Term of external auditor appointment

Report: 7
Date: 19 July 2004
By: Treasurer

Summary

This item reports correspondence with the Audit Commission which clarifies the longer term external audit arrangements.

A. Recommendation

That members note that the Audit Commission is likely to continue as the MPA’s external audit supplier until 2010.

B. Supporting information

Introduction

1. At the last meeting of the Audit Panel (27 May 2004) I reported correspondence with the Audit Commission relating to notification of a change of District Auditor for the Authority’s external audit. In my letter of 13 May 2004, attached at Appendix 1, I sought clarification as to the Commission’s intentions for the MPA audit from April 2006. I have since received a reply from Andrew Davies at the Audit Commission (attached at Appendix 2).

Term of appointment

2. Members will see that it is likely that the Authority will retain the Audit Commission (formerly District Audit) as its external audit supplier at least until 2010. It is not clear whether this means that the arrangements whereby KPMG carry out a significant proportion of the audit in support of the Audit Commission will also continue for that period.

3. This clarification is welcome and should ensure a period of stability and continuity in our relationship with the external auditor.

C. Equality and diversity implications

None.

D. Financial implications

None.

E. Background papers

None.

F. Contact details

Report author: Peter Martin, MPA.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1: Letters

Letter from Peter Martin, MPA to Brian Willmoor, Regional Director Audit Commission

Brian Willmoor
Regional Director
Audit Commission
First Floor
Millbank Tower
Millbank
London, SW1P 4HQ

13 May 2004

Dear Brian,

Appointment of Auditor

Thank you for consulting the Authority on the proposed change of District Auditor with Mike Haworth-Maden replacing Kash Pandya (your letter to Catherine Crawford dated 6 May 2004).

Can I say first of all that we value the relationship which Kash has fostered and we regret the need for him to move on, although I understand this is in accordance with the Audit Commission’s rotation rules.

I note that the appointment of Mike Haworth-Maden is for two years up to 2005/06. This of course reflects the extension of your original appointment agreed by the Commission. That decision implies that we may have a change of audit supplier from 2006.

We already have a new audit manager about to start on our audit and the new District Auditor will become increasingly involved as we move towards the handover from Kash. There is clearly a question mark over how effective the relationship will be with new personnel if at the same time we are working towards a change in the organisation providing the audit.

I would appreciate some clarification from the Commission as to its current intentions for the MPA audit post-April 2006 and the process which will be involved and I am therefore copying this letter to Adam Broome at the Audit Commission to seek a response.

Yours sincerely,

Peter Martin
Treasurer

Letter from Andrew Davies, Senior Manager, Audit Appointments and Fees to Peter Martin, MPA

Mr Peter Martin
Treasurer
Metropolitan Police Authority
10 Dean Farrar Street
London
SW1H 0NY

REF: AGC1779-04

21 June 2004

Dear Mr Martin

Appointment of auditor

I refer to your letter of 13 May to Brian Willmor, which you copied to Adam Broome, Associate Director, Head of Audit Appointments and Performance for comment. Adam has left the Audit Commission and your letter has been passed to me for response. Please accept my apologies for the delay in responding.

I note that you are concerned that the Metropolitan Police Authority may have a change of audit supplier from 2006 and how effective the relationship' with the new members of your audit team will be if the Commission is working towards a change in the organisation providing the audit.

The Commission has no immediate plans to rotate the audit supplier responsible for the audit of the Metropolitan Police Authority as it does not meet the initial criteria outlined in the appendix that accompanied Adam Broome's letter to Catherine Crawford dated 14 July 2003. I attach a copy of that appendix for your information.

You will see from the initial criteria that, whilst the Commission does not have a formal view on the ideal length of the appointment of an audit supplier to an individual audited body, we have used a term of appointment of ten years as the 'trigger' to determine the audited bodies that would be initially eligible to be considered for rotation of audit supplier. This would indicate that the earliest that the Commission would normally seek to rotate the audit supplier responsible for the audit of the Metropolitan Police Authority would be 2010. We currently have no plans to change the criteria.

Having said the above, you will appreciate that there are a number of other factors outlined in the attached criteria that might lead to the Commission proposing a rotation of audit supplier before the ten year term is reached. These factors include the direct links or cross organisational working between types of audited bodies, logical clustering of audit appointments, balance of portfolios of appointments and the Commission's contractual commitments to private firms.

I trust that the above is helpful. Please do not hesitate to contact me if you need to discuss the matter further at this stage.

Yours sincerely

Andrew Davies
Senior Manager, Audit Appointments and Fees

Cc: Brian Willmor, Regional Director, Audit Commission

Appendix 2: Criteria for selecting audited bodies eligible for rotation of audit supplier

Introduction

1. The main purpose of rotations for 2004/05 onwards is to assist in meeting the Commission's aim of reducing the average length of time that audit suppliers are appointed at individual audited bodies.

2. The responses to the initial consultation carried out with audited bodies in February 2003 (detailed in Appendix 1), and discussions with audited suppliers, highlighted a number of issues that we have taken into account in the development of the following criteria. The reasoning behind selection of audited bodies for rotation of audit supplier will be transparent - both to audited bodies and audit suppliers.

3. The criteria included in this paper will form the basis of the Commission's criteria for future proposed changes to audit appointments. In particular these criteria replace the Commission's leaflet "Appointing auditors: the Audit Commission's approach".

Initial criteria

4. We have used the following criteria to determine the audited bodies that will be initially eligible to be considered for rotation of audit supplier:

1. the length of appointment of supplier;
2. the length of appointment of key audit team members;
3. any audited bodies that should be rotated at the same time as another one due to location, coterminous operating areas or organisational links; and
4. the temporary exclusion of the NHS trusts that are being considered for the first wave of NHS Foundation trusts.

5. Where an audited body is initially eligible to be considered for a rotation of audit supplier, we believe a change should be made to provide a fresh perspective. However, we recognise that there are other factors to be considered. Not all the audited bodies identified through the initial criteria will, therefore, be rotated during 2004/05 or 2005/06. The Commission is, however, committed to achieving a rotation at all the bodies identified as quickly as reasonably possible.

Supplementary criteria

6. The initial criteria established a list of audited bodies that are eligible for rotation. There are a number of other factors generated from the consultation that have influenced the Commission's decisions on whether to propose a rotation at a particular audited body. In exceptional circumstances these have generated a number of additional bodies that are eligible for rotation. The supplementary criteria are (not in order of priority or significance):

5. whether there is any special reason why a change should not be made (e.g. on-going investigation);
6. whether a firm is prevented from taking on the appointment due to a conflict of interest; g) the logical clustering of audit appointments;
7. the timing of changes (particularly in relation to District Council Comprehensive Performance Assessment (CPA) and the deliberations over possible regional assemblies);
8. the limitations placed on the options for change as a result of the initial round of appointments;
9. the balance of a supplier's portfolio of audit appointments undertaken for the Commission;
10. the Commission's contractual commitments to the firms with audit appointments; and
11. the views of audit suppliers and audited bodies.

Initial criteria

a) Length of appointment of supplier

8. The length of time that the current audit supplier has been appointed to an audited body is one of the most significant factors. The Commission does not have a formal view on the ideal length of the appointment of an audit supplier to an individual audited body but is conscious there are a number of long-standing appointments in some cases dating back to the Commission's formation in 1983.

9. We have, however, used a term of appointment of ten years for the current audit supplier as the `trigger' to include an audited body in the initial list of audited bodies in all cases except unitary authorities. For unitary authorities we have used a length of appointment `trigger' of six years. (The length of appointment for unitary authorities is lower than other local government bodies as, in many instances, the audit supplier was also responsible for the predecessor bodies. However, it is our intention to increase the minimum period for unitary authorities by one year on an annual basis until it reaches ten years in 2007/8).

b) Length of appointment of key audit team members

10. The Commission now normally requires both the District Auditor/Partner and Audit Manager to rotate out of the audit of an individual audited body after a period of five years. However, we recognise that the mobility of experienced personnel within the job market means that there are occasions when more frequent changes of individual audit team members occurs.

11. We have normally excluded any audited body from the initial list of possible rotations where, at the start of the year in question, either the District Auditor/Partner or the Audit Manager has been in post for only two years immediately prior to when the rotation is due to take place. We will respond constructively to issues raised by audited bodies regarding our specific proposals, where these cause significant difficulties. We have prioritised those appointments where both the audit supplier and audit teams have been in place for the longest period of time.

c) Other audited bodies

12. Where we are aware that there is a direct link or cross-organisational working between local government bodies or local government and NHS bodies we have considered whether it is appropriate to make a change at all the bodies concerned at the same time.

13. The most obvious example of this is the close working relationship between single tier local authorities and co-terminous PCTs and/or other NHS bodies. However, we also recognise that different approaches have developed in different parts of the country as evidenced by comments from both audited bodies during the initial consultation period and audit suppliers. We have, therefore, only included those other bodies where we are satisfied that there is a reasonable case for a change.

d) Temporary exclusion of some '3 star' NHS trusts

14. We believe that excluding 3 star NHS trusts that are actively considering becoming NHS Foundation trusts for, at least 2004/05, should enable time for the picture regarding the audit arrangements for these bodies to become clearer.

Supplementary criteria

e) Special reason not to change

15. The Commission has asked audited bodies and suppliers to identify where there is any special reason why a change of auditor should not be made (e.g. on-going investigation). The Commission has considered any information received in conjunction with its own information. Where appropriate we have excluded any audited body where there is a significant special reason why a change should not be made at this time. The length of time the issue remains outstanding will be kept under review through the Commission's monitoring processes.

f) Conflict of interest

16. The Commission has asked audited bodies and suppliers to identify any potential conflicts of interest which would prevent any of the available audit suppliers from being appointed as the external auditor. In all cases these have been investigated and where applicable the Commission has not considered a particular supplier for that audited body.

g) Logical clustering of audit appointments

17. The Commission is proposing changes to audit appointments where we believe this will improve (and if possible maximise) the opportunities for joining up external audit supply at the local level.

18. This has been a particular theme raised by health bodies. We have received several requests to appoint a single audit supplier to all health bodies within a local `health economy' or strategic health authority area, This potentially cuts across the Commission's aim of promoting cross organisational working in areas where there are geographically `remote' unitary authorities or groups of a small number of single tier authorities.

19. Whilst we understand the concerns raised by audited bodies, we are committed to maintaining a mixed market of specialist audit suppliers within a framework area. However, where there is scope to further reduce the perception of duplication of audit effort through minimising the number of suppliers operating within a 'sub-area' of a framework area we have done so.

h) Timing

20. The Commission is looking to agree the complete set of appointments for 2004/05 and the majority of appointments for 2005/06 during this current process. Two key factors which will affect the timing of our proposals are CPA and potential Local Government Review (LGR) as a result of the deliberations regarding regional assemblies.

21. In terms of CPA, the timing of the majority of the proposed changes reflects the latest District Council CPA timetable and we are minimising the changes proposed when bodies are going through the CPA process.

22. In terms of LGR, any proposed changes in areas affected by potential LGR deliberations are being proposed for the 2004/5 financial year to maximise the time a new auditor is in post at a particular audited body prior to any possible change to the structure/responsibilities of that audited body in the event of any subsequent reorganisation.

23. The proposed rotations are also phased to ensure that they are achievable in an effective manner by audit suppliers.

i) Limitations arising from previous rotations

24. The award of framework contracts in some areas and the subsequent large scale changes to appointments within them last year means that the number of rotations possible in 2004/05 is reduced. However, we are committed to making changes in future years.

j) Balance of portfolio of appointments

25. Our aim is to provide all audit suppliers with a portfolio of audit appointments covering the full range of the Commission's remit. However, we recognise that the specific contract limits for some of the firms means that this is not always possible in all parts of the country. We have also taken account of the location of national or regional `specialists' within audit suppliers (e.g. if there is a `specialist' in the audit of police authorities based in the Midlands, we have avoided proposing changes in that area which would result in that individual no longer being responsible for any police audits in that area).

k) The Commission's contractual commitments to private firms

26. The Commission has framework contracts with private firms in each region of the country which guarantee a minimum level of work. As a general principle, where the Commission proposes a rotation, the supplier gaining work will also be losing work to roughly an equivalent value elsewhere in the same framework area. There are however a number of contracts and a number of suppliers where private firms work is due to either grow or reduce and this has been reflected in our final proposals. This contractual commitment may cause additional bodies to be identified for rotation over and above those which fall naturally out of the other initial criteria. This will be explained to affected bodies during the consultation process.

l) The views of audited bodies

27. The Commission is committed to a full and open consultation, process with audited bodies. We will respond appropriately to concerns expressed by audited bodies but it is worth re-stating the Commission's view that simply not wishing to have a change of audit supplier (or seeking a change without good reason) is not a sufficient reason for us to change our proposals.

28. Where an audited body has already expressed an interest in a rotation of audit supplier, but it does not meet the initial criteria, a rotation has still been considered. The rotation has been considered in the light of information from audit suppliers, our own records and the above criteria prior to reaching a final decision on whether to propose a change.

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