Subject:
Re-procurement and Appointment of External
Auditors
Date of meeting: 3 February
2020:
25 January 2022: Audit &
Standards Committee
Report
of:
Chief Finance Officer
Contact Officer: Name: Nigel
Manvell
Tel: 01273 293104
Email: nigel.manvell@brighton-hove.gov.uk
Ward(s) affected: All
For general release
1.1
The Local Audit and
Accountability Act 2014 brought to a close the Audit Commission
service and established transitional arrangements for the
appointment of external auditors and the setting of audit fees for
all local government and NHS bodies in England.
1.2
At its meeting on 10 January
2017, the Audit & Standards Committee considered a report
outlining three options for the procurement of future audit
arrangements, namely: to make a Direct Appointment, to make a Joint
Appointment with another public sector body, or to opt-in to a
national, sector-led scheme through Public Sector Audit
Appointments ltd, a special purpose company of the Local Government
Association (LGA). The Audit & Standards Committee approved the
preferred option of opt-in to the sector-led body and recommended
this course of action to Full Council on 26 January
2017.
1.3
This was approved and the
Council formally opted-in to the tender process leading to the
appointment of the external auditor on a five-year term. The
initial five-year term concludes with the audit of accounts for the
financial year 2022/23 and therefore it is necessary to put in
place arrangements to run the procurement and appointment process
for the 2023/24 audit with appointments being made on or before 1
April 2023.
2
Recommendations
That Audit & Standards
Committee:
2.1
Notes the requirements relating
to the appointment of an External Auditor to the Council for the
2023/24 audit.
2.2
Notes the letter of invitation
from PSAA for the Council to opt-in to the national scheme for
auditor appointments (Appendix 1).
2.3
Recommends that Council
formally agree to opt-in to the national scheme and adopt PSAA as
the appointing person for the Council for the appointment of
auditors for the period 2023/24 to 2027/28.
2.4
Recommends that the Council
delegates to the council’s Chief Finance Officer the
authority to take all steps necessary or incidental to give effect
to the decision in para 2.3 above.
That Council:
2.1
Formally approves the
Council’s opt-in to the national scheme and its adoption of
PSAA as the appointing person for the Council for the appointment
of auditors for the period 2023/24 to 2027/28; and
2.2
Delegates to the
council’s Chief Finance Officer the authority to take all
steps necessary or incidental to give effect to the decision in
para 2.1 above.
3
Context and background
information
3.1
By virtue of section 7 of the
Local Audit and Accountability Act 2014 (the Act), the Council is
required to appoint an independent auditor to audit its accounts
for a financial year not later than 31 December in the preceding
year. Such an appointment can be for more than one year but
the maximum term of the appointment is five years. The current
contract arrangements end with the audit of the 2022/23 financial
statements and therefore the first financial year subject to a new
contract will be the financial year 2023/24.
3.2
The Act and the Local Audit
(Appointing Person) Regulations 2015 (the Regulations) enable
authorities to choose to allow another body (specified by the
Secretary of State) to make the auditor appointment to the
authority. If the Council elects to use (i.e., opt-in to) a
specified body to make its local auditor appointment, the authority
must, within 28 days of being notified of the appointment, publish
a notice containing specified details of the
appointment.
3.3
Working with government, the
Local Government Association (LGA) has managed this process through
creation of its Public Sector Audit Appointments Ltd (PSAA)
company, a not for profit organisation set up to manage the current
appointment arrangements, which saw audit arrangements transition
from the outgoing Audit Commission in 2017. PSAA now manage the
vast majority of audit contracts in England for both the NHS and
Local Government.
3.4
In considering the appointment
options back in 2017, three options were available and the
advantages and disadvantages of each were considered by the
Committee. The options included Direct Appointment, Joint
Appointment with another public sector body, or opt-in to the
national, sector-led scheme through Public Sector Audit
Appointments ltd. To recap, the advantages and disadvantages of the
recommended option (i.e., to opt-in to the national scheme) were
and remain as follows:
Advantages/Benefits of Opt-in
to the Sector-led Appointment
3.5
The significant costs of
setting up the appointment arrangements, drawing up the detailed
specification (which has now changed substantially) and negotiating
fees is shared across all opt-in authorities. 98% of all
authorities (well over 300) opted-in last time around.
3.6
By offering large, nationwide
contract values, the audit firms are able to offer better rates and
lower fees than would be likely to result from local, direct or
joint appointment.
3.7
Any conflicts at individual
authorities would be managed by the sector-led body who would have
a number of contracted firms to call upon to undertake independent
reviews or remedies.
3.8
The appointment process would
be led by a specialist, dedicated body set up to act in the
collective interests of the ‘opt-in’
authorities.
Disadvantages/Risks of Opt-in
to the Sector-led Appointment
3.9
Individual elected members will
have less opportunity for direct involvement in the appointment
process other than through LGA and/or stakeholder representative
groups.
3.10
In order for the sector-led
body to be visible and to be placed in the strongest possible
negotiating position, the sector-led body will need councils and
other authorities to indicate their intention to opt-in before
final contract prices are known.
3.11
Since the last appointment
process there have been two main changes to the Appointing Person
Regulations laid before Parliament on 21 October 2021. The first is
that PSAA must notify local authorities of their individual Scale
Fees by 30 November each year preceding the year of audit;
previously this was much later on 31 March.
3.12
Secondly, the regulations give
PSAA much greater control over fee variations. Previously, any new
or changed financial reporting or audit standards that resulted in
additional testing by the auditor could be charged for by the
auditor outside of the national contract arrangements. This often
led to high additional charges, unregulated by PSAA and with
limited oversight. The new regulations allow PSAA to negotiate fee
variations for changes in requirements affecting the whole sector.
This should result in much lower price variations.
Improving the Quality of Local
Government Audit
3.13
There has been some negative
press in recent years regarding the quality of Local Government
audits by external audit firms. In 2018/19 approximately 57% of
audits were completed by the statutory publication date but this
reduced to 45% in 2019/20 and just 9% in 2020/21. The pandemic has
almost certainly affected performance in the latter years, however,
locally the experience has been more positive as
follows:
·
The accounts were completed and
certified by the publication date in 2018/19 (31 July).
·
Despite the pandemic, in both
2019/20 and 2020/21 the Statement of Accounts were also considered
by the Audit & Standards Committee prior to, and were published
by, the statutory publication date (30 November and 30 September
respectively). Although there were a small number of audit queries
outstanding at the reporting and publication dates, these were
resolved satisfactorily shortly after the publication dates and did
not result in any material changes to the statement of accounts in
either year.
3.14
In June 2019, Sir Tony Redmond
was asked to undertake an independent review of the effectiveness
of the new local audit arrangements and the transparency of local
authority financial reporting. The guiding principles for the
review were ones of accountability and transparency. The findings
and outcome of the Redmond Review were reported to the Audit &
Standards Committee on 12 January 2020. Some of the recommendations
are still under consideration by the Government, however, one of
the key findings was that the fee structure needed to be revised to
reflect the true cost of audit to audit firms. The Government
recognized this and provided £15 million nationally in
2021/22 (and ongoing) to support an improved quality of audit and
cover changes to audit requirements and the new Value for Money
(VFM) testing regime. BHCC has received £62,935 from this
allocation which closely matches the auditor’s fee variation
of £65,000 for the 2020/21 audit.
4
Analysis and consideration of
alternative options
4.1
A full analysis of the three
appointment/procurement options is provided at Appendix 2. In such
a highly regulated market where only the larger firms are likely to
be able to meet the requirements of the appointment process and
specification, having a sector-led body negotiating on behalf of
all opted-in authorities provides a much greater opportunity to
manage and influence the market and negotiate prices and
standards.
4.2
Note, there is no
‘in-house’ option available as external auditors must
be independent from the authority.
5
Community engagement and
consultation
5.1
No specific consultation has
been undertaken locally in relation to the appointment options,
however, the LGA and PSAA Ltd have undertaken various surveys and
consultations with local authorities and have shared the results of
these with the Chairs of Audit & Standards Committees and Chief
Finance Officers. These have generally focused on obtaining
feedback and views from local authorities aimed at improving the
appointment process, strengthening contract management and
improving the quality of audits.
5.2
The likely value of the
contracts is unknown but could be around £175,000 per annum
(including rebates) or around £875,000 over the 5 years. This
is below the Member Procurement Advisory Board (PAB) threshold of
£1m. However, even had the value exceeded £1m, Audit
& Standards Committee is considered to be a more appropriate
body to consider the options as it has both a relationship with and
understanding of the work of the external auditor, including
receiving reports on the outcome of the annual audit process and
approval of the Statement of Accounts. It also previously
determined the appointment route in 2017.
6
Conclusion
6.1
The Local Audit and
Accountability Act 2014 allows another body to make auditor
appointments on behalf of local authorities if preferred. PSAA Ltd,
an LGA company, provides a sector-led procurement and appointment
process that is expected to achieve considerably better value for
money than a local appointment process and at considerably lower
cost to the council. The appointment would be for 5 years for the
period 2023/24 to 2027/28.
6.2
Given that 98% of authorities
previously opted-in, which therefore provides substantial influence
and negotiating power over the market to PSAA Ltd, the council is
recommended to continue to opt-in to the national, sector-led
appointment process.
7
Financial
implications
7.1
There is a risk that current
external fee levels could increase significantly when the current
contracts end in 2023. Remaining opted-in to the national
collective scheme is expected to provide the best opportunity to
secure value for money by ensuring fees are as competitive as
possible through the large scale, collective procurement
arrangement.
7.2
If the national collective
scheme is not preferred, additional resources will be required to
establish a Local Auditor Panel and conduct a local procurement.
Until a procurement exercise is completed it is not possible to
predict with any accuracy what additional resources or costs may be
incurred for a local procurement.
Finance officer consulted: James
Hengeveld Date consulted:
23/12/21
8.1
Section 7 of the Local Audit and Accountability Act 2014 requires
every council to appoint a local auditor to audit its accounts for
a financial year not later than 31 December in the year before the
financial year which will be audited. Section 8 governs the
procedure for appointment, including by providing that the Council
must consult and take account of the advice of an Auditor Panel on
the selection and appointment of a local auditor. Opting-in to the
national collective appointment scheme in accordance with the
recommendation of this report removes the necessity for a local
Audit Panel.
8.2
If the Council fails to appoint
a local auditor then the Secretary of State may direct the Council
to appoint the auditor named in the direction or appoint a local
auditor on behalf of the Council.
8.3
The recommendations in the
report are proposed with a view to ensuring that the
Council’s duties to appoint an external auditor are met in
the most efficient and cost effective manner, in compliance with
the requirements of the Local Audit and Accountability Act
2014.
8.4
While Audit & Standards
Committee’s delegated functions mean that it is the most
appropriate Council body to consider these proposals and make
recommendations, the above Act requires that the appointment of a
local auditor must not be delegated, but must instead be made by
Full Council.
Lawyer consulted: Victoria
Simpson
Date consulted: 11/01/22
9.1
There are no known equalities
implications arising from this report.
10.1
Sector-led procurement is both
efficient and economical and is likely to result in the best use of
resources compared to over 300 authorities all procuring
separately. Although sustainability implications are likely to be
modest, there will be some benefits accruing from the massively
reduced number of contract documents (electronic or otherwise),
meetings (virtual or otherwise), legal engagements and paperwork
(electronic or otherwise) and so on.
11
Other Implications
Social Value and Procurement
Implications
11.1
The organisation procuring the
framework, PSAA, is responsible for ensuring the process is
compliant with the Social Value Act. However, the provision of
external audit to public authorities is so tightly regulated that
the scope for achieving wider value may be somewhat
restricted.
11.2
Although the procurement is
likely to make awards to larger audit firms with the necessary
accreditations, due to their scale many of these firms are able to
support strong social value policies including:
·
Many have charitable objectives
alongside their core business, for example, pro bono commitments to
helping develop measures of and accounting for public value
creation;
·
In particular, many support
significant opportunities for apprenticeships, internships and
other vocational experience programmes;
·
With the advent of remote
working, many are diversifying their staffing base which is
becoming less London-centric;
·
By the same token, a
significant number of people living in Brighton & Hove work for
the large London-based audit and accountancy sector, which
contributes to local prosperity and the local economy.
Crime & disorder implications:
11.3
There are no known crime and
disorder implications arising from this report.
Public health implications:
11.4
There are no known Public
Health implications arising from this report.
Supporting Documentation
Appendices
1.
Invitation to Opt-in to the National Appointment
Process
2.
Analysis of appointment options
Background Documents
1.
Link to the report and decision by Full Council on 26
January 2017 to Opt-in to the National Scheme for Auditor
Appointments. Please see agenda item 65:
https://present.brighton-hove.gov.uk/ieListDocuments.aspx?CId=117&MId=6131&Ver=4