Procurement strategy 2022

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Appendix – Risk Allocation Matrix

Introduction

The allocation and management of risk is central to all commercial contracts and is one of the core commercial principles informing the approach to contracting with third parties. Each party seeks to minimise its overall risk and maximise its reward, which creates an inherent tension between contracting parties. Effectiveness and value for money of contracted services will only be achieved where risk allocation is appropriate and where the party managing the risk is the one most reasonably able to do so.

Purpose

PSAA produced this risk allocation matrix to inform the development of its commercial model and pricing approach for contract of audit services to deliver the national scheme for local auditor appointments from April 2023. It sets outs PSAA’s assessment of the risks that each party is required to bear so provision can be made to mitigate and manage these risks in the most effective and economical manner.

Review

The risk allocation matrix will be reviewed periodically up to the point that the procurement is initiated where appropriate in the light of comments from audit firms and to ensure that it reflects the emergence of new information and any changes in circumstances.

Risk Allocation Matrix

Risk id Risk Category Explanatory comments Potential risk allocation
PSAA Audit Firms
1. Data inaccuracy Risk that inaccurate (or incomplete) data is provided to bidders during the procurement exercise leading to inaccurate pricing or solution. PSAA will make available the latest information about the audits at the commencement of the procurement, e.g. the most recent audit year completed, the scale fee and the nature and extent of recurring fee variations that are already baked into the scale fee but do not warrant the accuracy of this information. PSAA will adjust the ABNV to reflect any inaccuracies subsequently discovered in this information (see 12 below).

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2. Inflation Risk that the cost of supplier’s inputs will rise over time due to inflation. The contract will provide indexation on the price paid to audit firms based on the annual application of the prevailing rate of CPI, apart from in year 1. There is also an inflation risk for the audit firm; the cost pressures they experience may exceed their estimates and any allowance provided by an index-based adjustment. shared
3. Performance / availability Risk that the service will not be delivered to the requisite performance/availability levels. Audit firms must deliver the service in accordance with the NAO’s Code of Audit Practice and all regulatory requirements e.g. of the FRC. The contract will include a performance measure that relates to the audit firm’s stated capacity to deliver to a number of audits equal in value to the lot size plus a margin (say 5% of the lot size) for audits awarded before the end of 2022. The availability of sufficient audit resources is a supplier risk.   ●
4. Volume / demand Risk that the actual usage of the service is less than the guaranteed minimum. Local bodies that decide to opt into PSAA’s scheme are then statutorily committed to remain in the scheme for the full appointing period of five years, unless they are abolished under local government reorganisation. Contractual provision will guarantee a minimum volume of work. ●  
5. Volume / demand Risk that the actual usage of the service is greater than the lot size plus a small margin (say 5%) for audit awards before the end of 2022. PSAA may only award work in excess of this figure with the supplier’s agreement. ●  
6. Volume / demand Substantial additional work. PSAA will pay for substantial additional work and certain statutory actions as defined in the Appointing Person regulations namely

  • the consideration of the making of and the making of a public interest report or a written recommendation under Schedule 7 of the 2014 Act;
  • the exercise of any functions under section 27 of the 2014 Act in relation to the right to make objections at the audit;
  • any application to the court under section 28 of the 2014 Act for a declaration that an item of account is contrary to law or any appearance as respondent to any appeal against such a declaration;
  • the consideration of the issue of and any issue of an advisory notice under Schedule 8 of the 2014 Act;
  • any application for judicial review under section 31 of the 2014 Act or any appearance as respondent to any application for judicial review made in respect of the exercise of the auditors’ functions.

Substantial additional work will include future regulatory and code related changes unless notified to bidders in the ITT.

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7. Change in law The supplier mostly takes this risk. The supplier shall neither be relieved of its obligations to supply services under the contract nor be entitled to an increase in charges as the result of the general change in law. ● ●
8. Performance risk Risk that the services have/project has not been planned adequately for the purpose required or are not properly performed.                           Performance Indicators. Audit firms will have the responsibility for the adequacy of the planning and performance of the service provided and their compliance with the output/performance specification. The scope of local audit is fixed by third parties. It is determined by the requirements of the:

  • NAO’s Code of Audit Practice which sets the scope of the audit;
  • The Code of Practice on Local Authority Accounting published by CIPFA/LASSAC which sets the format of the financial statements;
  • HM Treasury in respect of the arrangements for Whole of Government Accounts; and
  • FRC (expected to become ARGA in the year this contract starts) who regulate the work of auditor in the application of International Auditing Standards.

PSAA will establish a series of KPIs for its quality evaluation of tenders.

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9. Delivery risk Risk that the delivery of the audit does not meet planned timescales. The Accounts & Audit Regulations effectively set a target date for completion of the audit. The past two years (2018/19 and 2019/20) have featured high levels of delayed opinions as a result of a variety of factors. As a result there is a current backlog of outstanding opinions. Audit firms must meet the target dates unless there are good reasons outside their control such as the poor preparation of audit papers or the need for statutory actions. shared risk
10. Scope of the Contract Audits are not allocated until after contract award. Audits are awarded remote from the audit firm’s principal office. Current thinking is that contract lots will be based on work of a specified value of work that is populated with named audits, reflecting a blend of authority types, after completing the tender evaluation process, in consultation with both winning firms and bodies. We are aware that audit firms expressed a preference for bidding for audits on a geographic basis. However, having considered this approach thoroughly we have concluded that it is likely to put at risk the statutory requirement on the appointing person to appoint an independent auditor to every opted-in authority. We intend to introduce a mechanism to enable bidders to reflect geographical preferences in their bids. In addition, when making auditor appointments following contract award (and therefore with audit quality matters already having been assessed), PSAA will have regard to the status of prior years’ audits and will be guided by the following principles:

  • ensuring auditor independence;
  • ensuring any minimum guarantees of work are delivered;
  • ensuring a blend of authority types for each audit firm;
  • taking account of a firm’s principal locations and geographical preferences (as specified in its tender response);
  • providing continuity of audit firm, where appropriate; and
  • accommodating joint/shared working arrangements where possible.
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11. The audit services fee Pricing for Code compliant audits where there is no substantial additional or lesser work or no statutory actions.                                                 Valuation of substantial additional work. The ITT will ask for prices based on the “audited body notional value” for 2021/22. The ABNV is the scale fee for 2021/22 plus actual and estimated recurring fee variations for 2019/20 audits. The winning bidder of each lot will be remunerated for their work to deliver Code compliant audits at a rate equal to the ABNV for that lot multiplied by its bid rate for that lot. Where individual audits currently attract scale fees that do not cover the basic costs of the audit work needed for a Code-compliant audit, PSAA propose to implement a minimum fee level at the start of the next appointing period, for the audit of the 2023/24 accounts. Our independent research indicates a minimum fee level of £31,000 should apply, based on the 2020/21 scope of audit work, to any opted-in body (a police and crime commissioner and a chief constable constitute one body for this purpose). PSAA cannot anticipate scale fees for the next appointing period at this stage because they will depend on the prices achieved in the procurement and any changes in audit requirements. Where any price increase means that the scale fee for a body does not reach the floor set by the minimum fee, the fee for that body would increase to reach the minimum level. PSAA consults each year on the fee scale and will consult in 2023 on the 2023/24 fee scale. The hourly rates used as part of the determination of the valuation of additional work will continue to be the same for all audited bodies. The winning bidder of each lot will be remunerated for additional work at a rate equal to the current rate card (which will be included in the ITT) multiplied by its bid rate for that lot. The rate card will be updated through the appointing period in line with changes to scale fees that are not related to the level of work – for example, inflation.   ●
12. Termination Risk that PSAA will terminate (or partially terminate) the contract early i.e. before the end of the initial contract term. Contractual provisions describe the conditions under which termination would be invoked, covering:

  • Insolvency or change of control
  • Material irremediable or unremedied breach
  • Persistent failure
  • Corruption, bribery, or discrimination
  • Serious security risk
  • Legislative changes.
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13. Subcontractor insolvency Risk that a subcontractor within the supplier’s or subcontractors’ supply chain becomes insolvent during the course of the contract term. The audit firm must take this risk as it is responsible for its own supply chains.  Failure in the subcontractor supply chain is explicitly excluded from the definition of a ‘Force Majeure Event’.   ●
14. Industrial action Risk of industrial action including by any of the supplier’s staff. The audit firm must take this risk as it is responsible for its own employee relations and it has the ability to control and it is a core element of service delivery. An industrial dispute relating to the audit firm’s (or any subcontractor’s) personnel is explicitly excluded from the definition of a ‘Force Majeure Event’. The audit firm must also take the risk of disruption by other industrial action e.g. the transport network but not industrial action at PSAA or the audited body.   ●
15. Force majeure Risk of unforeseen events outside of the reasonable control of the supplier, that affect the supplier’s ability to deliver any aspect of the contract to requirement time, budget, and performance. Neither Party shall be liable to the other Party for any delay in or failure to perform its obligations under the Contract (other than a payment of money) if such delay or failure results from a Force Majeure Event.  Each Party shall use all reasonable endeavours to continue to perform its obligations hereunder for the duration of such Force Majeure Event.  However, if any such event prevents either Party from performing all of its obligations under the Contract for a period in excess of six (6) Months, either Party may terminate the Contract by notice in writing with immediate effect. shared risk

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