CABINET 14 February 2017

EAST HAMPSHIRE DISTRICT COUNCIL CABINET 14 February 2017 APPOINTMENT OF EXTERNAL AUDITOR Report by Craig Smith, Head of Finance FOR RECOMMENDATION TO COUNCIL Portfolio and Cabinet Lead: Finance, Cllr Cowper 1.0 Purpose of Report 1.1 The purpose of this report is to recommend to Full Council the process for the appointment of the external auditor from the financial year 2018/19. 2.0 Recommendation 2.1 That Cabinet agree to recommend to Council that this Council opts out of the appointing person arrangements made by Public Sector Audit Appointments (PSAA) for the appointment of external auditors. 2.2 That Cabinet agree that the Head of Finance, in consultation with the Finance Portfolio Holder, implement the necessary procedural arrangements to procure the external auditors. 3.0 Summary 3.1 Following the demise of the Audit Commission new arrangements are needed for the appointment of external auditors. The Local Audit and Accountability Act 2014 requires local authorities to either opt in to the appointing person regime or to establish an auditor panel and conduct their own procurement exercise. 3.2 As part of closing the Audit Commission the Government novated external audit contracts to PSAA on 1 April 2015. The audits were due to expire following conclusion of the audits of the 2016/17 accounts, but were extended for a further year by the Secretary of State for Communities and Local Government. 3.3 This means that for the audit of the 2018/19 accounts it is necessary for authorities to either undertake their own procurements or to opt in to the appointed person regime. 3.4 There was a degree of uncertainty around the appointed person regime until July 2016 when PSAA were specified by the Secretary of State as an appointing person under regulation 3 of the Local Audit (Appointing Person) Regulations 2015. PSAA was originally established to operate the transitional arrangements

following the closure of the Audit Commission and is a company owned by the Local Government Association s Improvement and Development Agency (IDeA). 3.5 The implications of using PSAA are set out in its prospectus, which can be accessed online at http://bit.ly/2kwadym. 3.6 The key consideration for an authority that has decided to opt out and make local arrangements is the requirement to set up an independent auditor panel. The process is summarised below and in more detail in the appendix. 3.7 Regulation 19 of the Local Audit (Appointing Person) Regulations 2015 requires that PSAA be notified of the decision to opt in or opt out on the 9 th March and that a prior decision be made by the Full Council. To comply with this regulation the Cabinet is asked to make the recommendation above to Council on 23 February. The Governance, Audit and Scrutiny Committee will have an opportunity to discuss the Cabinet s recommendation on 15 February. 4.0 Process for Opting Out: 4.1 Authorities will need to opt out of the appointing person arrangements by 9 March 2017. The Local Audit and Accountability Act 2014, Section 7, requires a relevant authority to appoint a local auditor to audit its accounts for a financial year not later than 31 December in the preceding financial year. For the 2018/19 accounts a local auditor must be appointed by 31 December 2017. 4.2 There are two options open to the Council under the Act. In summary, these comprise: a) Setting up an Auditor Panel (with a majority of independent members, including the chair) and undertaking an individual external auditor procurement and appointment exercise; b) Joining with other councils to set up a joint independent Auditor Panel and undertaking a joint audit procurement and appointing exercise. 4.3 Within the period of 28 days beginning with the day on which the auditor appointment is made an opted out authority must publish a notice that: a) states that it has made the appointment, b) identifies the local auditor that has been appointed, c) specifies the period for which the local auditor has been appointed, d) sets out the advice, or a summary of the advice, of its auditor panel about the selection and appointment of a local auditor, and e) if it has not followed that advice, sets out the reasons why. The notice must be published on the council s website or in such manner as the authority thinks is likely to bring the notice to the attention of service users. 5.0 Process for Opting In: 5.1 Authorities will need to opt in to the appointing person arrangements by 9 March 2017. PSAA will commence the formal procurement process after this date. It expects to award contracts in summer 2017 and consult with authorities on the appointment of auditors so that it can make an appointment by the statutory deadline of December 2017.

5.2 PSAA will look to award contracts to five firms plus a sixth contingency firm to ensure that they can make an independent auditor appointment to every opted-in authority. PSAA has a statutory duty to consult each opted-in authority on its proposed auditor appointment. If an authority is unhappy with PSAA proposal, it can make representations to PSAA to consider and propose an alternative auditor, where this is appropriate. 5.3 Summary PSAA responsibilities include: a) PSAA will run the tendering exercise, evaluate bids and award contracts and will consult on individual auditor appointments. b) PSAA will ensure the appointment of a suitably qualified and registered auditor and expects to be able to manage the appointments to allow for appropriate groupings and clusters of audits where bodies work together, such as the Six Councils Partnership; c) PSAA will monitor contract delivery and ensure compliance with contractual, audit quality and independence requirements; d) It is expected that the large-scale contracts procured through PSAA will bring economies of scale; e) The overall procurement costs 6.0 Recommendation rationale 6.1 It is expected that opting in to the PSAA scheme would result in savings on the procurement process. The ongoing costs of external audit may be lower due to scale efficiencies. However, the main advantage to the Council in opting out is that, for the first time in its history, the Council will have the ability to manage the procurement process via the Audit Panel, determine for itself the external auditor, and commence engagement of the new external audit company. East Hampshire District Council has a commercialising strategy that is unique in local government and requires a bespoke approach. The long experience of the Finance Portfolio Holder in liaising with external auditors in the local government setting has indicated that a wider procurement approach will not be satisfactory. Cabinet is therefore asked to recommend to Council that the Council opts out of the PSAA scheme. 7.0 Implications Resources 7.1 Opting out of PSAA procurement will necessitate resourcing requirements through Legal and Finance that would need to be managed. These will be reported if they are likely to exceed budget. Legal 7.2 Local authorities are obliged to appoint external auditors. Detailed legal implications are set out in the body of the report. Financial

7.3 The current external audit firm that EHDC uses is Ernst and Young; and the cost in 2016/17 audit was 44,500 in scale fee plus 12,000 for grant certification. Procurement was previously undertaken by the Audit Commission before it was disbanded so there was no direct cost to the organisation and there will be no cost of procurement using PSAA. Procurement for external audit falls outside of the procurement responsibility within the Council s contract with Havant Borough Council and Capita. Appendix: EHDC Opt Out Briefing Paper Background Papers: PSAA Prospectus: http://bit.ly/2kwadym Agreed and signed off by: Legal Services: 6 February 2017 S151 Officer/Head of Service: Craig Smith, 3 February 2017 Cabinet Lead: Cllr Ferris Cowper, Finance, 6 February 2017 Contact Officer: Craig Smith Job Title: Head of Finance/Section 151 Officer Telephone: 02392 446624 E-Mail: craig.smith@easthants.gov.uk

PSAA Opt-Out Process Background and appointment options Under The Local Audit and Accountability Act 2014 Local authorities can appoint their own local public auditors via an auditor panel and this may be done either individually or jointly with one or more other authorities. Auditor panels must also advise the authority or authorities on the maintenance of independent relationships with the local auditor. Authorities may establish their own auditor panel to advise them on the appointment of their local auditor and there are four main options for this: Establish a separate and individual auditor panel, solely for the authority Set up a panel jointly with one or more other authorities Use an existing committee or sub-committee to act as the auditor panel (subject to compliance with the other provisions and regulations relating to auditor panels) Ask another authority s auditor panel to carry out the functions of the authority in question. Under the requirements of the Act, there is a requirement to prove that the auditor panel is independent. Criteria for an audit panel There must be a minimum of three members. There must be a majority of independent members and an independent chair. Specific regulations clarify how independence is to be defined for the purposes of auditor panels (see below) Panel members should have a certain level of specific knowledge and experience to ensure that the panel carries out its duties effectively. Authorities will need to ensure that they draft panel member job descriptions carefully and advertise widely enough to reach those potential candidates with the correct skills and experience and maximise the number of suitable applicants for those vacancies. Panel members may be paid an allowance and any reasonable expenses covered, but it is for authorities to determine such arrangements themselves. Clarifying Independence The main areas through which independence may be impaired are where the panel member has: Previous involvement within the last five years as a member or officer with the authority or another, connected authority or an officer or employee of a connected entity A relationship (familial or friendship) with a member or officer of the authority or a connected authority or with an officer or employee of a connected entity A contractual (commercial) relationship with the authority either as an individual or via a body in which the panel member has a beneficial interest, and

A possible conflict of interest through being a prospective or current auditor of the authority or, within the previous five years, is or has been: An employee of such a person Partner in a firm, or Director of a body corporate3 o which is a prospective or current auditor of the authority at the given time. Panel members can also be disqualified under section 104(1) of the Local Government Act 1972, which covers specific areas of disqualification for membership of committees and joint committees. In order to facilitate this process, it is suggested that panel members make declarations of interest that cover their family relationships and friendships, as well as any commercial relationships that may bar them from sitting on an auditor panel for any particular authority. Experience required of panel members The following list sets out some key areas in which at least some general knowledge and experience will be desirable in a panel member: Local authority finance Accountancy (public sector or commercial) Audit processes and regulation (public or private sector, external/local audit or internal audit), including more specifically, The role and responsibilities (statutory duties) of a local public auditor in local government. Recruitment/Allowances The auditor panel needs to go through a recruitment process, with posts advertised, skills and job/person specifications clearly laid out The Auditor Panel Regulations state that it is for the authority to determine what allowances it will pay to the members of its auditor panel. The Act also states that authorities must meet the reasonable expenses of its auditor panel when carrying out its duties. Function of the Panel The auditor panel must advise the authority on: The selection and appointment of the auditor Whether the authority should adopt a policy on obtaining non-audit services from the auditor, including the contents of such a policy Any proposal by the authority to enter into a liability limitation agreement Maintaining an independent relationship with its auditor The outcome of any investigation of an auditor s resignation from office, if this occurs, or on any proposal to remove a local auditor from office.

Authorities need to provide administrative/secretariat support as well as direct officer support in the form of providing advice on certain areas both during and outside of panel meetings. Additional PSAA Information (19/01/2017) All relevant authorities listed in schedule 2 of the Local Audit and Accountability Act 2014 (the Act), whether they opt in or not, are required to comply with Part 3 of the Act in relation to the appointment of local auditors. Section 7 of the Act requires a relevant authority to appoint a local auditor to audit its accounts for a financial year not later than 31 December in the preceding financial year. For the 2018/19 accounts, a local auditor must be appointed by 31 December 2017. For authorities that choose to opt into the appointing person arrangements, PSAA will appoint their auditor for them by 31 December 2017, having consulted the authority about the proposed appointment. For authorities that choose not to opt into the appointing person arrangements, there are two options available for appointing their own auditor. These are to: undertake an individual auditor procurement and appointment exercise; or undertake a joint audit procurement and appointing exercise with other bodies, those in the same locality for example. Both these options require the authority to consult and take into account the advice of its auditor panel on the selection and appointment of a local auditor. Section 9 of the Act requires a relevant authority to establish an auditor panel, section 10 sets out the functions of an auditor panel, and schedule 4 sets out provisions applying to auditor panels. An auditor panel must consist of a majority of independent members (or wholly of independent members), and must be chaired by an independent member. A guide to auditor panels for local government authorities has been issued by CIPFA. Within the period of 28 days beginning with the day on which the auditor appointment is made, section 8 of the Act requires an authority that has not opted into the national appointing person arrangements to publish a notice that: a) states that it has made the appointment, b) identifies the local auditor that has been appointed, c) specifies the period for which the local auditor has been appointed, d) sets out the advice, or a summary of the advice, of its auditor panel about the selection and appointment of a local auditor, and e) if it has not followed that advice, sets out the reasons why it has not done so. The notice must be published, if the authority has a website, on its website or in such manner as the authority thinks is likely to bring the notice to the attention of service users. Authorities that opt into the appointing person arrangements are not required to establish an auditor panel or to publish a notice under section 8 of the Act.