Enquiry:

Company ABC Ltd (hereinafter referred to as ‘Company’) is a Public Sector Enterprise listed at all Stock Exchanges of Pakistan. The Company complies with Code of Corporate Governance 2012 and Public Sector (Corporate Governance) Rules 2013, both issued by Securities and Exchange Commission (SECP) of Pakistan.

The Company has a well-equipped Internal Audit Department, headed by a Qualified Professional (FCA), and the Department carries out all Internal Audit Assignments in-house, except for few third party audits which are outsourced, keeping in view availability of staff resources.

Public Sector (Corporate Governance) Rules 2013 (hereinafter referred to as ‘Rules 2013’) requires all Public Sector Enterprises to implement, as far as practicable, International Standards for the Professional Practice of Internal Auditing (the Standards) issued by the Institute of Internal Auditors (the IIA).

External Quality Assessment Review: The Board Audit Committee (BAC) of the Company decided to conduct an External Quality Assessment Review (QAR) of Internal Audit Department, keeping in view the provisions of the IIA Standard 1312. The objective of this review was to assess the effectiveness of Audit Function, and to identify areas where improvement can take place. Furthermore, another objective of this review was to obtain independent assurance that all legal and regulatory requirements associated with Internal Audit Function are being complied with and that sufficient procedures exists within the Internal Audit Department to ensure that Quality work is performed.

Draft Internal Audit Manual: The Internal Audit Department has also prepared a Draft Internal Audit Manual, detailing procedures that should be implemented in the Audit Department, so as to achieve more efficiency and standardization of audit work. The procedures are in draft form, and are different from existing procedures being followed. Keeping in view that an External QAR may take place, it was envisaged that results of QAR are likely to impact the Draft Procedures which may require amendment/ improvement. Therefore, it was decided that results of QAR will be incorporated in the draft Manual, so that its implementation will not cause any inconsistency with the results and recommendations of QAR.

Scheme of Work: For this purpose, Internal Audit Department wants to appoint a Consultant, to broadly cover the following work:

1.    Carry out QAR in line with guidelines of the Standards issued by IIA, and produce a report highlighting areas in Internal Audit Department where improvement is sought, including the blend of staff and core competencies required, scope of work, effectiveness of existing procedures, etc.

2.    To take the results of QAR and review the Draft Audit Manual and ensure that the draft procedures are in line with the results and recommendations of QAR. Where any inconsistency is noted, the Consultant will be required to make suitable amendments or additions in draft procedures to bring them in line with results of QAR.

Question:

The Management of the Company is evaluating whether the above scheme of work raises any question of ‘Conflict of Interest’ or ‘Independence’ if the work of QAR and Revalidation of Draft Audit Manual is given to a single consultant. The Management has the following questions:

1.    If the Consultant who is carrying out QAR is also required to revalidate the Draft Procedures, will it create a ‘Conflict of Interest’, keeping in view the requirements of IIA Standard?

2.    Does QAR falls under the ‘Attribute’ Standards, and Review of Manual falls under ‘Performance’ Standards, and if so, do the Standards require that these work be carried out mandatorily by two separate consultants?

Internal Audit Department of the Company has reviewed the Standards in detail, including Practice Advisory on QAR (1312-1) and finds that no such conflict of interest prevails if a single consultant is required to carry out QAR and revalidation of draft Internal Audit Manual. Furthermore, QAR covers compliance of all Standards, and not just Attribute standards, and review of existing procedures is also part of such QAR.

Request to ICAP Committee:

The Committee is requested to kindly provide its view on the questions 1 and 2 noted above. The opinion of honorable Committee will assist the Company in opting a way forward.

Opinion:

The Committee has considered your enquiry and would like to state in the beginning that the Committee primarily deals with matters related to accounting, auditing, governance and related laws and regulations. Accordingly, the knowledge and expertise of standards issued by the Institute of Internal Auditors are not available with the Committee and accordingly we are constrained to issue any views and opinions on these standards.

However, since the matter relates to practicing members of the Institute, the Committee is expressing its views in accordance with the ICAP Code of Ethics, as applicable in Pakistan, which is obligatory on ICAP members.

Accordingly, we are expressing views on question 1 only.

Based on the available information the Committee considers that conflict of interest situation does not appear to arise when both the engagements are performed by a single consultant.

However, the Committee would like to emphasize that one of the primary responsibilities of the Audit Committee is to assess independence while approving engagement of consultants. The Audit Committee must take into account relevant facts, including an inquiry from prospective consultants regarding their own independence assessment of the engagement, and firm level risk mitigation and threat safeguard procedures to be adopted by the firm.

(April 22, 2014)