Letter to the Accounting Officer from
the Treasury Officer of Accounts
APPOINTMENT OF ACCOUNTANCY FIRMS TO AUDIT
AND OTHER ASSIGNMENTS IN THE PUBLIC SECTOR, AND NATURE OF THE
THIS DAO LETTER
1. This DAO letter and attachements update
the guidance given in DAO(GEN) 2/95, issued in May 1995, which
is hereby superseded. Although the main principles described in
DAO(GEN) 2/95 remain valid, the updated guidance provides more
information concerning the roles and responsibilities of the external
auditors of non-departmental public bodies (NDPBs) and has a wider
coverage than its predecessor.
2. The paper clarifies a number of issues
concerning the extent to which external auditors should be permitted
to undertake non-external audit work (such as consultancy or internal
audit work), and considers the circumstances in which departments
might agree to a firm capping the extent of its liability.
3. The guidance addresses three issues:
the procedures for appointing accountancy
firms to audit and other assignments;
various aspects relating to the nature
of the assignment; and
the responsibilities of the external
auditors of executive NDPBs.
4. This guidance applies in cases where
a department or its Minister is responsible for appointing private
sector firms to external audit assignments. It applies mainly
in respect of NDPBs not audited by the C&AG, public corporations
and nationalised industries. It does not apply in cases where
the Comptroller and Auditor General is the statutorily appointed
auditor, eg in the case of executive agencies, trading funds and
5. Although the guidance is aimed primarily
at external audit appointments, its recommendations may be helpful
when considering applications for other assignments such as those
for internal audit, corporate finance or taxation advice.
6. Departments which sponsor bodies which
are largely dependent upon public funding but which are responsible
for appointing their own auditors may wish to encourage the bodies
to follow the recommendations in the paper.
7. The guidance on the responsibilities
of the external auditor of an NDPB will apply to all NDPBs
whether the auditor is the Comptroller and Auditor General or
has been appointed by the Secretary of State. Although not directly
aimed at public corporations and nationalised industries, the
guidance will also be of interest to those bodies.
8. Appointments to audit and other accountancy
assignments are in principle no different from any other public
sector procurement for the supply of a service, and departments
should seek the advice of their procurement units when considering
the procedures to be adopted.
9. Departments should bear in mind that
audit and other accountancy assignments may fall within the scope
of the EC Services Directive which has been implemented
in the Public Services Contract Regulations 1993 (SI 1993/3228).
The memorandum does not provide a comprehensive interpretation
of the Regulations, and departments should consult their procurement
10. Audit appointments should be formally
re-tendered at least every five years. Where there are statutory
provisions for the auditor to be re-appointed annually, the contract
should be placed for a period of five years, but include provisions
for annual re-appointment.
11. A partner should not remain in charge
of an audit for a period exceeding seven consecutive years; the
attached annex A includes further provisions regarding the rotation
of the audit partner in the event of the incumbent firm retaining
the contract following a re-tendering exercise.
12. Guidance to departments on the circumstances
in which they might negotiate with private sector firms over any
conditions in the firms' contracts which sought to restrict
their liabilities was given in a letter to PFOs dated 6 May
1997 Restriction of Liability in Contracts for Public Sector
Auditing and other Financial Assignments. The conclusions
reached in that letter were that departments might accept restrictions
on a firm's liability if the overall result was that the contract
represented value for money for the department. This was to be
demonstrated by evidence of any benefits which the department
gained by accepting a limit on the firm's liability.
13. Since that letter was issued, the policy
has been refined to the extent that the argument for accepting
a limitation on a firm's liability rests on a balance of the risk
and cost. The annex to the letter to PFOs sets out in more detail
the conclusions reached. It is reproduced as Appendix D below.
It should be read in the context of the further guidance set out
in paragraph 32 to 35 of the annex below.
14. Firms successful in winning assignments
for external audits should not normally be invited to tender for
any non-external audit work, such as consultancy or internal audit
assignments. There is a presumption against firms acting as both
internal and external auditorsparagraphs 24 to 26 of the
annex to this letter provide further consideration of this issue.
Departments may wish to impose restrictions
on the value of any non-external audit work which is undertaken
by the external auditors (ie where the non-external audit work
is not put out to tender).
15. Details of the responsibilities of
the external auditor in the audit of an NDPB have been revised
and are now given in Appendix C to the annex to this letter.
16. The Public Audit Forum is a group set
up by the four national audit agencies (the National Audit Office,
the Northern Ireland Audit Office, the Audit Commission and the
Accounts Commission for Scotland) to provide a focus for developmental
thinking in relation to public audit. It has published three papers
The Principles of Public Audit; The Implications for Audit
of the Modernising Government Agenda and What Public Sector
Bodies Can Expect from their Auditors, copies of which can
be obtained from the Forum's website (www.public-audit-forum.gov.uk.)
17. Departments should send copies of this
letter to their sponsored bodies.
18. Enquiries about the accounting aspects
of audit and related assignments should be addressed initially
to the departmental accountancy adviser or internal audit team,
and questions affecting procurement aspects to the departmental
19 July 2002
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