Terms of appointment and further guidance from 1 April 2018

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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 rules 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 tell PSAA via auditregulation@psaa.co.uk about independence issues where the firm has had to put in place safeguards and reported them to those charged with governance under ISA 260, or where it has identified an independence issue for which appropriate safeguards cannot be put in place.

Rotation of key staff

2.5  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.

2.6  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.

2.7  Firms should, before the start of the sixth year on an engagement, confirm in writing to PSAA, via auditregulation@psaa.co.uk, why there are no independence issues that would preclude an extension of the relevant staff appointments, and indicate plans for future rotation.

2.8  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.

2.9  PSAA does not specify at which appointments an engagement quality control reviewer (EQCR) should be appointed. This is a matter for the judgement of the auditor in applying professional standards.

2.10  No 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 five years has elapsed.

2.11  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 auditregulation@psaa.co.uk why there are no independence issues that 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 five years has elapsed.

2.12  It is important to note that it is the individual’s relationship with the audited body that is the deciding factor. The start date stays the same if the audited body is reconfigured, but largely retains the same key officers or members.

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 ten 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 five years has elapsed.

2.15  For the avoidance of doubt all time periods specified are calculated continuously or in aggregate. 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.

Acceptance of non-Code work

2.16  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 AGN01). Non-Code work is work other than that required to meet the requirements of the Code. AGN01 includes a cap on non-Code work at 70% of the annual scale audit fee in any one year.

2.17  Where additional work is required to meet the requirements of the Code this should be requested via the fee variation mechanism set out in section 5 of the Terms.

2.18  Non-Code work can be undertaken, without prior approval from PSAA, if a firm is satisfied that:

  • it is not a prohibited non-audit service under 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.

2.19  PSAA has set the de minimis amount for non-Code work as the higher of £18,000 or 20 per cent of the scale audit fee (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). For the avoidance of doubt, certification work that is not required by a grant paying body as ‘being obtained from an auditor acting as reporting accountant’ counts towards the 70 per cent cap. 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-audited services provided to exceed the de minimis amount, the auditor should obtain confirmation from PSAA that the work does not compromise the firm’s 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, consent must be sought from PSAA before work is accepted.

2.20  When the auditor provides non-audit services to an audited body which has controlled undertakings, the total of non-audit services to the group as a whole should not exceed 70% of the total scale audit fee for all audit work carried out in respect of the entity to which the auditor has been appointed by PSAA.

Applications to PSAA for approval of non-Code work

2.21  It must be emphasised that the de minimis level specified by PSAA is a threshold for reporting purposes only. Whether the value of the proposed work is below or exceeds the de minimis threshold should not affect the auditor’s judgement as to whether carrying out the proposed work would, or could reasonably be perceived to, compromise the independence of the firm.

2.22  Each case will be considered on its merits, however PSAA will not permit non-Code work where the total value of such work exceeds the cap specified in AGN01 (currently 70 per cent). The percentage cap is calculated on the scale audit fee set for the financial year to which the non-Code work relates. This limit is also applicable to additional work carried out by the auditor of a group at a controlled undertaking.

2.23  Exceptionally, if auditors consider that there are objective, proper and legitimate reasons why it would not be possible to follow the guidance on non-audit services in AGN01 they will need to obtain consent from PSAA. In addition to the information specified in paragraph 2.25 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  Firms are required to establish procedures to identify and address promptly any potential breaches of these requirements.

2.25  Applications should be made in writing by the auditor at least ten working days before the 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;
  • the justification for the auditor doing the work; and
  • the estimated timescale and fee.

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

2.27  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;
  • the subject matter may be subject to review as part of future audit work or may be the subject of public challenge; and
  • performance of the work by the auditor, as opposed to another provider, would secure better economy, efficiency or effectiveness in the use of the audited body’s resources.

2.28  If satisfied that in the view of PSAA the proposed work will not compromise the 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 any such matters and (although unlikely) may need to appoint a different auditor to undertake any review of the work carried out.

Membership of audited bodies

2.29  No member or employee of the firm should accept or hold an appointment as a member of an audited body whose auditor is, or is proposed to be, from the same firm. In addition, no member or employee of the firm should accept or hold such appointments at related bodies, such as those linked to the audited body through a strategic partnership.

2.30  This exclusion includes the appointment as a councillor at local government bodies. Where an individual ceases to be a councillor they should have no direct relationship with, or involvement in, audit work relating to that body for a period of at least three years.

2.31  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.

2.32  A former school governor may join the local authority audit team for the financial year following that in which they ceased to be a governor.

2.33  No member or employee of a firm should be employed in any capacity (whether paid or unpaid) by an audited body or other organisation providing services to an audited body whilst being employed by the firm.

2.34  Certain staff changes or appointments require positive action to be taken. These events and the action required are detailed in the table below.

Event Action required
Where a senior member of the audit team (Audit partner/manager) 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 senior members of the audit team to be replaced by individuals who had not worked directly with the individual concerned in the last three years.
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.
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; or
  • appointed to any other post, including as elected member, 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 employed by the audited body.
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, 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 Contact Partner or equivalent, must satisfy him/herself that appropriate arrangements are being put in place locally to mitigate any actual or perceived threats to the independence of the auditor and/or firm.

2.35  Firms may enter into other business relationships with audited bodies or members of those bodies, or with third parties providing services to those bodies. In such circumstances firms of appointed auditors are expected to comply with the requirements of the Ethical Standard and AGN01.

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.

Secondments

2.37  The rules applying to secondments of staff to and from audited bodies and other organisations providing services to audited bodies and members of staff returning from secondment to audited bodies and other organisations providing services to audited bodies are the same as for staff being employed by and joining from audited bodies, as described in paragraph 2.34 above.

Political activity

2.38  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, whose activities 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 any gift or hospitality offered, if it may compromise or reasonably be perceived to compromise their integrity, objectivity and independence. Examples of acceptable gifts are low value items (less than £20), such as pens, diaries, coffee mugs or other small items that have been offered as a token of appreciation. Examples of acceptable hospitality are:

  • working meals provided to allow parties to discuss or to continue to discuss business;
  • an invitation to attend a dinner or function of a non-commercial body (Society, Institute, or similar) where the member of staff represents the firm;
  • hospitality through attendance at a relevant conference or course, where it is clear the hospitality is corporate rather than personal; and
  • a modest degree of hospitality relating to celebratory functions (such as Christmas or the retirement of a senior officer).

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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