Independent Audit

Once an LTA has prepared its assessment of the proposed franchising framework, if it wishes to proceed further, it must obtain an independent audit report on its franchising assessment. The auditor’s report must consider the analysis of the financial implications contained in the assessment.

 The report must state whether, in the opinion of the auditor:

  • the information relied on by the LTA in conducting the analysis is of sufficient quality
  • the analysis of that information is of sufficient quality, and
  • the LTA has had due regard to this guidance under section 13E(5) of the 2001 Act, in preparing the analysis.

Although the 2001 Act requires the report to be prepared by an ‘auditor’, it is not intended to be a formal audit report in accordance with the Financial Reporting Council guidelines. The independent audit is an analysis of the financial implications contained in the franchising assessment prepared by the LTA. It must state whether the information used to inform the assessment is of sufficient quality, that the document has been produced in good faith and does not contain obvious material or arithmetic errors which could cast doubt on its overall conclusions.

The aim of the report is to provide assurance in:

  • the accuracy of the financial data used,
  • that the affordability and VfM analysis have been developed with appropriate care by suitably qualified experts, and
  • that the process followed is robust.

Together, the franchising assessment and the audit report should allow the LTA to decide on whether or not to proceed with the franchising process with confidence and reduce the risks of the LTA’s decision being challenged in the courts on the grounds of reasonableness.

The audit report is not a test to be passed or failed. It is intended to allow any significant weaknesses in the LTA’s analysis of the financial implications to be identified and addressed before a final decision is made on whether to proceed with the franchise proposals.

Matters to be taken into account by the LTA when selecting an auditor

The Act also specifies under section 13F(5) of the 2001 Act that the ‘auditor’ is a person eligible to be appointed as a statutory auditor under section 1211 of the Companies Act 2006.

This means that the auditor needs to be a qualified accountant and a member of a UK Recognised Supervisory Body, such as the Institute of Chartered Accountants of Scotland, with no conflicts of interest that would lead to difficulties in acting as the auditor on behalf of the LTA.

The certification process is not included within the scope of the audit as set out in the Code of Audit Practice and Audit Scotland’s guidance on planning the audit. The appointed external auditor of the LTA will not be responsible for the certification of the required returns.

The LTA should ensure that the auditor has, or has access to, appropriate transport experience to inform their report. This experience could be provided by another individual or body who offers advice on the Assessment and/contributes to the auditor’s report, provided that the final report represents the auditor’s own opinion on the information relied on by the LTA, and their analysis of that information to inform their Franchising Assessment.

Matters to be taken into account by the auditor when preparing their report

Appointed auditors must have regard to this guidance under section 13F(4) of the 2001 Act, when preparing a report. This guidance issued by Scottish Ministers under section 13E(5) of the 2001 Act sets out the requirements in relation to the preparation of an LTA’s franchising assessment, as well as the methods to be used when assessing a proposed framework.

The LTA is encouraged to invite the auditor to review a small number of drafts of the franchising assessment before a formal report is provided.

Whilst the auditor must remain independent, the aim of reviewing the draft franchising assessment is to improve the documentation, so that an informed and robust decision can be reached as quickly as possible. Any reviews of the draft franchising assessment should be documented by the LTA, including the views and recommendations of the auditor, and any actions taken as a result.

Start of guidance for auditors when preparing a report under Section 13F

When forming their opinion as to whether the information relied upon to understand the financial implications of making the proposed framework, and the analysis of that information by the LTA is of sufficient quality, the auditor should look at the franchising assessment in the round.

The auditor does not need to review in detail every data source or assumption but should consider whether there are significant areas of weakness, omission or error which individually or collectively could have a material impact on the franchising assessment’s conclusions on the costs, benefits, risks, or value for money of any of the options.

The auditor should consider:

  • whether there are any significant and material gaps in the information used
  • whether the information used generally comes from recognised sources
  • whether the information used appears to have been selected objectively, rather than to support the arguments in favour, or against, any particular option
  • whether the franchising assessment takes into account any effects or potential effects from external factors (such as the COVID-19 pandemic)
  • whether the assumptions used in the assessment are recorded and, where reasonably possible, are supported by recognised sources
  • where information and evidence are less well defined but would otherwise lead to an absence of data from the assessment, the LTA’s approach is not unreasonable and potential risks associated with the assumptions made are identified
  • whether appropriate ranges have been used for forecasts and associated uncertainties identified in the assessment
  • the mathematical and modelling accuracy of the analytical methods used to calculate the impacts of the options, and
  • whether the LTA’s assumptions on the costs and benefits of the best alternative options reflects the evidence available of what could realistically be delivered at the point at which the assessment was developed.

End of guidance for auditors

Where information and evidence is less well defined but would otherwise lead to an absence of data, the LTA should flag where an auditor has questioned the basis of the assumption and include the potential consequence to the business case of the assumption being removed. This allows the potential risk identified by the auditor to be clearly included within the business case and addressed.

Start of guidance for auditors when preparing a report under Section 13F

The auditor should not report or pass judgement on the decisions taken by the LTA or the outcomes of the franchising assessment – their role must state in their opinion, whether the analysis of the information relied upon for the financial implications is of sufficient quality and whether the LTA has had due regard of the guidance, and that the mechanics of the process have been carried out correctly.

The auditor should not expect the LTA to update the assessment if information becomes available or is updated at a later stage unless they consider it would have a material impact on the conclusions of the assessment and the choice between the options.

Should the auditor consider that there are material issues with the quality of the information or its analysis they should advise the LTA accordingly and identify, where relevant, what different approach or data source they would recommend.

As highlighted earlier in this section of the guidance, the auditor is not expected to produce a formal audit opinion within the scope of the Financial Report Council guidelines.

End of guidance for auditors

As highlighted previously, the audit report is not a test to be passed or failed. If the auditor proposes modifications to the assessment, the LTA will need to consider these, and if necessary, make the changes or justify why they are not modifying the assessment.