Supporting a positive outcome. Practical guide to audit tendering

Transcription

1 Supporting a positive outcome Practical guide to audit tendering March 2017

2 Contents Introduction 1 1. When to tender 2 2. Ensuring appropriate governance 3 3. Forward planning 4 4. Tender objectives 8 5. Ensuring an effective and efficient process 12 Appendices 18 A Request for Confirmation of Independence 20 B Invitation to tender ( ITT )/Request for proposal ( RFP ) guidance 21 B Invitation to tender/request for Proposal pro forma letter 22 C Information to be provided to bidders 23 D Indicative proposal timetable 24 E Potential assessment criteria 26 Contacts 28

3 Introduction In response to changes in regulation, audit tendering has reached unprecedented levels in recent years. Audit tender status in the FTSE 350 since 31 October Both firms and tendering companies have increasingly professionalised their approaches; planning ahead, focusing on key criteria and innovation as well as minimising cost and disruption. There is no single best way to conduct an audit tender, but dealing with five key questions can underpin a successful process. 1 When 17% 39% should we tender? 44% Retained Switched Yet to tender Companies are free to tender at any time but in practice most have tendered to coincide with a rotation of their Lead Audit Partner and in compliance with the pertaining regulations which are: a) The Competition and Markets Authority (CMA) Order which introduced mandatory audit tendering every ten years for FTSE 350 companies incorporated in the UK, and emphasises the role of the Audit Committee. b) EU Audit Regulation 537/14 (EU Regulation) (now implemented in to UK law through the Statutory Auditors and Third Country Auditors regulations 2016 (SI 2016/649 amendments to Part 16 Companies Act 2006)). This sets out tendering and audit firm rotation regulations and provisions related to the conduct of an audit tender. c) Revised UK Corporate Governance Code which includes a disclosure provision on tendering and applies to all premium listed companies (including those in the FTSE 350, whether incorporated in the UK or overseas). Each of these regulations affects companies in different ways, depending on the tenure of their auditor. 2 How do we ensure appropriate governance? There is a greater emphasis on the involvement of the Audit Committee Chair and the Audit Committee as a whole. Provisions in each of the new regulations prescribe this. Shareholder consultation is also increasingly important and industry regulators may also take an interest. A publication issued by the FRC in February 2017 (Audit Tenders Notes on Best Practice) provides, amongst other comments on tendering, the results of round table discussions involving audit committees and investors including the expectations that were expressed in these sessions. 3 What should be done well ahead of time? Forward planning helps ensure that the audit tender is properly reflected within the company s broader business priorities. In particular, careful due diligence in relation to firms competencies, conflicts and especially independence is a critical element of success. The EU Regulation prohibits the arbitrary exclusion of (smaller) firms and contains strict specific independence requirements; further heightening the need for forward planning. A sensible investment of time getting to know shortlisted firms and their proposed teams also helps ensure that each of the shortlisted firms has at least a fair chance and that the formal tender process can be shortened. 4 What do we want to achieve? The EU Regulation requires the communication of fair and transparent criteria which helps decision makers focus their tender process on those areas most important to them. Early discussion also of course tends to promote consensus. 5 How can we ensure effectiveness and efficiency? Clear rules of engagement and project management responsibilities from the start are normally better for both the tendering companies and the firms. Careful planning and management of data provided and access to key people ensures that firms are properly informed. The best tenders also go beyond compliance and create at least some opportunities for firms to develop and test their ideas. Specification of submissions and presentation requirements can help promote meaningful comparison of firms to assist in the final evaluation. An effective process ends with clear communication of results to stakeholders. This practical guide has been produced to help companies answer these questions and conduct an audit tender which is right for their organisation. 1

4 1. When to tender Companies can conduct tenders whenever they wish, for example if the business need or service issues support it. However, regulatory change is driving substantially increased levels of audit tendering, so it is important to understand how these developments apply to your organisation. The Competition and Markets Authority (CMA) Order The CMA Order applies to financial years beginning on or after 1 January 2015 and requires FTSE 350 companies to tender their audits every ten years. The CMA actually encourages even more frequent tendering and requires additional disclosure in companies annual reports when audit tenure reaches five years. This disclosure must include companies intentions in relation to audit tenders and their reasons, in the best interests of shareholders. So far companies have not been keen to tender more often than the regulations require. N.B. All premium listed companies including those in the FTSE 350 (whether incorporated in the UK or overseas) will also continue to be subject to a disclosure provision on tendering. This is because the revised UK Corporate Governance Code provides that the audit committee should explain the approach taken to the appointment of the statutory auditor, length of the incumbent s appointment, when a tender was last held and advance notice of any re-tendering plans. EU Regulation The EU Regulation entered into force in June 2014 and is effective from 17 June The rules apply to Public Interest Entities (PIE), as defined alongside, and normally require mandatory firm rotation after a maximum of 10 years. Implementation of the EU Regulation can however vary from country to country across Europe. The UK, for example has taken up an option allowed by the EU to extend the maximum audit tenure to 20 years subject to a competitive tender after 10 years. Some EU Member States have mandatory rotation periods of shorter than 10 years. These variations can cause practical difficulties which will need to be planned for. Transition provisions The new rules under both the CMA Order and the EU Regulation are subject to transition provisions which are based on auditor tenure at 16 June For the CMA Order this runs from the date of auditor appointment. For the EU Regulation however, this runs from the date that the auditor was appointed to the entity as a PIE. Where the two differ the Regulation which requires the earliest tender will apply. Interpretation of the rules can be complex. Where there are doubts the FRC and/or where applicable, the Competition and Markets Authority can be consulted. A Public Interest Entity is defined as: Entities governed by the law of an EU member state with transferable securities listed on an EU regulated exchange Entities incorporated outside the EU, for example, in the Channel Islands, will not be caught by this part of the definition. ESMA, the European markets regulator, publishes a list of regulated exchanges. Exchanges such as AIM and the lower Luxembourg Bourse are not included. Credit institutions This will include all firms licensed by a financial services regulator within the EU to take deposits. Insurance undertakings This will include all firms who undertake regulated insurance activities but not, for example insurance brokers. Details of how the transition provisions apply to companies, depending on audit tenure are set out below. In practice most companies have also planned their tenders to align these regulatory requirements with the rotation of the Lead Audit Partner. Tenure at 16 June 2014 If 20 years or more 2 When to tender EU Regulation (tenure based on date the appointment to the enitity as a PIE) Rotation of appointment of first financial year starting after 17 June 2020 CMA Order (tenure based on auditor appointment date) Mandatory tender at next appointment after 17 June 2020 If years Rotation of appointment for first financial year starting after 17 June 2023 Mandatory tender at next appointment after 17 June 2023 If less than 11 years When the start of the first financial year covered in the audit engagement letter was between 17 June 2003 and 16 June 2006 (i.e. those where auditor tenure is more than 10 years prior to the 2016 application date) PIEs need to tender and make an appointment such that the new audit engagement takes effect for the next financial year beginning after 16 June The remainder of PIEs (i.e. those where auditor tenure is less than 10 years at 17 June 2016) must count 10 years from the first financial year covered in the audit engagement letter and apply the new regime to auditor appointment for the first financial year beginning after that date. Companies must apply the new 10 year tendering regime for audit appointments made on or after 17 June 2016 (i.e. they will need to tender within 10 years of the last audit tender).

5 2. Ensuring appropriate governance involving the right people In public companies and most other organisations in the UK, the Board is responsible for the audit appointment, which is, in turn, ratified by the shareholders at an Annual General Meeting. The role of the Audit Committee For many years, the Audit Committee has been formally responsible for recommending the auditor appointment to the Board. This overall responsibility has recently been reconfirmed in the CMA Order, EU Regulation and the UK Corporate Governance Code. While the formal responsibility of the Audit Committee in recommending auditor appointment has long been recognised, in practice its interpretation has differed. For some, tender process approval and the Audit Committee Chair attending the final presentations and chairing a decision discussion has been considered adequate. At the other end of the range, some companies have sought to exclude Management from the selection process, other than providing information to the bidding firms. In most cases, decisions have been collaborative, involving the Audit Committee Chair (and increasingly other Audit Committee members) and Finance Management. Tenders are normally more successful when responsibilities are clearly agreed up front, including what would happen should there be disagreement about the final outcome. Both the CMA Order (Part 5) and EU Regulation (Article 16) contain specific additional provisions, which reinforce the Audit Committee s leadership role in a tender process (see below). These new provisions suggest a more explicit distinction between those providing information to bidders to help them put their tenders together and supporting the decision makers (typically Management) and those who will make the decision (the Audit Committee). The CMA Order does allow the Audit Committee to consult anyone it deems appropriate, but it does suggest much greater overall control of tenders for Audit Committees. Involving Shareholders Given the rights of shareholders, good practice would suggest a consultation with them before starting any tender. In some cases, companies have consulted major shareholders individually. This has included getting their views on the shortlist of firms to be invited, the decision-making criteria and the proposed tender process. Others have considered it adequate to disclose their plans to tender in the Annual Report. Best practice might suggest consultation with various different shareholder groups. The recent FRC publication (Audit Tenders Notes on Best Practice (February 2017) considers feedback from round tables that they conducted including shareholders. In addition, the Investment Association issued a publication Guidelines on Audit Tenders (January 2017) setting out its expectations in this area. Consulting with Regulators In certain industries, for example, financial services, it may also be prudent to consult with the relevant regulators. Provisions relating to the role of the Audit Committee EU Regulation (Article 16) CMA Order (Part 5) 2. The Audit Committee shall submit a recommendation to the [Board] of the audited entity for the appointment of statutory auditors or audit firms. Unless it concerns the renewal of an audit engagement the recommendation shall be justified and contain at least two choices for the audit engagement and the Audit Committee shall express a duly justified preference for one of them. 3e. The audited entity shall prepare a report on the conclusions of the selection procedure, which shall be validated by the Audit Committee (NB evaluating and communicating the decision is returned to in Section 9 below). 5.1 Only the Audit Committee, acting collectively or through its chairman and for and on behalf of the board of directors, is permitted to: a. To the extent permissible by law and regulations, negotiate and agree the Statutory Audit Fee and the scope of the Statutory Audit b. Initiate and supervise a competitive tender process c. Make recommendations to the board of directors as to the auditor appointment pursuant to the competitive tender process d. Influence the appointment of the Audit Engagement Partner. N.B. The content of the report required under 3e above is not currently defined. N.B. The order also states that if a Board does not accept a recommendation from the Audit Committee, it should include a statement from the Audit Committee explaining the recommendation and why the Board has taken a different position in the Annual Report and any papers recommending appointment or reappointment. Ensuring appropriate governance involving the right people 3

6 3. Forward planning Successful audit proposals need planning. For the largest and most complex organisations, it can involve thinking several years ahead. The principal challenges relate to: 1. The company s business priorities and service relationships. 2. Identifying a viable shortlist of firms to be invited. 3. Managing independence. 4. Getting to know the firms and their people. Laying the foundations Management options Business priorities An audit tender inevitably involves some disruption to Management and an auditor change more so, no matter how well a transition is planned and managed. A transition, including in most cases the new firm shadowing the outgoing firm, can take some months, if not in the largest companies, years. When planning a tender, you also therefore need to consider other business priorities, any other on-going or planned projects and the management resources available to support them. Pressures might come, for example, from initiatives originating within the business such as finance transformation, systems changes, major acquisitions and reorganisations or specific problems, or from external sources, such as business performance pressures or changes in law or regulation. In some companies there may be EU public interest subsidiaries requiring their own tenders and sometimes to different legal timescales. Existing service relationships and their impact on auditor independence might complicate the situation even further. Many companies have such relationships with a number of firms who might also be considered to take part in an audit tender. In some cases, these service relationships can be extensive and/or complex and may be central to supporting companies in important areas of their business. So it s important to take a holistic view of the company s relationships with relevant service providers: You may conclude that current services, which could conflict with the audit, are so important you want to protect them and so exclude the relevant firm from any audit tender; It may be possible to reduce or avoid problems by deferring or accelerating an audit tender to avoid service conflicts; or You may decide that the audit relationship will take precedence. In this case, should an existing non audit service provider be successful in the audit tender, you may need to issue tenders to replace the firm in other services. A change in auditor will inevitably restrict the services the incoming firm can provide. It will, as a result, reduce the choice of firms available for non-audit services. Business priorities Business issues Trading Transactions Finance transformation Systems implementation Controls development Management resources Changes in the Board, Audit Committee and senior management Defer Manage Accelerate Service relationships Internal audit Systems and controls/ Sarbox Transformation Regulatory support Corporation tax Personal tax Remuneration committee 4 Forward planning

7 Shortlisting To avoid unnecessary disruption, and to ensure they comply with the EU Regulation, companies often run a pre-proposal market assessment of some kind to identify firms with the capability and competence to undertake the audit. It is both efficient and fair to potential tendering firms to consider all of those firms who could feasibly conduct the audit, not just the large firms, but only to invite firms with a realistic chance of success into the formal tender process. The EU Regulation prohibits the exclusion from the selection process of any firm without proper consideration. What this means in practice has not been clarified but most companies have conducted a market assessment of firms who might be able to provide the audit service and satisfy the identified decision-making criteria. Approaches to market assessment A variety of approaches to scoping the market assessment have been used. Desktop research Considerable information about firms is available in various publications and on their websites. Informal consultation Some have found it useful to consult informally with potential tendering firms, obtaining their views on whether they feel they could realistically provide the audit. In some cases, those consulted have chosen not to take part. Request for information / pre-qualification questionnaires Lastly, a formal Request for Information or a Pre-qualificiation questionnaire has sometimes been issued to potential auditors, seeking clarification on such issues as potential conflicts, independence and capabilities and competences of the firms. In some cases, this has also extended to identifying proposed team members. Market appraisal Desktop research Informal discussions with firms Formal request for information through an an RFI document Inviting the incumbent Inviting the incumbent to tender when they do not have a realistic chance of winning due to mandatory firm rotation may not be considered fair. On the other hand where they have a strong track record it may be unfair to exclude them where there is at least one more five year lead partner rotation period they could fulfil. Many companies have had an upfront discussion with their current auditor and have agreed the best way forward between them. There is no right number of firms to invite, although the regulations require a competitive tender, but each firm invited is entitled to expect the same treatment. Access (and disruption) to Management and Audit Committee members increases each time an additional firm is added to the proposal list. In current practice, three competing firms is not unusual, while it is uncommon for more than four to be involved in a full tender process. Having drawn up a desired shortlist, it is worthwhile to have each firm confirm their intention to participate prior to issuing the formal Request for Proposal. Regulatory requirements and shareholder expectations Independence and conflicts Business priorities Non-audit service relationships Independence Criteria Conflicts Geographic coverage Industry experience FTSE 100/250 experience Specific skills Audit quality Forward planning 5

8 Managing independence For all companies, managing independence is a key consideration; for large companies, it can be the most challenging aspect of the audit tender process. Prohibited non-audit services The requirement for firms to be independent is not new. Companies and their auditors have been required to evaluate non-audit services provided by firms in prior periods to address any self review threat from services that impact the financial statements. The EU Regulation has however introduced further specific requirements and restrictions. A list of prohibited nonaudit services has been introduced and is set out in the box alongside. In the UK, the prohibitions on nonaudit services have been implemented in the FRC s revised Ethical Standard for auditors (June 2016) which is also applicable to audits of financial years beginning on or after 17 June Because affected non-audit services will be prohibited from the first day of the first financial year being audited, or the date that audit work commences if earlier, a tender process may need to be completed early enough in the previous year (or even the year before that) to enable any such services to be exited. Where a firm has been providing services of a nature identified in bold type face in the box alongside, there is a 12 month cooling off period. This means that such services must be exited by the first day of the financial year preceding the auditor appointment. Given the importance of this issue, many companies have invested significant time ensuring that firms have identified all of their existing non-audit services, explicitly confirming that they will be able to exit them when required. This is an area which is likely to require careful consideration and monitoring. Non audit services fee cap In addition to prohibited non-audit services, the EU Regulation also introduces a cap on other permissable non-audit services provided to the PIE. This cap is set at 70% of the audit fee averaged over three years. The application of the cap can cause complexity because in the UK the FRC has decided that the cap should be calculated at two levels: at UK PIE level and at Group level. This is therefore also likely to require careful monitoring in international and financial services groups in particular. The combination of prohibited services and the cap can cause challenges for managing service relationships, especially as there will be an overlap period when both an outgoing auditor and an incoming auditor are required to be independent. Within the limitations of the regulations, companies do have the ability to flex their existing policies for purchasing non-audit services from their auditors either permanently or for a limited period. Other independence matters In addition to non-audit services, companies also need to consider: The independence of the firms regarding financial arrangements (for financial services firms). The position of alumni of competing firms in positions related to the audit, such as senior Finance Management and membership of the Audit Committee. An example of a Request for Confirmation of Independence is set out in Appendix A. Prohibited non-audit services under EU Regulations: Tax services; Services that involve playing any part in Management or decision-making. Bookkeeping and preparing accounting records/payroll services. Designing and implementing internal control or risk Management procedures for preparation/control of financial information or designing and implementing financial technology systems. Valuation services, legal services, internal audit. Services linked to financing, capital structure and allocation and investment strategy. Promoting, dealing in or underwriting shares. Certain HR services. 6 Forward planning

9 Getting to know the firms and their people Many companies have spent time prior to the formal tender process getting to know the firms and their people so that the they go into the tender confident that they have a shortlist of firms that have the capability to deliver the audit they require as well as people they could work with. As this is also an opportunity to give the firms introductory briefings about the business, appropriate Non Disclosure Agreements should be put in place. Get to know activity has included: Meetings between decision makers and the proposed lead audit partners. Often firms are asked to put forward a choice of candidates and companies make their selection ahead of the tender. Companies should be aware of the CMA Order, part 5 which states that Only the Audit Committee may influence the appointment of the Audit Engagement Partner. Identification of other team members; including other partners and senior staff in key locations and or functions. Assigning small pieces of work to potential bidders to get more of a feel of how they work in practice. Presenting each firm with challenges or issues to see how they would respond. This normally works best when the challenge relates to a real issue the company is currently grappling with. Many companies have presented the firms with a technical accounting issue. Getting to know the firms prior to the tender process provides a number of benefits: It provides an opportunity to test teams and personal fit, with any requested changes dealt with prior to the tender process. Firms will have a better understanding of the company s business, which has the potential for shortening the formal tender process which follows. Getting to know the firms Following the CMA Order and the UK Corporate Governance Code which lay the responsibility of the tender process firmly with the Audit Committee, companies should involve the Audit Committee in the Get to know process at key points. This is likely to include interviewing and selecting the Lead Partner, and meetings involving the Audit Committee Chair (and other members of the Audit Committee). Interviewing potential lead partners Getting to know meetings Business discussions Small assignments Shorter final tender processes? Forward planning 7

10 4. Tender objectives fair and transparent assessment criteria Ahead of an audit tender, it is worthwhile thinking about what s important in the audit relationship, what needs to be maintained and what changes are desirable. This review also provides an opportunity to consult shareholders about their expectations. Research suggests that in selecting their auditors, companies have been influenced by a range of factors. These have included the audit quality and the audit service propositions put forward by the firms, the capabilities and competences of the proposing firms, past relationships and track record they have Selection criteria The EU Regulation requires that: The tender documents shall contain transparent and non-discriminatory selection criteria that shall be used by the audited entity to evaluate the proposals made by statutory auditors or audit firms (Article 16, section 3e); Where, in accordance with Union or national law, the competent authorities (The FRC in the UK) require firms to comply with certain quality standards, those standards shall be included in the tender documents. There is currently no further Regulation or guidance as to what selection criteria might include. experienced with the tendering firms and their teams, and the behaviour demonstrated by the firms during the tender process feeding into a final decision discussion and evaluation. Each of these influences is expanded on in this section and included in a pro forma list of Assessment Criteria set out in Appendix E. Recent research suggests that in selecting their auditors, FTSE 350 companies assessments have been affected by the factors set out in the diagram below: Final decision-making Who is involved? What will they consider? How will they decide? Audit quality and audit service Audit quality Service quality Coordination and communication Systems and controls reliance Working with other assurance providers Dealing with accounting issues Ideas and insights Working relationships Behavioural influences during the proposal Caring (listening, demonstrating, understanding and responding with energy and enthusiasm) Mutual testing (sharing ideas and responding to challenges) Interaction (establishing rapport and building relationships) Response quality Capabilities and competences Team leader Industry Technical/ specialists Geography Delivery Potency Match Style Team Structure Fit Firm No conflicts Culture Relationships and past track record Incumbent relationship Targeting and non audit services Past relationships elsewhere Cross directorships Alumni Auditing regulatory and market environment Independent contextual influences Individuals and company background 8 Tender objectives fair and transparent assessment criteria

11 Audit quality Most audit committees would agree that audit quality is of utmost importance, but many find it difficult to evaluate it as part of a tender process. What is audit quality? Good audits mean that shareholders can make confident decisions based on the information that has been audited. And confidence in the audit opinion means that shareholders are confident that: Any problems will be found; and Any problems will be reported. So, how do you maximise confidence that your audit will both find problems, and report them? Although every Audit Committee will have different views on what is more and less important, it is helpful to examine three areas in answering this question: the proposed teams, their proposed audit approach and the audit firms. 1. How does your audit team contribute to high audit quality? To be confident that your audit team will find problems and report them, you need competent professionals who have integrity and courage. Although it s important to have confidence in your Lead Partner, you also need to be satisfied that the whole team has the right characteristics, can work together and communicate effectively with each other and with Management and the Audit Committee. 2. How does the audit approach contribute to high audit quality? Although auditors must follow auditing standards, there s still a lot of discretion to be applied in designing an audit. Your audit team needs to identify the most significant risks that could cause a material problem and design an audit scope and approach that will address those risks. They will make important choices that are critical in optimising audit quality for your entity, and its risk profile. These will include decisions about what might be material, where they need to visit, and how they will use technology in gathering audit evidence. Maximum audit coverage of your group will not necessarily lead to higher audit quality. It s much more important to focus on whether the right risks have been identified and if the planned audit work will properly address those risks. You will also need to be confident that all audit work will be reviewed rigorously and on a timely basis, so that any problems are identified. 3. How does the audit firm contribute to high audit quality? The culture of the firm and the importance it attaches to its audit practice and the delivery of high audit quality can make the difference between an audit team who is passionately committed to delivering the right audit report, and a hard-working audit team who is keen to finish the job within budget and on time. The Audit Quality Review reports issued by the FRC and The Annual Transparency Reports issued by the firms also provide valuable evidence of how each firm maintains and enhances audit quality and the results of Regulatory Inspections undertaken on them. Audit quality Lead Partner and team Integrity, authority Relevant experience (industry, sector, issues) International strength and depth Effective communication Teamwork Audit approach Risk assessment and link to work plan Materiality, scope and coverage Systems and controls reliance Use of technology Use of experts and specialists Approach to review Audit firm Tone and culture Investment (Training, Methodology, Systems) External reviews Leadership of the profession Tender objectives fair and transparent assessment criteria 9

12 Audit service There is considerable scope to design the audit service with the tendering firms. Potential considerations here have included: Coordination and communication of the audit The way that the audit is organised to ensure effectiveness and efficiency, including the relationship between the Group team and subsidiary teams, and clarity about their respective responsibilities. In addition, how the audit firms will communicate across the teams conducting the audit and with Management and the Audit Committee. Systems and controls reliance How well the proposed approaches align with the internal control environment. For example, including enhanced substantive tests of transactions and balances where systems are formative but where systems are developed and reliable, giving credit for this and providing constructive feedback. Working with other assurance providers This will include internal audit, risk and regulatory specialists, others testing controls (for example, under Sarbox) etc. This also may include outsourced service providers. Dealing with accounting issues How accounting issues will be highlighted and when and how they will be dealt with, including the timing of discussion, the balance of commercial and technical considerations, empowerment of the Lead Partner, the role of the firm s technical department and engagement with the Audit Committee. Ideas and insights How competing firms might best share their experience from other clients, and of working in the relevant industry and provide perspectives on the business and operations. Companies have also been interested in competing firms views on their organisation and people as part of the process. Use of audit technology Companies have been interested to understand how the use of technology might increase assurance and provide insight from the audit; particularly the use of data auditing. Value for money Fees have tended not to be a determining factor. This is because companies have often taken a decision that this will not be the case (given, for example, the importance of audit quality) or because the fees quoted by the competing firms have been similar, or because companies have made their selections based on other factors and then negotiated with their preferred firm, once identified. Capabilities and competencies Capabilities and competences can be assessed on three levels: the Lead Partner, the team put forward and the firm. The Lead Partner The Lead Partner has been seen by some as the most important consideration within their selection. Given the nature of the audit contract, where the issues to be faced aren t easily predicted and defined, the auditor selection process has been likened to a recruitment of a senior independent non-executive. In assessing lead partners, three things have been considered important: 1. Their experience of auditing similar companies; especially in the same or a similar industry and in terms of size, complexity and status (for example, FTSE 100 or FTSE 350); 2. Whether or not companies feel that a lead partner has the authority and ability to command the global team and deliver their firm; 10 Tender objectives fair and transparent assessment criteria 3. The Lead Partner s style and fit with the tendering company; whether the lead partner would provide robustness and constructive challenge and communicate effectively with Management and the Audit Committee. The team put forward Senior members of the core audit team have been assessed based on similar criteria to the Lead Partner. There has also been focus on: 1. Teams in key geographies and divisions; 2. Specialists working within the audit, especially those involved with auditing systems and controls and addressing industry specific risks (for example, actuaries involved in auditing reserves). Companies have also been keen to understand the structure of the proposed team, how responsibilities are organised and how effective teamwork seems to be. The firms At this level, the major considerations have often been about shortlisting or identifying reasons why a particular firm might not be selected. For example: 1. Firms resources (industry experience, geographical spread and strength in key locations and listed company audit experience); 2. Independence and conflicts with non-audit services or real or perceived conflicts with other companies; 3. Reputational, regulatory or legal issues of concern. Given the importance of the Lead Partner, companies have been keen to understand commitments to contuinuity and succession plans.

13 Past relationships and track record A firm s track record can be assessed by considering a number of influences: The company s knowledge of the firms, based on their interactions with them and their teams prior to the tender Although they may not have seen the firm in place as an auditor, they may well have had contact with key people and started to form opinions as to their ability and fit. The firms previous experience of working with the company in (relevant) other services If a particular firm has provided certain services to a high standard, this might be some evidence at least that they might provide the audit to a similar high standard. The experience of the key decision makers (especially perhaps the non-executives) Working with firms and teams at other companies, either in the past or where there are cross-directorships, is likely to provide at least some evidence of how they might work on this audit. Other companies experiences of working with individuals in the team, especially the Lead Partner Companies are increasingly asking for references for both team members and the audit firm to evidence skills and competence, as well as track record at other clients. Behaviour during a proposal process Companies have also looked to how firms have behaved in the tender process, in coming to their decision including assessing the firm s in areas such as: Motivation Have the firms demonstrated that they really do want the audit and are therefore likely to deliver it to a high standard? Evidence of a high level of commitment to deliver a high quality service has included factors such as the firms ability to really listen, understand and respond to the company s issues, to empathise with the company s situation and to demonstrate energy and enthusiasm in the interactions that take place during the tender process. Chemistry and fit Companies have been keen to ensure that potential auditors can demonstrate sensitivity to the company s culture and work effectively with key people, including the Audit Committee and relevant Management. They have looked as evidence of this fit in behaviour during meetings and other interactions. As noted on the previous page, in assessing the working relationship, companies have also looked at how well the tendering firms seem to operate as an effective and coherent team. Competence and capability demonstrated Companies have not only assessed firm s capabilities and competences through meetings and presentations, they have tested whether or not the teams really do have the knowledge and expertise to understand and respond to important aspects of the audit. The firms, in turn, will be developing their understanding. As part of this, they will be testing their ideas and service propositions. Companies have typically considered the quality of ideas and innovation put forward as part of their overall evaluation. The presence of behavioural influences on auditor selection underpins the importance of running an effective tender process and this is considered next. Tender objectives fair and transparent assessment criteria 11

14 5. Ensuring an effective and efficient process Upfront planning will not only make sure that the tender process is effective and efficient but also that it is appropriate for the organisation. Companies should design a process that suits their organisational structure, values, culture and ways of working. With more work being done before the formal Invitation to Tender, recent tenders have tended to follow a shorter formal process with restricted access, which is easy to control. It generally comprises: provision of information, meetings with Management and the Audit Committee, document submission and a presentation. Increasingly companies are also including a demonstration of audit technology in the process. Whatever the shape of the process there are a number of critical success factors to ensure effectiveness: Clear governance Clear rules of engagement An effective tender process Critical success factors Informing the bidders Testing firms Exploring ideas and adding value 12 Ensuring an effective and efficient process Clear Governance As set out in Section 2, clarity on key decision makers, who is leading the process and who is running it on a day to day basis is important. Often a tender committee, is formed, led by the Chair of the Audit Committee and often comprising other members of the Audit Committee and key members of Management, usually the Group Financial Director, and sometimes the Group Financial Controller. The relationships between the Non Executives and Management will differ but companies should take into account the role and responsibilities of the Audit Committee under the CMA Order, EU Regulation and UK Corporate Governance Code which require the Audit Committee to be the primary decision maker on behalf of the Board, with Management in a support role. Balanced access to the right people Feedback at the right points Purpose of the process Clear rules of engagement Competing firms should be clear about the rules of the process. Increasingly companies have interacted and communicated through a single project manager. Additional access outside the formal tender has tended to be controlled and discouraged, minimising disruption but also making it fairer for the firms. Blocks on all corporate entertaining during the tender process are normally put in place. Balanced access to the right people It s best to provide enough access so firms can put together a compelling proposition but not so much that it adds too much of a burden on Management and the Audit Committee. Decisions on who should meet with the tendering firms generally align with the culture of decision making within the organisation. For example, a centrally controlled organisation may restrict access to Group Management and the Audit Committee, whereas a company with autonomous divisions may also grant access to divisions or other local Management. For most companies, one or two sessions with key Management is probably enough with access to at least the Chair of the Audit Committee if not also with one or two other Audit Committee members. Most recent tenders have concentrated most meetings into a one to three day period during which firms have been allocated a room at the company s office and Audit Committee and Management have held meetings in rotation with them. These Carousel meetings can help shorten the process and facilitate very immediate comparisons of firms across the relevant days. Feedback at the right points Competing firms are likely to seek feedback on their performance during the tender. Some companies have built formal checkpoints into the tender process so that feedback can be appropriately managed. Common feedback points tend to be after the meetings and/or document submission.

15 Informing the bidders Detailed company information through data rooms To put together a realistic proposal, firms will need detailed information on the company s organisation and structure, risk and control, accounting, reporting and audit scope. CMA Order Part 4.5: also states that FTSE 350 companies in preparing tender documents must have regard to the need to ensure that tender documents allow the bidders to understand their business and type of audit to be carried out. Virtual data rooms, open for a specified period, are becoming the most common way to release and store this information. Companies have increasingly outsourced the provision of data room to third parties. As much of the information is confidential it should only be released after firms have signed a Non-Disclosure Agreement. A suggested list of information to be made available to competing firms is in Appendix C. If the incumbent auditor is not included in the process companies may wish to consult them on what information should be provided and seek their help in putting the material together. As the tender progresses the firms are likely to request additional information and these requests are usually dealt with on a case by case basis. Two of the most common additional requests are for audit fee information and Audit Committee reports prepared by the incumbent auditor, which could be considered commercially sensitive by the incumbent this level of information is probably given in about one third of tenders. Hold Harmless letters will need to be put in place if report from the incumbent are released as part of the data room. Introductory briefings Introductory briefings, sometimes in plenary sessions with all the competing firms in the same room, provide an efficient way to provide the firms with the same base level of information and also introduce an interesting face to face competitive dynamic between firms who use the opportunity to ask additional questions. These briefings are usually in addition to the release of company information via a data room and one-on-one meetings with Management and the Audit Committee. Meetings as part of the decision-making process Rather than being seen as a channel to just inform the bidders, meetings are often scored and help to inform the overall decision making process. Management often share their views at the end of the meeting process, as an additional source of information to help the Audit Committee in its final deliberations. Evaluating performance through a scorecard could become more common, given that under Article 16 of the EU Regulation, companies are required to demonstrate that the tender has been conducted in a fair and transparent manner. Any feedback and scoring could also potentially be subject to external review under this Regulation. Ensuring an effective and efficient process 13

16 Testing firms and exploring their ideas As noted in Section 4, companies select their auditors on the basis of a number of factors including audit quality, audit service, capabilities and competencies of the Lead Partner, team and firm, as well as behaviour during the tender process. Tender meetings provide an opportunity to test these factors by probing certain areas and seeing how firms respond, as well as observing behaviour. They also provide an opportunity to test the proposed approaches and service, including overall co-ordination and communication, systems and controls reliance and approach to technical issues. Evaluating firms approaches to technical issues There are a number of industries where the accounting judgments made by the Lead Audit Partner are inherently complex and have a significant impact on the audit. How the Lead Partner and firm resolve technical issues and the approach the firm generally takes on technical matters could be a key decision making factor. To test this some companies have presented the firms with a technical issue to be resolved, asking them to describe how they would go about resolving the issue, the factors they would consider, and the judgement they would ultimately make in this situation. This is often done in a separate session as part of the meetings process or can be a case study to be discussed at the final presentation. Value adding approaches Interactive workshops: joint interactive workshops to co-develop the approach to the audit, e.g scope, risk etc or to develop a solution to a specific issue. Technology demonstrations: asking firms to demonstrate their audit technology tools and/or analyse an area of data using data analytics (see box below). Case studies: a scenario based approach, asking the firms to solve a particular problem or outline their approach to a specific issue. Specific projects: asking the firms to undertake a specific piece of work to test their capability and ways of working. Meet and greets : combining formal meetings with an informal social element to assess how each firm interacts and the degree of personal fit. Exploring ideas and adding value A proposal process can bring a return on investment from the time spent in the form of insights, ideas and innovation. Successful processes can be designed to encourage firms to bring different approaches and new ideas a number of ways to achieve this are in the box alongside. They do require additional effort to set up but can help get more value out of the process, as well as give a flavour on what each firm would be like to work with. Technology in the audit Audit firms are increasingly using technology to deliver the audit, not only to increase audit quality but to deliver insight. As part of the tender process they are likely to want to showcase their technology tools and demonstrate the value that can be generated. Technology demonstrations are increasingly part of the proposal process and firms are likely to ask for this time if not given at the start of the process. In addition, they often request client specific data to run through their technology to demonstrate the insight that can be generated. This is a good way to be able to differentiate between technologies, which, on the face of it, can often seem the same. It is advisable for the Audit Committee and management to decide their stance on the importance of technology at the beginning of the process and whether it will form a decision making criteria. 14 Ensuring an effective and efficient process

17 Specifying the tender submissions Proposal documents provide a mechanism for firms to articulate their approaches and the reasons why they should be selected as external auditor. Feedback from tender debriefs indicates that the proposal document seldom makes the difference between winning and losing but it can form part of the overall score and provide information on key areas to support discussion and debate. In recent tenders companies have tended to ask for shorter proposal documents (generally a maximum of pages, with an additional limit on appendices), and have suggested a list of areas to be covered. There has also been greater innovation in format. Recently the trend has been to request electronic submissions for ease of transmission. Increasingly companies have not requested printed documents. Questions to consider Whether to take a prescriptive or flexible approach to the document A prescriptive approach, for example, requesting answers to specific questions in a prescribed format, makes sure all areas are covered and makes it easier to compare documents. A more flexible approach, allowing firms to respond under general headings (for example, team, audit approach etc) tests each firm s ability to identify all the relevant factors and encourages innovation and creativity. Most companies are taking this more flexible approach and a suggested list of areas to be covered in the document is outlined in Appendix B Invitation to tender/request for proposal guidance. How fee information should be presented Companies ask for varying levels of fee information. Generally, the greater the detail requested, the greater level of fee information should be provided to firms so that they are able to give as accurate fee quote as possible. If asking for a detailed fee breakdown, including hours and rates, it s advisable to provide a fee template to be completed to enable better comparison. Although not common practice, there have been some instances where companies have made the decision fee blind. They ask for the fee not be disclosed with the document submission, or to be disclosed in a separate document which is not opened until after the decision on the preferred firm is made. The company then enters into negotiations with that firm. Whether to consider additional material Firms often submit additional material including video, marketing materials and various graphics to demonstrate enthusiasm and commitment, highlight particular strengths or articulate their proposition in innovative ways. Such materials can give a feel for the competing firms but may also cause unnecessary distraction. Companies can make clear in the Invitation to Tender documents whether or not they wish to be sent additional materials. Who will review and assess the documents This can depend on who has been involved throughout the process. A wide distribution may identify all relevant issues and help build consensus. It is more common that companies restrict circulation to the tender committee. This is a more efficient approach. The proposal project manager, often the Financial Controller or Head of Internal Audit, can be asked to review the documents and provide a comparative analysis to the tender committee. Given the Audit Committee s decision making responsibilities, this analysis should be as objective as possible so as to help appropriately inform them in their deliberations. Ensuring an effective and efficient process 15

18 Planning the presentation The presentation is usually the final opportunity to compare the firms and it can be the only time that some members of the Audit Committee meet the competing firms. The tender committee will also be able to test the firms and address any concerns they may have. It also may be the last chance for each contender to outline their proposition and demonstrate what they would be like to work with. Shortlisting before the final presentation Front runners may emerge during the process. To maximise efficiency companies often shortlist those firms going through to the final presentation stage on the basis of their performance in meetings and in the document. The possibility of shortlisting should be flagged in the Invitation to Tender document. Questions to consider The composition of the panel and their respective roles The panel for the final presentation is usually the tender committee that was formed to oversee the process and often with additional members of the Audit Committee (and less often other Board members). It is extremely rare for the panel not to be chaired by the Audit Committee Chair and increasingly panels have been led by Audit Committee members with Management in a supporting role. Some organisations have chosen to have two presentations an initial presentation to Management and a final presentation to the Audit Committee, although that is arguably not compatible with the Regulation if there is any suggestion of Management making or unduly influencing the tender decision. The format to be adopted Sometimes companies prescribe a specific format for the presentation and the areas to be covered similar to the document, this makes it easier to compare the firms. Leaving it up to each firm to use the time as they see fit tests whether they really understand what companies are looking for, their culture and ways of working. Competing firms often seek to differentiate themselves by reference to their innovative presentation approaches and new technology, providing a wow factor. How questions should be dealt with A standard list of questions can be prepared prior to the actual presentation or questions can arise on the day, prompted by the content of the presentation. It is often a mix of both. Later presentations can prompt additional questions and a way to follow up with each firm on any issues may need to be agreed. The majority of final presentations are normally minutes with an equal balance between presentations and questions. 16 Ensuring an effective and efficient process

19 Evaluating and communicating the decision Consistent with regulation, in practice, the Audit Committee Chair has normally chaired the decision discussion, making sure all views are shared and consensus (where appropriate) is reached. Following the EU Regulation the decision ought logically to be based on the transparent and nondiscriminatory selection criteria established at the outset and how well the firms have performed against each criteria at each stage of the process. At the end of the process companies are required to prepare a report, validated by the Audit Committee, which recommends at least two choices to the Board based on the results of the process, with a suitably justified preference for one of them. In addition, under the EU Regulation a company may need to demonstrate to the competent authority (in the UK the FRC), that the process was conducted in a fair manner. It is too early to know what these provisions will mean in practice, but the decision making process may be subject to more scrutiny than it has been in the past and so will need to be carefully documented. Communicating the decision Companies have generally chosen to inform the bidders as quickly as possible unless there has been a good reason not to, such as the need to complete the audit process. The need for the successful firm to become independent by the required date may increase the need for a quick decision. In addition to the competing firms and the incumbent firm (if not part of the tender) the following stakeholders will need to be informed: Internal Management: This will be important if there is a change of auditor so that any prohibited non-audit work can be ceased within the required timeframe and the new firm can become independent. Early preparations for transition are also likely to be required. Shareholders: Those shareholders that were consulted prior to the process may well be interested in the outcome and the disclosure for the annual report following the tender will need to be prepared. Companies are now tending to put a lot more detail into their annual report disclosures, not only outlining that a competitive tender has been completed, but giving details of the tender process, the decision making criteria and why the successful firm was chosen. The stock exchange and regulators: where relevant. The media: Most large companies issue a press release disclosing the results of the tender and thanking the incumbent firm for their service, if a change in auditor is proposed. Post decision reviews/tender debriefs Once the decision has been made and communicated, the tendering firms, regardless of whether they win or lose, are likely to want to undertake an independent proposal debrief with a number of the key decision makers. Ideally, this should include the Audit Committee Chair as well as the person who ran the process. Each firm will want open and honest views on how well they performed relative to the other firms. Ensuring an effective and efficient process 17

20

21 Appendices

22 Appendix A Request for Confirmation of Independence [Audit partner] [Audit firm] [Date] Dear [ ], Request for Confirmation of Independence As recently discussed with you, the Group has decided that it will review its audit arrangements for the year ending 31 December XXXX. The purpose of this letter is to formally ascertain your interest in submitting a proposal for the audit tender, and to obtain confirmation of your independence. An indication of the potential timetable being considered for the audit tender is as follows: Month XXXX Audit Request For Proposal issued Months [ ] Key meetings to be held Month [ ] Presentation and decision At this stage, we are requesting that your firm submits a written document setting out: Explicit confirmation that your firm is: free of conflict; keen to participate in the tender process in mid-[ ]; and Able to accept appointment as auditors for the audit year ending 31 December [ ], should you prove successful. A detailed list of audit and non-audit services you currently provide to the Group as at 31 December [ ], to include: number and location of audit services provided; type and location of non-audit services provided; associated fee levels in GBP of each audit and non-audit service provided; audit and non-audit services proposed, but not yet approved/commenced; an indication of any threat to independence that providing the above non-audit services may cause. Specifically, do you believe that there is a date by which these services cannot be provided under the current regulations?; and safeguards that your firm will apply to either eliminate the threats, or reduce them to an acceptable level. Any other threats to independence or potential conflicts of interest arising from personal, financial, business, employment and other relationships and associated safeguards to eliminate or reduce the threat. Submissions are requested by [ ]. Assuming acceptable responses, we will share a more detailed project plan and contacts in due course. All questions and requests should be coordinated through [ ]. Details as follows: Yours sincerely, [Insert name] 20 Ensuring an effective and efficient process

23 Appendix B Invitation to tender ( ITT )/Request for proposal ( RFP ) guidance The ITT/RFP should communicate the objectives, requirements and rules of engagement: competing firms should be clear about what they are required to do and when. Key areas to be covered Information about the company: Key information on the company, including key statistics; Background on any strategic initiatives, such as finance transformation, that are likely to impact the audit; Objectives of the process and background on current auditor relationships, if applicable. Outline of the process: Outline of governance underpinning the process leadership role of the Audit Committee and their corresponding involvement, role of Management, details of the decisionmaking panel and how the decision will be made; Details of the transparent and non-discriminatory decision-making criteria (as required by Article 16 of the EU Regulation) such as: overall audit quality, service proposition (including day-to-day approach, approach to relying on systems and controls, working with other assurance providers (e.g. internal audit), coordination and communication, additional value) capability and competence of the lead partner, team and the firm, behaviour during the proposal process and deliverables; Timeline and key milestone dates meetings, document submission, presentation. Shortlisting dates, if applicable; Details of access given, including those available for meetings, and how the meeting process will be managed; Information to be made available and/or details of any data room, if applicable (Appendix C); Required submissions and/or presentations; Rules on contacting and communicating with company staff outside of the formal process, including any restrictions on corporate entertainment; Communication requirements throughout the process, including a key point of contact within the company; Confidentiality requirements; Decision and formal appointment dates, including opportunities for shadowing the incumbent firm, if applicable. Scoping information The scope of the proposal, including service requirements and entities to be covered; Any audit related requirements in addition to the external audit. Document requirements Any specific requirements relating to format, delivery including page limits and use of appendices; Information required: Executive summary: the key elements of the offer and why it best suits the needs of the company; Business understanding, key issues, needs and risks; Team: experience, credentials, team structure and coordination, approach to succession and continuity, references; Industry, technical and other specialist expertise to be applied; Audit approach: methodology, proposed scope, materiality, approach to technical judgments, reliance on controls, working with internal audit, use of technology, audit timetable; Ideas, innovation and value add; Reporting and communication, including approach to working with the Audit Committee; Approach to audit transition; Audit quality, quality control and continuous improvement; Conflicts and independence; Details of the firm, including geographical coverage, industry and external audit experience and track record; Fees, including approach to expenses, fee increases, billing and payment terms. Possible attachments Confirmation of intention to bid to be signed and returned; Non Disclosure Agreement/ Confidentiality Agreement to be signed and returned; Fee template to be completed by competing firms. A Request for Proposal proforma letter is set out on the next page. Ensuring an effective and efficient process 21

24 Appendix B (continued) Invitation to tender/request for Proposal pro forma letter [Date] [Senior Partner or main contact] [Firm and address] Dear [ ] The Board of [organisation] has decided to invite a number of audit firms to propose for the audit [and related services] of the [Group]. The purpose of this letter is to invite [firm] and advise you of the process by which we will select the successful firm. [Insert a summary of relevant information about the company to the extent considered necessary and not covered elsewhere for example in the Information provided to bidders. See Appendix B.] The tender process is being supervised by the Audit Committee, who will make a formal recommendation to the Board on the auditor appointment. To support them in this process, a tender panel has been identified and will include [insert names of tender panel]. In making their formal recommendation, the Audit Committee will consider the following criteria [to tailor/edit]: Approach to ensuring overall audit quality The quality, experience and fit with the company of the lead partner, team and the firm The approach to managing the audit including: Approach to managing the day to day process, Reliance placed on the company s system of accounting and internal control Coordination and communication Working with other assurance providers The value provided from the audit Approach to transition (if applicable) The performance of the firms during the proposal process As part of the tender process, and to assist you in formulating your proposal, [access to a data room] will be provided, subject to receipt from you of a signed copy of the enclosed Non Disclosure Agreement. You may wish to meet the Chairman of our Audit Committee and certain members of our Management. A list of people available for you to meet is provided. It is envisaged that the meetings will be completed [insert dates]. All meetings should be organised with [insert tender coordinator] who will be controlling the conduct of the tender. No contact should be instigated with the company in relation to this tender without their prior approval. A final proposal document of no more than [20] pages [including appendices] is required to be submitted by [insert date]. The required contents of this document are set out in [attachment see page 21 of this document for suggested areas to cover in a proposal document]. A number of firms will be asked to present to a panel led by the Audit Committee on [insert dates]. I should be grateful if you would confirm by [date] whether your firm would like to submit a proposal. Yours sincerely, [Insert name] Enclosures 22 Ensuring an effective and efficient process

25 Appendix C Information to be provided to bidders Information is now more commonly provided through a data room opened to bidders during specified dates. Potential contents of a data room Organisation and structure Reporting and statutory Group structure chart Organisation charts for key functions Operating locations and key business and accounting activities Outline of key corporate functions (Group consolidation, treasury, legal and company secretarial, taxation, internal audit, compensation, benefits and pensions, information technology, risk Management) Shared services strategy, organisation and processes (where applicable) Group internal audit and risk Management organisation Group IT organisation Details of global IT applications Details of group IT infrastructure Details of any planned organisational changes, such as finance transformation, IT implementations, that may impact on the delivery of the audit Key contact information Risk and control Audit committee timetable, meetings agendas and reports (with auditors permission) Overview of current and emerging risks Key Group risk policies Key systems of control and their development Risk Management procedures and relevant reports Controls documentation Internal audit strategy and plan Internal audit reports Details of regulatory reporting requirements (where appropriate) Details of relevant current and proposed projects (systems changes, reorganisations, etc.) Audit, accounting and reporting Accounting policy manual and background to any critical accounting judgments Key accounts that are not in the public domain Details of audit scope(s) required Tax strategy, accounting and details of any outstanding disputes Previous year s fees by division/ territory and statutory entity Year-end timetable and financial calendar for the coming year Auditor independence policy Ensuring an effective and efficient process 23

26 Appendix D Indicative proposal timetable In advance of the tender T Two to Three years T One year Planning Confirming governance and responsibilities for decision-making Considering relevant business priorities Coordinating with non-audit service relationships Identifying independence issues Shareholder consultation re: firms to be invited and assessment criteria Consultation with relevant regulators Assessment criteria to be evaluated (and relative importance) Shorlisting including documentation of appropriate market assessment Getting to know the bidders Preparation of data room/confirmation of firms data requirements Preparation and formal approval of tender documentation to include: Access allowed and process for feedback from meetings Matters to be included in and format of tender documents Any restrictions over unsolicited materials Arrangements for final presentation Execution Issue request for proposal Formal confirmation of intention to bid received from firms Signed Non Disclosure (and hold harmless) Agreements received from firms Confirmation of meetings arrangements Open data room Meetings with firms and internal feedback Audit committee status review (and feedback to firms on performance to date) Receipt of proposal documents and any follow up clarification Further shortlisting as approved by the Audit Committee Presentations Any follow up to presentations and final decision-making Follow up Communication of decision: To firms Internally Shareholder communication Press release 24 Ensuring an effective and efficient process

27 Week One During the tender Week Two Week Three Week Four Week Five Week Six Week Seven Week Eight After the tender Ensuring an effective and efficient process 25

28 Appendix E Potential assessment criteria Division/location:... Rate each criteria on a scale of 1 to 5, where 1 is excellent and 5 is poor. Evaluation criteria Firm s ratings Notes 1. Audit Quality and Audit Service Quality a. Audit approach How does the risk assessment compare to the Board s assessment? Can differences be explained? Is the planned audit work tailored and responsive to the identified risks? b. Audit service How effectively will the audit be coordinated including transparent communication? Is technology being used to help facilitate this? Does the audit approach align effectively with the operation s systems and controls? Is the approach to issue resolution effective and clear? How well does the approach coordinate with other relevant service providers? How effectively will value adding ideas and insights be identified? Does the team understand, and can they articulate, what will be material to the user of the accounts? Does the proposed audit scope focus on those areas of likely to generate material audit risks? Where detailed audit procedures are not performed how will they be comfortable that the risk of a material problem is low? How will the central team monitor the work in remote locations? What is the use of technology in the audit? Does it enhance audit quality? c. Pricing Do the fees support the scope and do they offer value for money? 2. Capability and Competence a. Lead partner How relevant and extensive is the experience of the lead partner? Industry, segment, otherwise? What expertise does he/she bring of our current and foreseeable issues and challenges? Do you feel he/she will bring adequate challenge, courage and integrity? How well will they communicate with the Audit Committee and Management? What has been the style of previous audit opinions they have signed? Do you foresee conflicts with other clients? Do you feel he/she has capacity to undertake the audit? (name) (name) (name) (name) 26 Ensuring an effective and efficient process

29 Division/location:... Rate each criteria on a scale of 1 to 5, where 1 is excellent and 5 is poor. Evaluation criteria Firm s ratings Notes b. Proposed team How strong are the other key partners and managers? Group, divisional/territory, specialist? How would you assess their strength in depth more broadly, including, for example, the junior team? Does the proposed team structure fit with our organisation? Are the responsibilities and accountabilities clear? Had the team worked together before? How effectively will they use technology to support communication? How would you rate their proposals on continuity of staff? Do you foresee conflicts with other companies? c. Firm How does the firm support an appropriate culture which understands the purpose and importance of audit? What is the approach to and coverage of internal quality reviews? What have been the results? What are the results of external inspections (AQRT and QAD)? Have all threats and potential threats to independence been identified and (where relevant) are robust plans in place to address them? Are there any major gaps in capability or competence: Geographical, sector, technical depth? 3. Relationships and Past Track Record a. Track record How strong is their track record of working with our organisation? If incumbent, what is your experience of the firm have they delivered a high quality audit and responded to feedback? For other firms how strongly have they performed in delivering relevant nonaudit services? What other experience have our people had with them elsewhere? How strong are their references? Are their proposals consistent with our/others experience? 4. Behaviour and Deliverables a. Behaviour during the process Did the proposing team listen and respond to requirements identified? Did they demonstrate an understanding of the business and risks relevant to the audit? What was the quality of ideas and innovation identified? Did they appear as if they wanted the work? Were the team prepared and organised? How well did the lead partner lead the team? What was the quality of teamwork? Could you work with these people? b. Proposal document(s) Was the document clear and concise? Did they present as a team? How well did the content respond to our needs? Were all of the questions set out in the RFP fully and properly addressed? c. Presentation(s) Was the content relevant and focused? Was the presentation clear and concise? Did they present as a team? Were the responses to questions adequate or were there concerns raised or unanswered? (name) (name) (name) (name) Ensuring an effective and efficient process 27

30 Contacts Philip Drew Proposals Director M: +44 (0) E: Kate Robinson Proposals Director M: +44 (0) E: Gilly Lord Head of Regulatory Affairs M: +44 (0) E: 28 Ensuring an effective and efficient process

31