APPOINTMENT OF ACCOUNTANCY FIRMS
Contents:
Scope
Key Points
Background
Procurement
Qualifications
Capping of Liability
Payments by Results
Internal / External Audit
Relationship
Annex: Independent Accountants
Qualifications Requirements
Scope
1. This section gives guidance on the appointment of
accountancy firms to undertake non external audit work such
as internal audit, consultancy and corporate finance.
Key Points
2. There should be a presumption against accountancy
firms involved in the external audit of an organisation
undertaking non external audit work for the same
organisation. In line with best practice this policy should
apply to Audit Scotland where a member of staff of Audit
Scotland is appointed by the AGS to undertake the external
audit.
3. Non external audit services should be acquired by
competition unless there are convincing arguments to the
contrary.
4. Restrictions on accountancy firms' liability are
acceptable where they represent an appropriate balance of
risk and cost.
5. Close working relationships should be established
between the internal and external auditors.
Background
6. Under the terms of the Public Finance and
Accountability (Scotland) Act (the PFA Act) the Auditor
General for Scotland (AGS) is responsible for the external
audit of Departments and other direct funded bodies and
office-holders. The PFA Act also allowed for the
modification of enactments making the AGS responsible for
the external audit of most sponsored bodies. (Some bodies
which are wholly or substantially dependent on public funds
are themselves responsible for appointing their external
auditors e.g. bodies which have been set up as limited
companies.)
7. As well as carrying out the audit himself / herself
the AGS may appoint any qualified person to undertake the
external audit on his or her behalf which might mean a
member of staff of Audit Scotland or an employee of a
private sector accountancy firm. However, there should be a
presumption against accountancy firms involved in the
external audit of an organisation undertaking non external
audit work for the same organisation. Arguments which
support the separation of the external audit and non
external audit work include the need to avoid conflicts of
interest and the possible loss of objectivity and
independence. In line with best practice this policy should
apply to Audit Scotland where a member of staff of Audit
Scotland is appointed by the AGS to undertake the external
audit.
8. Accountancy firms involved in the external audit of
an organisation may undertake non external audit work for
the same organisation only in exceptional circumstances and
any such proposals should be cleared in advance by Scottish
Executive Finance.
Procurement
9. Non external audit services should be acquired by
competition unless there are convincing arguments to the
contrary. The procedures to be followed - including, where
applicable, compliance with European Union rules - should
be those adopted in respect of any public sector
procurement and Departments should seek the advice of their
procurement units. Accountancy firms involved in the
external audit of Departments should not be invited to
tender.
Qualifications
10. For non external audit assignments generally, there
are no formal requirements relating to membership of a
particular professional accountancy body, although
Departments should ensure that the qualifications of the
firm or person tendering for the assignment are appropriate
to the task to be performed. Guidance on qualifications
requirements for reports on grant claims or other forms of
assistance are set out in the
Annex to this section.
Capping of Liability
11. Accountancy firms may wish to include clauses in
contracts which impose a limit on their financial
obligations in the event of claims being made against them
for negligence or other reasons. In the case of non
external audit work Departments may negotiate with firms
over the terms of any restrictions on liability but they
should be satisfied that the contract represents an
appropriate and acceptable balance of risk and cost.
12. For example, if a private sector firm was to carry
out individual internal audits under the direction of the
Head of Internal Audit, the degree of risk would be low,
and the firm would have a limited prospect of being sued
other than for a sum related to the job being done. It
would therefore be reasonable to accept a limit on the
firm's liability with consequent advantages to the fee
charged for that assignment. However, if the firm was
responsible for the full internal audit service, including
drawing up an internal audit plan, advising on audit need
and producing an annual internal audit opinion, it would
have accepted a high level of risk with potentially high
claims. To safeguard the interests of the Department, the
presumption should be that the firm must accept no capping
of its liability, or at least must accept a high level of
liability.
13. Although it may be argued that firms will apply more
quality control and supervision if they perceive that their
exposure to financial loss is high, they are likely to
charge more for their services if they bear a higher level
of risk. Departments should therefore weigh up the
potentially higher cost of the service provided against the
greater confidence that the job will be well done. By
reducing their exposure to financial risk, private sector
firms are limiting the scope of Departments to seek
compensation in the case of loss and a balance must be
struck between the interests of the Department and those of
the firm. The balance of consideration should tilt towards
greater satisfaction that the work will be done properly so
that the need for redress does not arise.
Payments by Results
14. Some consultants offer services on a payments by
results basis. In certain circumstances such services could
represent a good value for money option provided that
appropriate safeguards are observed.
Internal / External Audit Relationship
15. Departments should ensure that close working
relationships are established between the internal and
external auditors. The two types of auditor should consult
each other and co-operate in order to seek opportunities to
avoid duplication of work and achieve an efficient use of
audit resources.
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Page Published/ Updated on: 21st December 2001