| 16 August 2005 |  |
| To | Heads of HEFCE-funded higher education institutions |
| Direct Line | 0117 931 7300 |
| Direct Fax | 0117 931 7203 |
Circular letter number 22/2005
For further information contact Ian Parry, tel 0117 931 7091, e-mail i.parry@hefce.ac.uk
Dear Vice-Chancellor or Principal
External audit: independence, objectivity and ethics
1. This letter invites comments on proposed changes to the HEFCE code of practice on audit and accountability. Any comments should be sent to Amy Parslow (a.parslow@hefce.ac.uk) by 14 October 2005.
2. In 2004 we published 'Accountability and Audit: HEFCE Code of Practice' (HEFCE 2004/27). This code contains paragraphs on auditor objectivity, additional services and rotation of external audit providers and audit partners.
3. Since the code was issued, the Auditing Practices Board (APB) has published its ethical standards for auditors (www.asb.org.uk/apb/publications/ethical.cfm). The standards require external auditors to assess the potential threats to the auditors' independence or objectivity and to apply safeguards to address them. They set out general requirements and principles for the auditor to follow which should be incorporated within the firm's own policies and procedures. The standards address 10 specific areas of non-audit services, including internal audit, IT services, tax and accounting services. They apply to audits of financial statements in both the private and public sectors.
4. We have compared some of the key elements in the new ethical standards against the existing requirements in the code. This indicates that further changes to the code are necessary to accord with best practice. The proposed changes are highlighted in Annex A. Following comments from the sector, we aim to incorporate any changes into the web-based version of the code in October 2005.
5. To assess the potential risk to auditors' independence, we analyse the value of non-audit services provided by external auditors as part of our review of institutions' financial statements. The outcomes are reported to our Audit Committee. Although lower than in the previous year, the value of non-audit services reported for 2003-04 equated to 84 per cent of the total external audit fee in the sector. The HEFCE Audit Committee has requested that I ask you to inform your own audit committee about additional services (non-audit work) provided by external audit, before that work is undertaken, and to draw their attention to the new APB ethical standards.
6. Please could you copy this circular letter to your audit committee and external audit engagement partner.
Yours sincerely
Howard Newby
Chief Executive
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