ICAS guidance & recommendations for audit firms and charities on the audit tender process
Audit firms are being asked to complete charity audit tender questionnaires with information which raises ethical and legal concerns.
ICAS has recently become aware that some charities are asking audit firms, submitting tender questionnaires, to provide information on how much the firm intends to contribute to the charity’s activities each year in exchange for opportunities to promote the firm through the charity, should they be awarded the statutory audit.
The audit firm’s answer to this question is then scored as part of the overall tender evaluation.
ICAS has alerted OSCR and the Charity Commission for England and Wales about this issue.
Audit firms:
- Must refuse to make a financial contribution to a charity’s activities in exchange for the charity promoting the firm at any point in their relationship with the charity.
- Must ensure that no charity audit client advertises the firm in its promotional material.
- Should inform the charity that this practice is not acceptable.
We strongly recommend that charities remove any requests for the audit tender questionnaires which indicate that a funding contribution from the audit firm:
- Will contribute to its overall tender score.
- Can be made in exchange for promotional opportunities for the audit firm.
In addition, charities should not make requests in their audit tender questionnaires or impose conditions as part of the tender process which:
- Are contrary to the professional or ethical requirements placed on auditors.
- Could be perceived as limiting fair competition.
- Could create conflicts of interest (actual or perceived) in the selection process.
- May otherwise be contrary to the law, including the statutory duties of the trustees. In the case of charitable companies, the trustees are the directors under company law and must also comply with the statutory duties of directors in the Companies Act 2006.
ICAS has published a good practice guide Selecting your auditor (April 2018) for third sector and non-for-profit bodies. The guide explains the tender process and professional and ethical requirements which apply to the auditor, including requirements around auditor independence.
Specific considerations for audit firms: the ICAS Code of Ethics and the FRC’s Ethical Standard
All CAs are required to comply with the five fundamental ethics principles within the ICAS Code of Ethics. One of the fundamental ethics principles being “Objectivity - To not allow bias, conflict of interest or undue influence of others to override professional or business judgements.”
The Code requires CAs to use their professional judgement to identify and evaluate threats to compliance with the fundamental principles, and then apply safeguards to eliminate the threats, or reduce them to an acceptable level.
Audit firms must also adhere to the requirements within the FRC’s Ethical Standard 2016 in order to be able to demonstrate their integrity, objectivity and independence.
Accepting a charity audit client’s offer to market the audit firm in its promotional material is in contravention of the FRC’s Ethical Standard.
Section 2 of the FRC’s Ethical Standard - “Financial, Business, Employment and Personal Relationships” - provides a specific prohibition against an audit client marketing the audit firm as such a relationship is an unsurmountable threat to auditor independence.
Audit firms should specifically refer to Section 2, paragraphs 2.27 and 2.28.
