FRAMEWORK FOR ENGAGING PRIVATE SECTOR AUDITORS BY A SUPREME AUDIT INSTITUTION

ByMuhammad Akram Khan

Former Deputy Auditor General of Pakistanmakram1000@gmail.com

1. OBJECTIVE

Supreme Audit Institutions (SAIs) have to conduct audit of public funds. With increase in the scope of government functions, the size and resources of the SAIs sometime do not increase at the same pace. The SAIs find themselves unequal to deliver the job expected of them even if budgetary resources become available. The time and effort to train appropriate number of auditors and physical resources in terms of office space, vehicle, computers, software and other office supplies cannot become available easily. There is a suggestion that the SAIs should benefit from the availability of qualified accountants and auditors in the private sector and outsource some of its responsibilities. In fact, some SAIs like Office of the Auditor General of New Zealand use private sector auditors for delivering some of their audit services. The objective of this paper is to present a general framework for engaging private sector auditors by a Supreme Audit Institution. The paper shall focus on administrative matters relating to appointment, remuneration, and determination of scope of work, oversight and ownership of the work done by private sector auditors.

2. BACKGROUND

2.1 The SAIs are generally responsible for the audit of expenditure and receipts of all l government organizations including public sector commercial enterprises and autonomous bodies. Over years, the business of government has become quite complex because of the expansion in the role of government and also because of highly complex global environment in which the government has to operate. The government is facing new challenges. The situation has become more complicated with growing demands for transparency and accountability. This has created a situation of formidable challenge for the Supreme Audit Institutions. Although all Supreme Audit Institutions are facing the challenge of keeping pace with the rapid changes and growing expectations, but the Supreme Audit Institutions of developing countries are under extreme pressure. They have not been able to go along with the changing environment. Their manpower is not adequately trained and skilled to deliver the output expected of them. Moreover, the financial resources of these

institutions have also not expanded at the same level as the government’s activities. As a result, the Supreme Audit Institutions find themselves in a very tight position. On the one hand they are expected to cope with challenge of giving an objective assessment of highly complex government functions and on the other they are pressed hard by lack of adequately trained human resources and poor financial support.

2.2 In the above circumstances, some SAIs feel that it would be a worthwhile effort to supplement their human and technical resources by engaging private sector auditors who have the necessary expertise and background for conducting audits in some areas. For this purpose, auditors qualified from the country’s prime accounting and auditing bodies like institutes of chartered accountants or institutes of cost and management accountants or from some foreign similar professional body could be an appropriate choice.

2.3 The present paper addresses the following issues relating to engagement of private sector auditors by a SAI.

Need for engaging a private sector auditor Selection of the private audit firm Agreement with the private audit firm

3. DENTIFYING NEED FOR ENGAGING A PRIVATE AUDITOR:

3.1 Normally, the need for engaging a private sector auditor should initiate from the respective Director General or Director of Audit in the field. As a good management practice, it should be generally done at the time of preparing annual plans specifying the need for support from the private sector.

3.2 The need for engaging a private sector auditor can also originate from the SAI headquarters office if it finds the field offices would not be able to cope with the volume of work.

3.3 While considering the need for a private sector auditor, the concerned officers should keep the following guidelines in view:

a) Normally, private sector auditors will be engaged for financial auditing assignments.

b) The Field Audit Office requesting to engage a private sector auditor should indicate its need in the light of human or physical of financial resources required to meet any audit assignment. In the SAIs headquarters office all such requests should be considered as a block. As a first step, resources should be re-allocated among the Field Audit

c) Offices so that need for engaging a private sector auditor is minimized. It may be possible to transfer some personnel from a sister office for a short time to meet the requirement of some other office.

d) All requests for engaging private sector auditors should be consolidated in the SAI’s headquarters office and considered in a seminar before e the annual plans are cleared and approved. In the seminar, the total number of audit issues, subjects or areas should be clearly identified. The seminar should also spell out the audit objectives and scope of various assignments.

e) The set of assignments cleared in the above seminar should be the basis for assigning jobs to the private sector auditors.

f) If during the year, SAI headquarters finds that this list should be modified, it should be possible to do so. Directors General of Audit can also make proposals to modify this list during the year for the approval of the SAI headquarters. But such modifications should come before the engagement of the private sector auditors.

4. DEFINING THE NEED

4.1 It is important that all Field Audit Offices requesting for the services of a private auditor should define their need in as specific terms as possible. Generally, they should frame their proposal with at least the following details:

(a) Define the entity or entities to be audited(b) Delineate the scope of audit [Generally, they should not be requesting for a

general financial audit. ](c) Identify the attributes and qualifications of the auditor [esp. experience required,

expertise expected, etc.]

5. SELECTION OF A PRIVATE AUDT FIRM

5.1 The selection of a suitable private firm should follow the standard practice of selecting a firm for each assignment through an open tender. The request for private sector auditors can be advertised for a wider competition. But it can also be circulated among the leading firms of auditors. In any case the request should contain all the necessary information about the service required. On a minimum, such request must contain the following:

(a) An introduction to the organization of the SAI.(b) An introduction about the Government system of accounting and the audit cycle

[starting from audit planning and terminating with the meetings of the PAC](c) Entities to be audited

(d) Location of entities to be audited(e) Scope of work(f) Contact persons in the SAI(g) Auditing standards to be followed by the auditors(h) Applicable laws for the audit assignments and those being followed by the auditee

agencies(i) The evaluation criteria for selecting the firm(j) The number of years for which the agreement will run [Normally, a multi-year

contract will be economical for both the auditors as well as the SAI](k) Expected time when the service will be required(l) Minimum qualification and experience of the auditors(m)Availability of the key personnel(n) Method and timing of payment(o) Possible assistance that the SAI will provide(p) Possibility of training the SAI staff on the job by the selected firms(q) Availability or otherwise of the past audit reports(r) Expected audit products(s) Consequences if due dates are missed(t) Offer to provide any clarification needed by the bidders

5.2 The proposal to be submitted by the bidding firms should contain, besides the information requested above, at least the following:

(a) The method of approaching and conducting the audit by the selected firm(b) Evidence that the firm is independent of the agencies to be audited(c) Evidence that the firms have a system of Continuing Professional Education of its

staff(d) System of supervision followed by the firm(e) Quality assurance practices of the firm

6. SELECTING THE FIRM OF AUDITORS

6.1 The above request for the services of a private auditing firm should aim at selecting the most firm for undertaking as assignment. Appropriate procedure for it will be as follows:

6.2 The request from the SAI should clearly say that the intending firms should submit a complete proposal for undertaking the assignment.

6.3 Simultaneously, the firms should be asked to submit the cost and fee estimates. Although, the cost and fee should not be the determining factor, yet it should carry 20%

weight while evaluating the bids. The technical side of the bid should have a weight of 80%.

6.4 The SAI should form an audit committee of senior officers of his department with the provision for associating some knowledgeable persons from outside. The committee should have the mandate of defining the parameters for selecting the firms and deciding about the most appropriate ones.

6.5 The audit committee should evaluate these proposals and decide about the selected firms.

6.6 Annex-1 to this paper contains an evaluation criteria.

7. AGREEMENT WIT THE PRIVATE FIRM

7.1 The standard agreement with the private audit firm should contain clauses relating to the following matters:

(a) Responsibilities of the auditors with deadlines for submitting the outputs(b) Audit cost(c) Relationship with the SAI and staff of the DG Audit(d) Determination of scope of work(e) Agreement on audit criteria(f) Oversight of the private auditor’s staff: periodic progress reports and meetings(g) Access to the working papers(h) Reporting format(i) Ownership of the final products(j) Payment of remuneration(k) Type and timing of the support to be provided(l) Right to modify the contract and the framework for doing so(m)Cancellation of contract(n) Arbitration

7.2 It will be advisable that the Law Department of the government vets the standard agreement.

7.3 The following points should be kept in view while drafting the standard agreement:

(a) The responsibility for planning, executing and reporting the audit results should be that of the private audit firm.

(b) The SAI has the right to associate one or more his auditors with the private sector firm to work on the job for the purpose of training. No remuneration will be paid to the auditing firm for this training.

(c) The SAI should have the right to determine and approve the scope of work. Internally, the SAI should form a committee to examine the scope of work proposals and to advise the SAI headquarters on their suitability.

(d) The auditing firm should propose the audit criteria and the should have the right to approve it.

ANNEX-1

TECHINCAL CRITERIA FOR EVALUATING PRIVATE AUDITORS

The technical criteria can vary from assignment to assignment, emphasizing certain aspects in each case. But as a general rule, the evaluation committee can adopt or adapt the following criteria. The scale of marking could be from 1 (lowest) to 5 (highest). A "yes" answer to the following questions should entitle a firm to 5 marks:

1. Does the proposal of the bidder indicate that it has a correct understanding of your objective, organization's needs and final products to be delivered?

2. Does the proposal contain a sound technical plan and a realistic estimate of the time required for completing the assignment?

3. Do you think that the bidder shall be able to abide by your timetable?4. Does the bidder's proposal indicate that the firm will use a systematic approach for

system examination and evaluation of internal controls?5. Does the proposal have a provision for using the work of other auditors, where it is

available, for avoiding duplication of effort?6. Does the firm have right type of experience in handling similar audit assignments in

the past?7. Do prior clients of the firm have a positive opinion about the firm's performance?8. Does the proposal clearly show that the collective experience and qualification of the

proposed audit team has the necessary competence to undertake the assignment?9. Is the continuing professional education of the key personnel sufficiently

documented?10. Does the proposal visualize the association of Auditor General of Pakistan's auditors

in any capacity, especially, from the point of view of their on-the-job-training?11. Does the proposal specify that any changes in the key personnel would be notified to

you in time?12. If it is a multi-year proposal, does it specify the planning and examination approach

for subsequent years?