Select Committee on Treasury Appendices to the Minutes of Evidence


Letter to the Accounting Officer from the Treasury Officer of Accounts



  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  This DAO letter and attachements update the guidance given in DAO(GEN) 2/95, issued in May 1995, which is hereby superseded.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 some NDPBs.

  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 units.

  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 auditors—paragraphs 24 to 26 of the annex to this letter provide further consideration of this issue.[14]

  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 (


  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 procurement unit.

19 July 2002

14   Ev 234. Back

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