will be common arms-length transactions such as the payment of business rates.

Other auditors

2.36  Firms should not accept engagements which involve, or could be perceived to involve, commenting on the opinions or performance of other PSAA appointed auditors involved in local audit work.

2.37  Where an incoming auditor is considering a Prior Period Adjustment to the financial statements they should consider whether it would be helpful to discuss the matter with the outgoing auditor.

Political activity

2.38  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 should not take part in political activity, such as canvassing or standing for office or acting as a spokesperson, on behalf of a political party or special interest group, the activities of which relate directly to the functions of local government or to a particular local government body.

Gifts and hospitality

2.39  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.

Confidentiality

2.40  Firms are required to put in place arrangements to ensure all staff working on local audits are aware of and understand the confidentiality requirements set out in legislation.

2.41  Any identified breaches in confidentiality arrangements should be notified to PSAA.

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