Office of the Comptroller and Auditor General
Contracting Out of Audit Work to Private Sector
Table of Contents
1 Background to the Review 8
2 Background to the Contracting of Audits 11
3 The Contracting Programme 14
4 Contracting and the Efficiency of Audits 17
5 Managing the Contracting Programme 22
6 A Role for Contracting in the Future? 25
7 Performance Measures and Indicators 27
This report was produced following a review carried out by the Office of the Comptroller and
Auditor General under the Expenditure Review Initiative. The review looked at the contracting
out of audits by the Office in the period 2002 to 2005.
The Context for Contracting of Audits
The Office carries out an annual programme of audits of the financial accounts of (currently) 375
public bodies and funds. In the late 1990s, a significant problem of arrears in the audit work began
to emerge. This happened because, at a time when the number of accounts to be audited was
increasing, the Office had considerable difficulties in retaining staff — in the four years 1998 to
2001, an average of 21% of the staff left the office each year to take up job opportunities
elsewhere in what was a buoyant labour market. As a result, the Office had insufficient staff to
carry out the audit programme in a timely way, and lost a considerable part of its staff knowledge
and experience base. Since 2002, increased staff numbers and improved staff retention rates have
restored the Office’s capacity to meet the annual audit demand.
While in-house capacity was being built up in a sustainable way, the Office undertook annual
programmes of contracting out of audits to private sector firms as a means of meeting part of the
yearly audit demand. This freed up in-house staff resources to tackle audit arrears.
The arrears problem has now been largely eliminated. Arrears may still arise in the future, but this
is likely to be for reasons other than a lack of audit resources. For example, audits may be in
arrears because clients do not produce accounts for audit; or, where audit fieldwork has been
completed, because there are issues arising in the course of the audit that have not yet been
concluded with the audit clients.
The bodies and funds audited by the Comptroller and Auditor General are very diverse in nature
and in their accounting requirements, policies and practices. Consequently, careful consideration
was given each year to selection of the most appropriate audits for contracting out.
The general aim of the selection strategy was to contract only audits where there was a reasonable
prospect that the contractors would be able to complete the audit on time. Audits were selected
only from the area of work of the Office’s Semi-State Audit Division, which deals with the
accounts of State-sponsored, health, education and other bodies. Central government departments
and offices, and other large audits, were considered unsuitable for inclusion in the contracting
programme because of the steep learning curve (and the associated costs) that would inevitably be
involved for contractors with little or no prior public sector audit experience. Audits being
contracted were also grouped into regional clusters, to make them more attractive to locally-based
Cost of Contracting
The amount of audit work offered on contract varied from year to year, but generally did not
involve the larger organisations within the Comptroller and Auditor General’s remit. Almost one
third of the 2002 audits and a quarter of the 2003 audits on the Semi-State Division side were
contracted out, at a cost in the region of €500,000 each year. Just over one tenth of the Division’s
2004 and 2005 audits were contracted out, at a cost of around €240,000 each year.
In addition to the amounts paid to contractors, significant in-house costs were incurred in
administering the procurement competitions, managing the contracts, reviewing the audit files
6 Contracting of Audits to Private Sector Firms
submitted by the contractors and following up on the issues raised. Taking these in-house costs
into account, the total costs of carrying out the contracted work were around €700,000 a year for
2002 and 2003 contracted audits, and around €400,000 a year for 2004 and 2005 contracted audits.
Contracts were awarded each year to the contractors offering the most economically advantageous
tenders, following keenly-contested competitive tendering processes. Nevertheless, the prices
charged by contractors for their services changed significantly from year to year. Prices went up
28% between 2002 and 2003, and by a further 6% in 2004, before falling by 13% in 2005. These
price movements reflect the combined outcome of the degree of competition in the market for
provision of audit services, the various strategies adopted by tenderers in pricing their bids, and the
impact of new entrants to the procurement competition.
Achieving cost savings was not the primary purpose of the contracting programme. However, a
comparison of the marginal costs of contracting with the marginal cost of the (notional) alternative
of carrying out the same audits in-house indicates that contracting yielded savings in three of the
four years reviewed. Contracting did not generate a significant saving in 2004, which was the year
that contractors’ prices peaked.
Timeliness of Contracted Audits
Over the period reviewed, the contracting of significant levels of current-year audits effectively
freed up the equivalent of around 33 staff years of in-house resources (i.e. net of in-house
resources used to manage the contracting) to concentrate on arrears elimination. Resources were
also redeployed from other work areas within the Office, and there were some changes in work
practices. As a result, the average time gap between the end of the year of account and the
completion of the audit narrowed significantly. For example, the average time to completion of
2001 audits was 73 weeks; with 92% of 2004 audits completed, the average time to completion
was 42 weeks.
Audits cannot generally commence until the relevant accounts are presented for audit. Measuring
from the point in time when accounts become available, audits contracted out were completed
slightly more quickly than audits carried out in-house. This reflects the strategy of including in the
contracting programme bodies which were likely to be best prepared to deal with the audit.
Managing the Contracting Programme
There was very keen competition for the work among tenderers. Subject to all tenderers
demonstrating that they had the capacity to provide the required service, price was the main
criterion used in selecting the contractors.
Competitiveness in the market, and an apparent strategic approach to pricing on the part of
tenderers, meant that the Office got good value from the contracting process. However, there was
a high degree of turnover of contractors from year to year, which potentially placed an additional
audit burden on clients who had to provide information afresh to new auditors each year.
The services of contractors were procured generally through annual tender competitions. (A small
number of audits were contracted for two years.) Past contractors surveyed for this review
suggested that all the parties involved — the Office, the audit clients and contractors — would
benefit if the same audits were contracted for a number of years.
Audit firms signed up for fixed price tenders and did not receive additional fees in the event that
material audit issues were identified. Several contractors commented on problems that arose due
to the lack of preparedness of the audit clients. In some cases, this led to delays in completing the
audit and additional costs being incurred by them. In a number of cases, the Office agreed to
release contractors from their contracts because of long delays in account production by clients. In
one case, the contractor was released part way through the audit due to the client’s inability to
service the audit properly.
A sample of the audit files submitted by contractors in 2003 were formally assessed by in-house
quality assurance reviewers to establish the quality of the work done during the audits by the
contractors. In addition to identifying a number of areas where the contractors were asked to do
further work to bring the audits to the required standards, lessons from the formal review were
incorporated into the contracting selection and evaluation procedures for the following year.
Using Contracting in the Future
This expenditure review concluded that contracting should continue to be considered as an option
in meeting audit demand in appropriate circumstances e.g. in ensuring that a significant problem of
audit arrears does not re-emerge in the future.
A number of key short to medium-term changes in the external environment for auditing public
bodies will impact on the optimal operational strategy for the Office in carrying out its programme
of audit work. These will also affect the extent to which contracting of audits may potentially
make a useful contribution to the achievement of Office objectives. The main issues to be taken
into account include
changes in the number and organisation of public bodies to be audited
the impacts of decentralisation, which will disperse further the locations at which the Office
is required to carry out audits; it may also, for a period, diminish the capacity of bodies
being audited to prepare for and respond to audits, due to turnover of staff; and will result
in the Office losing experienced staff who opt to take up decentralisation opportunities in
increased pressure on all public bodies to publish their audited accounts quickly following
the end of the year of account, leading to greater seasonality in audit work
the development of electronic systems for ‘paperless’ auditing, both by the Office and in
potential contractors, which may result in compatibility problems.
This review of the Office’s experience of contracting has pointed up a number of issues that
should be taken into account in planning any contracting of audits in the future. These include
the possibility that other, more flexible procurement models might be used, such as draw-
minimising any negative impacts of contracting on clients
the potential for conflicts of interest on the part of contractors to arise over time, as they
win other business in public sector bodies.
Broadly the same set of measures and indicators used in setting and monitoring performance
targets for audits done in-house should be capable of being used in target setting for audits
contracted out and for managing the contracted audits programme. Most of the information
required for measuring performance of financial audits is available from the Office’s management
information and management systems, but the systems need to be set up in such a way as to allow
routine reports to be generated comparing performance in managing audits.
1 Background to the Review
1.1 Under the Expenditure Review Initiative, central government departments and offices are
required to carry out cyclical programmes of reviews of their spending. The main objectives of
the Initiative are
to ensure there is systematic analysis of what departments and offices are actually
achieving with the resources they use and
to provide a basis on which more informed decisions can be made on priorities within and
between expenditure areas.
1.2 Departments and offices work in cooperation with the Department of Finance in deciding
on topics for review, and the sequencing of reviews. The Department of Finance has issued
guidelines on the general approach to be taken and on the review objectives. Senior managers in
departments and offices select the areas of spending to be reviewed and the review terms of
reference, and these are subject to Department of Finance agreement.
Review Terms of Reference
1.3 The contracting out of audits to private sector audit firms by the Office of the Comptroller
and Auditor General (hereafter referred to as the” Office”) was proposed as a subject for review.
Terms of reference for the review were drawn up along the lines set out in the Department of
Finance guidelines and were agreed with the Department of Finance. The terms of reference were
“The review of contracting of financial audits will:
examine the current validity of the objectives of the contracting of financial
review the outputs of contracting of financial audits in terms of timeliness of
completion of audits, cost of audits and quality of work done
comment on how efficient and effective the contracting of financial audits has
been, including in relation to clearance of arrears, and on how well it has been
assess if there is a continued justification for recourse to contracting, taking
account of the specific risks and opportunities associated with the approach,
seasonality in the audit workload and the overall strategy of the Office, and if so,
the objectives of any future recourse to contracting of audits
any constraints to its future use, and how those constraints should be
specific performance measures or indicators that might be used to
monitor better the contracting of audits
The review will examine the contracting of financial audits in 2003 and 2004.
Data in relation to audits conducted by Office teams for the same period will
also be examined.”
1.4 In practice, it was necessary to look at the experience of contracting of audits for the years
2001 to 2004 (i.e. the 2002 to 2005 audit years) in order to get a full and up-to-date understanding
of how efficiently and effectively the contracting programme had worked.
Background to the Contracting of Audits 9
Organisation of the Review
1.5 A Steering Group, comprising staff of the Office and representatives of the Department of
Finance, was established to oversee the carrying out of the review. The members of the Group
Office of the Comptroller and Auditor General
Gerry Smyth, Director of Audit
Seamus McCarthy, Deputy Director of Audit
Peter Deane, Deputy Director of Audit
Department of Finance
David Hurley, Principal Officer, subsequently replaced by David Denny, Principal Officer
Tom Byrne, Higher Executive Officer
1.6 Following a tendering competition, the Office commissioned Petrus Consulting to carry out
the expenditure review. The work was carried out by the consultant during the period May to
1.7 The Department of Finance guidelines for the Initiative require that, before reports on
expenditure reviews are completed, they must be subjected to a quality assurance process
performed by an independent external evaluation expert. This is intended to ensure that the
evaluative process and methodologies employed are robust. Following a tendering competition,
Dr Richard Boyle of the Institute of Public Administration was engaged to carry out this quality
1.8 The work undertaken in carrying out the expenditure review included the following
Examination of relevant strategic documents of the Office (e.g. the Statement of Strategy
2004 – 2006, and annual Corporate Reports)
Review of the Office’s work programme and resource planning processes
Review of the files documenting the process for procurement of contracting service in the
period subject to review
circulation of a questionnaire to the firms which carried out contracted audits
analysis of management information on the cost and timeliness of audits extracted from the
Office’s management information system.
interviews with key staff involved in the contracting process.
Structure of the Report
1.9 Part 2 of the report gives background information about the Office’s audit function, and
the reason why contracting of audits was undertaken. In Part 3, the scale of the contracting out
and the way in which the process was undertaken are described. The outcome of the contracting
process is discussed in Part 4, focusing in particular on cost effectiveness and timeliness.
Management of the contracting process is examined in Part 5. Part 6 looks to the future,
considering the kinds of challenges that are likely to arise for the Office in delivering a timely and
10 Contracting of Audits to Private Sector Firms
cost effective audit service to its client agencies, and the potential role that contracting of audits
might play in meeting business targets. Part 7 considers what performance measures might be
most suitable to use in managing contracting out of audits in the future.
2 Background to the Contracting of Audits
Functions of the Office of the Comptroller and Auditor General
2.1 The Comptroller and Auditor General audits and reports to Dáil Éireann on the annual
financial accounts of government departments and offices, non-commercial State sponsored
bodies, public sector health agencies and various other public bodies. He is also empowered to
carry out examinations of the value for money achieved by those bodies in the performance of
their functions. Under his Comptroller function, he approves the release of State money for
purposes authorised by law.
2.2 The ultimate purpose of the Comptroller and Auditor General’s functions is to assure Dáil
Éireann and citizens that public money is being properly administered and is being spent to good
effect. In implementing his mandate, the Comptroller and Auditor General takes account of the
special considerations which attach to the management of public funds, including the requirements
of probity, risk management, sound corporate governance, accountability and transparency.
2.3 The role of the Office derives from the functions assigned to the Comptroller and Auditor
General. The Office delivers a programme of work designed to enable the Comptroller and
Auditor General to issue opinions on public accounts audited by him and publish reports on
important matters relating to value for money and the administration of public funds.
Accounts audited by the Comptroller and Auditor General
2.4 In 2004, a total of 376 sets of financial accounts (relating to the 2003 year of account) were
subject to audit by the Comptroller and Auditor General. This includes the accounts of
central government departments and offices (44 accounts)
funds managed by departments, such as the Social Insurance Fund and the Revenue
(receipts) Account (42 accounts)
non-commercial State-sponsored bodies (137 accounts)
health boards and agencies (42 accounts)
third-level education institutions (36 accounts)
vocational education committees (33 accounts)
county enterprise boards (35 accounts) and
North-South bodies, audited jointly with the Northern Ireland Audit Office (7 accounts)
The enormous differences in the scale and nature of activities carried out by the bodies subject to
audit, and significant sectoral differences in accounting requirements and practices, result in great
variation in the level of resources and effort required to audit the different accounts.
2.5 The number of accounts subject to audit by the Comptroller and Auditor General has
increased in recent years as new public bodies were established, particularly in the non-
commercial State-sponsored, health and education sectors. Between 1999 and 2005, the total
number of accounts for audit each year increased from 325 to 375.
12 Contracting of Audits to Private Sector Firms
2.6 The implications of changes in the number of accounts for the level of resources required to
carry out the audit programme have to be examined on a case-by-case basis in the light of the
particular circumstances surrounding the establishment (or abolition) of each body subject to audit.
Some of the new audits required significant additional resources; others required relatively little
extra resources. The Office identified the resource implications of the additional audit load, and
the Department of Finance agreed to increase the formal staffing establishment of the Office from
144 at the end of 2001, to 176 at the end of 2004.
2.7 The actual number of staff serving in the Office may not exceed the establishment level,
and in practice, will generally be below that level e.g. because of the time it takes to fill posts
when staff leave.
2.8 In the late 1990s, a particular staffing problem emerged when a high number of staff left
the Office to take up job opportunities elsewhere in the public sector and in the private sector, in
what was a very buoyant labour market. In the four years 1998 to 2001, the number of staff that
left the Office each year was equivalent to around 21% of serving staff. The staff retention
problem resulted in the average staff level falling to around 85% of the establishment in the period
2000 to 2002, thereby reducing the number of staff available to carry out audits. Perhaps more
significantly, the loss of so much accumulated experience and knowledge, and the inevitable lead-
time required to build up the knowledge and experience level of newly-recruited staff further
eroded the ability of the Office to respond to the audit demand.
2.9 A number of measures were adopted to try to improve the rate of retention of staff in the
Office. These, combined with a down-turn in the external jobs market, reduced the staff turnover
rate to a more sustainable level — around 8% in 2002 and 2003, and 5% in 2004. At the same
time, the increase in the establishment and steady recruitment resulted in staff numbers increasing
from an average of 125 in 2000 to an average of 160 in 2004.
2.10 At the end of 2004, the Office had a serving staff of 159. These were allocated between
four divisions of the Office:
Vote Audit Division, which audits accounts mainly of central government departments and
funds (48 staff — 30% of the total)
Semi-States Division, which audits the accounts of state-sponsored, health, education and
other bodies (75 staff — 47% of the total)
Value for Money Division, which carries out value for money examinations (14 staff —
9% of the total)
Corporate Services Division, which provides support services, such as human resources
management, auditing standards, accounts, IT, accommodation etc (22 staff — 14% of the
2.11 Most of the financial accounts audited by the Comptroller and Auditor General are
presented on a calendar year basis. Ideally, the audit of each year’s accounts should be completed
as soon as possible after the year of account. In practice, time is required by the bodies concerned
after the end of the year of account to prepare the final accounts, many of which are submitted for
audit in the second quarter of the year.
Background to the Contracting of Audits 13
2.12 Audits are scheduled in anticipation of accounts delivery, having regard to statutory
deadlines. The scheduling takes account of available audit staff resources, but must also take
account of when the bodies being audited are likely to be ready for the audit visit. Co-operation
between the audit team and the body being audited is required to ensure that matters raised during
audit are resolved speedily, so that the audit can be completed.
2.13 Given the nature of the account preparation and audit process, there is a significant risk that
delays in completing audits will arise. Difficulties can arise on either side (the Office or the
audited body) or on both. For whatever reason, if an audit is not completed before the year-end
following the year of account, the audit is considered to be in arrears.
2.14 Significant arrears of audits began to emerge in the late 1990s, mainly because the rapid
turnover in staff resulted in difficulties for the Office in mobilising sufficient audit teams with the
level of resources and the experience required to meet the demands of the annual audit programme
within the audit year. The growing number of audits added to the challenge. By the end of 2000,
a total of 134 audits were in arrears. The backlog continued to increase until the end of 2002,
when a total of 256 audits were in arrears.
2.15 Most of the audit arrears that arose were in relation to the accounts of semi-state, health and
Origins of Contracting Out of Audits
2.16 A small number of audits were contracted out to private sector auditing firms in 1997, with
the general objective of providing a good practice benchmark for the work of the Office. In 1998,
the level of contracting out was increased as a means of addressing the emerging arrears problem.
Resources to fund the cost of contracting out were available as a result of expenditure savings due
to staff vacancies.
2.17 Contracting out of audits was only one element in the strategy to eliminate the audit arrears
problem. Measures to increase staff retention were developed and implemented at the same time,
and there was significant recruitment and training of new staff. In assigning staff, resources were
reallocated from value for money examination work so as to build up staff levels on financial audit
2.18 The strategy of arrears elimination has reduced the backlog of audits. At end 2005, 68
audits were in arrears, but in most of these, the audit work had been substantially completed.
2.19 In the future, arrears may still arise, but this is likely to be for reasons other than a lack of
audit resources. For example, audits may be in arrears because clients have not produced accounts
for audit; or, where audit fieldwork has been completed, because there are issues arising in the
course of the audit that have not yet been concluded with the audit clients.
3 The Contracting Programme
Objectives of Contracting Out
3.1 The main strategic goals of the Office in relation to the carrying out of audits of financial
to audit the accounts of central government bodies to applicable standards
to carry out audits effectively through the efficient management of resources, costs and
performance — with a primary focus on cost of audits and timely completion of the audit
to manage the relationship with stakeholders (including audit clients) constructively.
3.2 Contracting out of audits was undertaken as a way of helping to achieve the strategic goals
relating to financial audits, by engaging additional resources on a short-term basis to meet some of
the audit demand. In managing the contracting, it was necessary for the Office to ensure that the
service was procured in a cost effective way, and that the audits contracted out were completed on
time and to the required standard.
3.3 In evaluating the level of efficiency achieved by the Office in using the money spent on
contracting, it is appropriate to focus primarily on the cost of the audits, and the timeliness of audit
completion. Comparisons with the costs and timeliness of completion of audits carried out in-
house are also appropriate, but such comparisons must have regard to differences in the type and
complexity of the audits carried out by contractors and those carried out in-house. These questions
are addressed in Part 4 of this report.
3.4 The scope of the audit work contracted out extended to operational planning for the audit,
carrying out of the audit on-site at the audited body’s premises, resolution of all matters arising
from the audit, and compilation to the required standard of the audit file for submission to the
Office. The audit files were then handled within the Office in the same way as if they had been
undertaken in-house, resulting in the issuing of an audit opinion by the Comptroller and Auditor
General. In this context, the main effectiveness issues revolve around ensuring that the audit work
is carried out to a standard that is sufficient to allow a reliable audit opinion to be given by the
Comptroller and Auditor General. Another key effectiveness issue was for the Office to ensure
that its ongoing working relationship with bodies audited on its behalf by the contracted firms was
maintained and developed. How well these effectiveness challenges were managed is discussed in
Part 5 of the report, along with other issues around the management of the contracting.
Scale of Contracting Out
3.5 In 2002 and 2003, around 80 audits on the Semi-State Division side were contracted out
each year (see Figure 3.1). In 2004 and 2005, the number of audits contracted out was less than
half that level, reflecting the increased capacity of the Office to carry out the work in-house. The
level of direct payment to contractors was influenced mainly by the scale of contracting. For 2002
and 2003 contracted audits, payments totalled around €500,000 a year, falling to around €240,000
a year for 2004 and 2005 audits.
1 The strategic goals of the Office are set out in its Statement of Strategy 2004-2006.
Contracting and the Efficiency of Audits 15
Figure 3.1 Summary of extent of contracting out of
audits, 2002 to 2005
Year Number of Contract
2002 85 469
2003 76 515
2004 31 253
2005 35 234
a Audits contracted out in 2005 relate to the 2004 year of
Selection of Audits for Contracting
3.6 Because of the diversity in the nature of the bodies audited by the Comptroller and Auditor
General and in their accounting requirements, policies and practices, detailed consideration was
given each year to selection of the most appropriate audits for contracting out. The general
objective of the selection strategy was to contract only audits where there was a reasonable
prospect that the contractor would be able to complete the audit on time.
3.7 The following were the main principles used in selecting audits for contracting in the period
2002 to 2005.
In general, the most straightforward audits were selected for inclusion in the programme.
This was intended to reduce the learning curve for potential contractors. Additionally, this
tactic would free in-house resources to concentrate on audits where sector-specific and
public-sector knowledge was needed.
The particular requirements arising from the accounting system for central government
departments and offices were considered to make them unsuitable for inclusion in the
contracting programme, because of the steep learning curve that would inevitably be
involved for auditors with only private sector experience. In the context of short term
contracting, this was likely to result in high costs, both for the Office in managing the
contracting and for potential contractors in delivering the required service. Consequently,
none of the accounts of such bodies were contracted out. Effectively, this restricted the
contracting out to the area of work of the Semi-State Audit Division.
Accounts in respect of which the Office considered the audit risks to be low were
prioritised for inclusion in the programme. Generally, where there was a history of
difficulties in account preparation or in dealing with the audit, the bodies concerned were
excluded.2 Audits of new bodies, where audit risks had not yet been satisfactorily
established, were also excluded.
From 2003 on, bodies where audits were already in arrears, for whatever reason, were not
included in the contracting. This meant that contractors were able to focus on the latest
year of account, and to refer to a complete prior-year audit. The experience of the Office in
clearing arrears had shown that there frequently were extra difficulties in such cases in
getting sufficient explanations about issues arising during audits e.g. where relevant staff
2 In earlier years, contractors struggled to complete audits of some clients that were badly prepared, and
some had to be released from their contracts. See paragraphs 5.10 and 5.11.
16 Contracting of Audits to Private Sector Firms
might have moved on. It was felt that including audit arrears in the contracting could
increase the risks around delivery of the completed audit file on time.
Geographic location was taken into account in the selection. Audits for contracting were
clustered into groups in the same region, so as to minimise the extent of audit-related travel
for each cluster. It was hoped that this would help to induce audit firms in the relevant
regions to bid for the contracts, and that the travel-related cost advantage would be
reflected in a lower price to the Office.
Prior year experience with audits contracted out was also taken into account in selecting
audits for contracting.
4 Contracting and the Efficiency of Audits
Scale of Contracting
4.1 In simple numeric terms, the number of audits contracted out in 2002 and 2003 represented
over a quarter of the annual audit caseload on the Semi-State Division side, dropping to around
one eight of the annual caseload in 2004/2005 (see Figure 4.1). However, in terms of the
estimated resources required to carry them out, audits contracted out were, on average, somewhat
smaller than audits carried out in-house. Based on planning projections of the level of resources
required to carry out the audits in-house, the audits contracted out in 2005 represented about 11%
of the (weighted) audit caseload, while they represented around 12% of the total number of audits.
A broadly similar pattern is evident in the years 2002 to 2004.
Figure 4.1 Scale of contracting out relative to overall Semi-State audit programme, 2002 to
2002 2003 2004 2005
Audits contracted out 85 74 31 35
Contracted audits as % of all audits 32% 26% 11% 12%
Estimate of resources required to carry out 15.6 13.4 6.2 6.6
audits in-house (whole time equivalents)
As % of overall resource requirement for audits 29% 23% 10% 11%
Direct Cost of Contracting
4.2 Contractors were selected each year on the basis of the most economically advantageous
tender for each of the clusters of audits available. The procurement process was designed to
ensure the Office got good value from the contractors, and cost accounted for 70% of the
evaluation criteria scores.
4.3 The amounts paid to contractors — the direct cost of contracting — varied from year to
year, reflecting the number of audits and the prices tendered by successful contractors. The cost
per staff year was estimated in order to compare how the unit prices charged by the contractors
changed over time. See Figure 4.2.
Figure 4.2 Direct costs of contracting of audits, 2002 to 2005
2002 2003 2004 2005
Cost of contracted audits — €000 469 515 253 234
Whole time equivalents of contracted audits 15.6 13.4 6.2 6.6
Cost per contracted whole time equivalent — €000 30.1 38.4 40.8 35.5
Change in cost per whole time equivalent — +28% +6% -13%
18 Contracting of Audits to Private Sector Firms
4.4 The prices charged by successful contractors increased sharply between 2002 and 2003. By
2004, prices were almost 36% more than in 2002. In 2005, prices fell significantly. This
movement in prices reflects the combined outcome of the degree of competition in the market for
provision of audit services, the various strategies adopted by tenderers in pricing their bids, and the
impact of new entrants to the procurement competition.
Total Costs of Contracting
4.5 The payments to contractors do not represent the full costs to the Office of contracting out
audits. A number of Office staff are engaged, full-time or part-time, in managing the contracting
process e.g. in procuring the contracted service, working with contractors to prepare for audits,
assisting contractors when difficulties arise, and reviewing and following up on audit files when
they were submitted by the contractors. These represent overheads of the contracting programme.
4.6 The Office uses a time-recording system that is designed to record and report on time
allocations to individual audit jobs and projects, and to estimate the cost of jobs. Up to 2005,
provision was not made on the system for recording separately the management and review
activity associated with contracting out. Time allocated to these functions was instead recorded
under general administration and management headings. As a result, the system cannot generate
records of the staff time absorbed in managing audits contracted out in the period 2000 to 2004.
4.7 The staff involved in managing the contracting of audits were asked to provide estimates of
the proportion of their productive work time that was absorbed in that function in the period 2002
to 2005. Estimates of the staff resources absorbed, on a ‘whole time equivalent’ basis, are
presented in Figure 4.3.
Figure 4.3 Estimates of in-house staff time associated with contracting of audits, 2002 to
2002 2003 2004 2005
Staff managing/administering of contracting (whole time 3.3 2.5 1.7 1.6
4.8 The cost of staff time involved in managing and administering the contracting was
estimated, taking account of salary, employer’s PRSI, overheads and an allowance for deferred
pension costs. In Figure 4.4, payments to contractors (direct costs) and the estimated in-house
costs of contracting (indirect costs) are combined to give an estimate of the overall cost of the
contracting programme. The total cost of contracting is significantly greater than the amount paid
to contractors. In-house costs associated with contracting generally accounted for around 40% of
the total costs of contracting.
Contracting and the Efficiency of Audits 19
Figure 4.4 Estimated total cost of contracting of audits, 2002 to 2005
2002 2003 2004 2005
Payments to contractors (€000) 469 515 253 234
Costs of managing contracting (€000) 299 233 163 160
Total cost of contracting (€000) 768 748 416 394
Management costs as % of total costs 39% 31% 39% 41%
Relative Costs of Contracting
4.9 The contracting of audits was undertaken because the level of resources available in-house
was not sufficient to carry out the full audit programme within year, while also dealing with audit
arrears. In implementing the contracting, the Office sought to minimise the cost of carrying out
the contracted audits by geographic clustering of the audits to reduce the associated travel cost and
through competitive tendering of the work. While achieving cost savings was not the primary
purpose of the exercise, it is of interest to compare the cost of contracted audits with the cost of
carrying out the same audits in-house.
4.10 Figure 4.5 presents a comparison of the costs of contracting and the (notional) alternative of
carrying out the same audits in-house (e.g. by transferring some staff temporarily from other
duties, and deploying on audit the staff engaged in managing contracting). The comparison was
done on a marginal cost basis, rather than on the full cost basis used in Figure 4.4, since overall
Office overheads (e.g. management staff costs, support services, accommodation costs, etc) would
be relatively unaffected by the decision to contract out audits, or to carry out the audits in-house.
Figure 4.5 Estimated savings achieved through contracting of audits, 2002 to 2005
2002 2003 2004 2005
€000 €000 €000 €000
Marginal cost of carrying out audits in-house 768 690 359 406
Marginal cost of contracting 631 644 352 332
Estimated saving through contracting 137 46 7 74
Note: a Differs from the total cost of contracting estimates shown in Figure 4.4 because it excludes overheads
apportioned to staff involved in managing contracting.
4.11 The marginal cost comparison indicates that contracting yielded a significant saving on
expenditure in 2002, but the saving reduced in the subsequent two years. By 2004, the increased
costs of contracting had almost eliminated any element of saving. A significant saving re-emerged
in 2005, at least in part reflecting the low cost bids received.
20 Contracting of Audits to Private Sector Firms
Timeliness of Audit Completion
4.12 Timeliness of audit completion is a key efficiency issue for financial audit. Assessment of
performance in this regard generally focuses on the time that elapses between the end of the year
of account, and the signing of the audit certificate. All audits relating to a particular financial year
must be completed before the final assessment of timeliness can be prepared, but interim measures
can be compiled when the bulk of the audits are completed.
4.13 As the problem of significant audit arrears emerged, the average elapsed time to completion
of audit grew. The average time to completion of 2001 audits was around 73 weeks. The
deployment of additional resources to carry out audits (including contracting), and a sustained
focus on eliminating arrears resulted in the average elapsed time to completion being reduced for
later years. The average time to completion for 2004 audits (with about 92% complete) was 42
weeks. See Figure 4.6.
Figure 4.6 Average time to completion of 2001 to 2005 audits
2001 2002 2003 2004 2005
Note: Based on status of audits at 22 December 2005. The proportions of audits completed at that
date were: 2001 and 2002 — 100%; 2003 — 98%; 2004 — 92%; 2005 — 83%.
4.14 The overall elapsed time to completion of audits can be divided into two main components,
over which the Office exercises different degrees of control
the elapsed time from the end of the year of account to the presentation of the accounts for
audit, which is within the control of the body being audited
the elapsed time from the receipt of the accounts for audit, to the signing of the audit
certificate, over which the Office has a greater degree of control (though the standard of
preparation of accounts, and the ability of the audited body to respond to issues raised
during audit will also impact on the elapsed time).
4.15 The elapsed time to presentation of accounts averaged 26 weeks for 2001 audits, and
increased to 29 weeks for 2002 audits. Accounts were presented more promptly in the following
years — the average elapsed time for presentation of accounts was 22 weeks for 2003 audits, and
20 weeks for 2004 audits. With 94% of accounts received for 2005 audits, the average elapsed
time for presentation of accounts was 17 weeks.
4.16 Where audits were selected for contracting out, the average elapsed time to presentation of
accounts was lower than for accounts generally, each year. This reflects the strategy of including
Contracting and the Efficiency of Audits 21
in the contracting programme those bodies that were likely to be best prepared for dealing with the
4.17 Measurement of the elapsed time between receipt of accounts for audit and the completion
of the audit provides a basis for comparison between the audits carried out in-house and those
contracted out. Figure 4.7 presents such a comparison.
Figure 4.7 Average time to carry out 2001 to 2005 audits
Audits done in-house
50 Audits contracted out
2001 2002 2003 2004 2005
Note: Based on status of audits at 22 December 2005. The proportions of audits completed at that date
were: 2001 and 2002 — 100%; 2003 — 98%; 2004 — 92%; 2005 — 83%.
4.18 On average, audits contracted out were completed in a somewhat shorter time than audits
carried out in-house. To some degree, the difference may reflect the strategy of choosing audits
for contracting where the bodies concerned were likely to be best prepared for dealing with the
5 Managing the Contracting Programme
5.1 The Office has developed procedures to ensure that the quality of audits performed on its
behalf by contractors reaches the same minimum standards as the financial audits carried out in-
house. The process is administered by a designated unit in the Semi-States Division, with
assistance from the Office’s Accounts Branch. The procedures include
the initial procurement and selection of professionally qualified firms and individuals to
carry out audits
review of the individual working papers for each audit
an overall review of working papers presented to establish the adequacy of the audit
approach used by each firm.
5.2 The procurement process commences with the selection of specific audits to be contracted.
These audits are grouped into clusters on the basis of geographic area. The tender competition is
advertised in the EU Journal. Tenders received are evaluated in detail and audit firms selected on
the basis of the most economically advantageous tender.
5.3 Tenders are initially evaluated as to whether the tendering firm undertakes to complete the
audits by the deadlines set out in the invitation to tender and whether they demonstrate the
capability to perform the audits tendered for. Aspects considered at this stage include the size of
firm, the staff resources proposed, and evidence of experience, professionalism and credibility of
personnel. In the second stage of the evaluation, the proposed cost, mandays required, knowledge
and appreciation of the public sector accountability process are assessed. The professional
approach of the tenderers is also considered, based on aspects such as the audit planning
procedures, audit methodology, documentation and review practices, client service standards and
procedures to ensure timely completion. Following the application of appropriate weightings, the
tenders are ranked, and the firm considered to have submitted the most economically advantageous
tender for each cluster of audits is selected and contracted.
5.4 Analysis of the bids received from tenderers in the yearly procurement competitions
indicates that firms that won contracts in one year tended to increase their bid prices moderately in
succeeding years. However, especially on the smaller audits, they were frequently displaced by
new entrants who underbid them, or by firms that had won similar contract clusters in an earlier
year, lost them subsequently and regained them by adjusting their pricing. This degree of
competition kept tender prices down, but also resulted in a lack of continuity that potentially
placed an additional audit burden on clients who have to provide information afresh to new
auditors each year.
5.5 The survey of audit firms carried out as part of this review asked respondents to identify
potential improvements to the procurement process. Responses were received from ten of the
firms who participated in the contracting, and their comments included the following points.
Half the respondents suggested that there would be benefits for all parties if audits were
contracted to the same firm for a number of years. They pointed out that the contractors
would benefit from a learning curve effect, the audit bodies would have auditors with
greater familiarity and the Office would have a reduced procurement burden.
Two respondents commented favourably on the process, stating that it was carried out in a
timely manner and that the material requested was relevant and specific to the purpose.
Managing the Contracting Programme 23
Another suggestion made was that the time input for audits in earlier years should be made
available when tenders were being sought. However, this could cause difficulties if the
time input in the previous years were either abnormally high or low.
5.6 Because the procurement process was heavily weighted towards price, a strategy of
reducing prices as an ‘investment’ to win a group of audits was unlikely to have been rewarded by
winning a similar group of audits in the following year. In those circumstances, there would be
little incentive for a contractor to try to deepen its understanding of the client’s business or to
probe issues very deeply. On the contrary, probing an issue could result in further work for the
contractor that would generate no additional reward, since the fee had already been fixed.
5.7 There may have been other reasons for tenderers pricing their bids strategically. For
example, some contractors may have taken the view that they would improve their chances of
generating future income from public sector work generally, based on the experience and
knowledge gained on the contracted audit work. In this way, they may have expected to recover
their ‘investment’ from this broader pool of work.
5.8 The involvement of firms in both audits and in other public sector work may give rise to
problems of conflict of interest in the future. There is a range of work undertaken by firms —
such as accountancy services, tax services, advice on corporate governance arrangements, ICT
consultancy and internal audit — that represents actual or potential conflicts of interest when it
comes to acting as external auditor. If contractors succeed in winning such work, they may
consequently become ineligible to act as external auditors in the future. This may ultimately
reduce the level of competition in procurement competitions and potentially have an impact on
5.9 Service delivery is the responsibility of the audit firms selected for the particular audits.
The Office has a role in establishing contact between the audit firm and the body to be audited and
to assist in situations where the auditors encounter difficulties.
5.10 Audit firms submit fixed price tenders and do not receive additional fees in the event that
material audit issues are identified. Several contractors commented on problems that arose due to
the lack of preparedness of the audit clients. In some cases, this led to delays in completing the
audit and additional costs being incurred by them. Suggestions to improve the situation included
having the CEO/Board of Management provide a formal undertaking that the audit file was ready
in the format required in the letter of engagement prior to commencing the audit and making audit
clients more accountable for the quality of information provided to the auditors.
5.11 In a number of cases, the Office agreed to release contractors from their contracts because
of long delays in account production by clients. In one case, the contractor was released part way
through the audit due to the client’s inability to service the audit properly. In cases where
contractors experienced difficulties with the preparedness of clients, this was taken into account in
the selection of audits for contracting in subsequent years.
5.12 Under the terms of the contract with the audit firm, each audit must be planned, performed
and reported on to the appropriate standards set out by the Auditing Practices Board. 3 After the
completion of the audit fieldwork, the contractor submits a report on the results of the audit and an
audit sign-off document to the Office, along with the audit working papers and the draft financial
3 The Auditing Practices Board leads the development of auditing practice in the UK and in Ireland.
24 Contracting of Audits to Private Sector Firms
statements. Staff of the Office review the files and statements submitted, and any issues arising or
defects are notified to the relevant contractor.
5.13 A sample of contract files in 2003 were formally reviewed to assess the compliance of the
audit approach being used with auditing standards, the quality of the audit files presented to the
Office. The quality review considered the appropriateness of the audit tests carried out, the quality
of audit evidence, soundness of decisions and recommendations, documentation completion
standards and file structure and layout. The review concluded that
Large contractors had very robust and comprehensive auditing systems; smaller contractors
had complied with most aspects of auditing standards, but some had relied more on
judgement than on formal systems in certain complex areas, such as determination of an
efficient audit approach, and in considering materiality and risk.
There were some problems with the quality of many of the files initially submitted by the
contractors, including a few cases of inaccuracies and inconsistencies, audit tests carried
out when others might have given greater assurance, and poor presentation.
Where necessary, files were referred back to contractors for further action, until the work done was
deemed to be sufficient to allow the issuing of a reliable audit opinion. Lessons learned from this
review were taken into account in the procedures for selection and evaluation of contractors for the
5.14 In responding to the survey of contractors undertaken for this review, suggestions for
improvements in this area included
the review by Office staff being carried out on electronic copies of the working papers with
hard copies to follow at completion
greater commitment on the part of the Office to scheduling the reviews and clearance of
audit queries e.g. setting dates in advance for all reviews and faster turn-around..
Review and Feedback
5.15 The Office is currently planning to carry out a survey across all bodies audited to obtain
feedback on the audit process generally, including audits carried out by contractors on behalf of
6 A Role for Contracting in the Future?
6.1 The environment in which the audit of the financial accounts of public sector bodies is
carried out is subject to considerable change. Delivering the audits efficiently and effectively in
that environment requires that the Office’s operational strategies evolve to meet the changing
6.2 The key short to medium-term changes in the external environment which need to be taken
into account in developing the optimal operational strategy for financial audits, including any
future role for contracting of audits, include the following.
Changes in the number and organisation of public sector bodies may result in a requirement
to adjust the level of resources allocated to carry out financial audits in the future.
Contracting could serve as a source of additional resources in the short-term where
allocation of significant additional in-house resources may take more time. However,
changes are not all in the direction of increasing the level of audit demand. For example,
the resources required to carry out the audit of the Health Services Executive will be less
than the resources required to audit the health boards and health agencies that have been
amalgamated to create the Executive.
Decentralisation of public sector bodies is likely to impact on the Office in a number of
ways. First, it will disperse further the bodies being audited, which is likely to result in
significant increases in the amount of travelling that would be involved in carrying out
audits from a single Dublin base, or the establishment of a regional office structure.
Second, extensive exchanges of staff in bodies being audited may create difficulties for
audited bodies in preparing accounts for audit and in dealing with audit demands. Third,
the Office may lose a significant number of experienced staff who opt to take up the
opportunity to transfer to decentralising posts. 4
There is an increased expectation that the financial accounts (and performance reports) of
public bodies should be made available quickly following the year of account. As a result,
in the future, it may be expected that most financial accounts will be presented for audit
within a narrow time period (January to April), with an expectation that audits will be
completed quickly. This will heighten what is already a seasonal demand profile. The
Office has committed itself to meeting published customer service targets on timeliness,
and is now meeting those targets.
The Office has carried out a pilot exercise to test the potential for developing a ‘paperless’
audit process, and is considering the results of the exercise. This kind of process may yield
productivity gains. On the other hand, where the Office and/or potential contractors use
different auditing software, there may be difficulties in carrying out the necessary reviews
of audit files. This would make the contracting of audits less attractive.
6.3 In addition to changes in the general environment for audit, the Office’s experiences with
contracting, as described in previous sections, also need to be taken into account in considering the
circumstances in which contracting of audits might be availed of in the future. The following are
key issues that will arise to be considered.
The arrangements for contracting of audits in the past (i.e. annual procurement
competitions for clusters of specified audits) allowed the Office to secure resources for
auditing at a competitive cost, but were inflexible. There may be benefits to be gained in
4 The number of staff who will leave through decentralisation transfers cannot yet be determined. Over a quarter of the
serving staff have registered an interest in one (or more) of the decentralisation locations. However, not all of these
may receive a transfer offer; and not all of those who are offered transfers may take them up. Up to January 2006,
seven staff had been offered transfers: of these, five have accepted the offers and two have declined.
26 Contracting of Audits to Private Sector Firms
trying other structures. For example, the Office could seek to put in place one or more
draw down contracts, where contractors would agree in advance to provide up to a
specified maximum quantity of audit services at an agreed unit price; subject to agreement
with the contractor, the Office would decide how much of the service to call for, in what
combination, and for what audits. This would allow for a more flexible response to the
demand for audits.
Excessive turnover of contractors may impose an additional burden on clients, and may be
disruptive of the Office’s relationship with clients. In line with the Office’s strategic goal
of managing the relationship with its stakeholders constructively, any future contracting
should seek to minimise such client impacts.
A continuous and sizeable programme of contracting of audits could progressively give rise
to potential conflicts of interest, if contractors subsequently win other business in public
sector bodies. This might rule out certain firms from particular audits and make contracting
6.4 Despite the concerns outlined above, contracting should continue to be considered as an
option in meeting audit demand in the future. Substantial progress has been made in reducing
arrears and securing more timely certification, and in certain circumstances, contracting of audits
might have to be considered to preserve those gains.
7 Performance Measures and Indicators
7.1 Contracting out of audits is an alternative approach to carrying out financial audits using in-
house resources. Consequently, the same set of measures and indicators used in setting and
monitoring performance targets for audits done in-house should be capable of being used in target
setting for audits contracted out and for managing the contracted audits programme.
7.2 The key measures that are relevant to target setting and monitoring of performance in
relation to the carrying out of financial audits have been used in earlier parts of this report. These
number of audits to be carried out in each audit year
estimated staff days for carrying out each audit in-house
cost per staff day
the full cost of carrying out each audit
average cost of audit, and average adjusted for audit size (measured by staff day
elapsed time to presentation of accounts for audit
elapsed time from presentation of accounts to completion of audits
elapsed time from end of year of account to completion of audit
7.3 The measures proposed above can be used to derive the following measures specific to the
choice of means of carrying out audits (i.e. in-house or contracted out)
total staff resource requirement to carry out audits in-house (audit workload)
proportion of audit workload being contracted out/undertaken with in-house resources
unit cost of contracting out (€/workload day) compared to in-house charge rate.
7.4 The process of selection of audits for contracting has implications for the outturn values for
performance measures. Simple comparisons of values for contracted audits and audits undertaken
in-house, without reference to the impacts of the selection strategy, are not meaningful.
7.5 Most of the information required for measuring performance of financial audits is available
from the Office’s management information system. However, the system is not set up in such a
way as to allow routine reports to be generated comparing performance by method of delivery (i.e.
in-house, contracted out, all). Consequently, it is difficult to extract relevant information from the
management information system to inform decision-making about the contracting of audits. In the
event that contracting of audits is undertaken again in the future on a significant scale,
management information reports should be adapted to allow performance to be monitored for the
different delivery methods.