Examination of Witnesses (Questions 142
- 159)
TUESDAY 1 FEBRUARY 2000
MR STEPHEN
FREER AND
MR VERNON
SORE
Chairman
142. Can I welcome you to the Committee, and
ask you to identify yourselves, for the record, please?
(Mr Freer) Thank you. I am Steve Freer. I am the new
Chief Executive of CIPFA; and this is Vernon Sore, who is the
Policy and Technical Director of CIPFA.
143. Thank you very much. Do you want to say
anything by way of introduction, or are you happy to go straight
into questions?
(Mr Freer) We are happy to go straight into questions,
Chairman.
Christine Butler
144. What do you expect the Public Audit Forum
to achieve?
(Mr Freer) Our hope is that it will achieve better
co-ordination of public audit amongst the principal agencies.
145. I am not being nit-picking here, but you
said you hoped, and I asked you what do you expect it to achieve;
slightly different?
(Mr Freer) The reason I was using the word hope is
that it is early days, but we would expect it to—
146. Where expect implies a certain degree of
confidence?
(Mr Freer) We would expect it to deliver a more co-ordinated
system of public audit, and a more efficient and effective audit
process. And I think I would also say that we are encouraged by
the early work of the Forum, which has existed now for about 18
months and has already produced a couple of notable and helpful
publications; but, I make the point, it is early days, and obviously
time will tell how successful the Forum is.
147. You do not think it will just serve to
endorse the status quo, being that it is run by the audit
bodies themselves, and it is not being challenged particularly?
(Mr Freer) Again, I would hope not, and I think there
is an obligation on the audit bodies to ensure that it does not
develop in that way and reinforce complacency, if you like, within
the agencies. And the early commitment that the agencies have
made, in terms of seeing it as being a forum which is there to
improve co-ordination and improve efficiency and effectiveness,
I think, augurs well, in terms of the attitudes of the agencies.
Mr Cummings
148. The Committee have been informed that Ernst
& Young have withdrawn from the market, last year, claiming
that the low fees made it impossible for it to continue operating.
Do you believe there is a real danger that more firms will pull
out of the public audit market due to low fee levels?
(Mr Sore) If I can answer this one. Yes, it is true
that Ernst & Young and another firm did withdraw from the
Audit Commission market; and I think there is a danger that some
other firms might. However, to balance that, it is quite clear
too that some very big firms have actually stayed in the market
and have not pulled out, and the reasons for that may be various,
it may be that they find great advantages in being in the audit
market for Audit Commission work because of the high prestige
it brings. So I think it is a balancing act. But I think there
is evidence on both sides; yes, some firms have pulled out, some
have not. And, in terms of fee levels, which I think this is mainly
related to, I think you have to sort of put it into the context
of what is a low fee level for an audit firm. Audit Commission
fees might be low in comparison with the fees they could earn
elsewhere, but it may not mean necessarily that the fee itself
is inadequate to cover their costs and their reasonable expectation
of return.
149. Given that both sides of the market, local
authorities and audit firms, seem very unhappy with the levels
of fees, does this mean that the Audit Commission has got it right?
(Mr Sore) Again, I would say, yes, probably, on balance,
the Commission has got it right. I refer again to the fact that
if all the firms, and obviously they are very commercial operators,
these big firms, felt that the fees were too low, presumably,
we would have seen more come out of the market by now. So I would
say that, possibly, on balance, the Commission has got it right,
yes.
150. And has the Audit Commission work led to
improved professional standards, in your opinion?
(Mr Freer) I would say, yes. It depends on whether
we are speaking about professional standards of the professions
within local authorities, or whether we are talking about improved
standards, in terms of the professional standards of the auditors
carrying out the audits. But, actually, in both cases, I would
say that I think there is encouraging evidence that the Commission's
work has led to improvements in standards.
151. Do you have any concerns about the Commission's
ability to retain its critical mass and calibre of staff?
(Mr Freer) On balance, I would say, no. First of all,
I think, just by observation, the Commission appears to offer
competitive terms and conditions when it recruits its staff, and
so I think it is in a strong position to retain its best staff.
I would then perhaps just qualify that in relation to the new
function of carrying out Best Value inspections, where, obviously,
there is a particularly difficult task in ensuring that large
numbers of suitably skilled people are recruited and trained and
put in position to carry out those inspections very quickly. But,
again, I would be very optimistic that the Commission will do
that well, and that Best Value inspections will be carried out
well.
152. In your evidence, you say it is important
that the Audit Commission has the ability to recruit and retain
high calibre staff, and do you believe they have the ability?
(Mr Freer) Yes. Again, I think, all the evidence is
that the calibre of staff that are recruited by the Commission,
and that, of course, then translates through into the quality
of the work that is produced by the Commission, by those staff,
all of the evidence is that the Commission does well in those
areas.
Mr Olner
153. I just wonder whether you think there is
a difference perhaps between the approach by the Audit Commission
and by private firms of auditors in the way they report on the
audit?
(Mr Freer) No, I do not think so. Most of my own personal
experience is of private auditors rather than of the District
Audit Service, but just by discussion with colleagues around the
country, and so on, my impressions are that the standards are
increasingly uniform in both systems of audit, and, I think, the
earlier discussion about management letters, for example, increasingly,
I think, there is a consistency about the style of management
letters that I have seen, irrespective of whether it is a private
auditor or a district auditor writing the management letter.
154. But the Audit Commission's district auditors'
letters are a lot sharper than those that are given by private
firms?
(Mr Freer) I would not have said so. I say again,
my main experience has been of private auditors, and when they
need to be sharp my experience is that they are more than ready
to be sharp, either in terms of praising good practice or in criticising—
155. But that was not what the Chairman of the
Public Accounts Committee told this Committee, in its first evidence
session, where he cited, I think, South Yorkshire Health Authority,
where they had private auditors, and discrepancies would not have
come to light without there having been a whistle-blower. So,
for years, there was this sort of cosy relationship and this softening
of reporting?
(Mr Freer) First of all, I think there is a danger
in trying to build a general case on a single specific example.
But I would also say, I am not arguing that either system of audit
is perfect and will always pick up every discrepancy that, in
an ideal situation, ought to be identified by auditors; clearly,
both systems are imperfect, in that sense.
Mrs Dunwoody
156. But is there not a difference between a
commercial audit and an audit of local government, that there
is no point in having an auditor who does not understand the complex
processes with which he is dealing? And in a commercial firm,
without in any way meaning to underplay the quality of their work,
that must be easier than if, for example, you are dealing with
the National Health Service, where if a health professional says
to you, "It is essential that we keep on board X," then
at a certain moment there must be a degree of trust between the
auditor. So is there not a sort of danger that there will be a
grey area between the two, where the commercial auditor can look
at a commercial firm and very rapidly come to some assessment,
but that degree of expertise must be different in the public sector?
(Mr Freer) Yes. Certainly, auditing a public body
is very different from auditing a private firm; but the auditors
that the firms use to carry out public audits are specialised,
local authority auditors.
157. Have been, but then we are told that the
build-up of staff will need to be quite quick, surely?
(Mr Freer) That is a different point, that is about
Best Value inspections, and those staff are going to be employed
by the Commission. The staff that are employed by private firms,
at the moment, are employed to carry out audits, and they recruit
and train and develop specialist local authority auditors, and
in many cases they are former local authority practitioners; and
that is a similar approach to that which is adopted by the District
Audit Service.
158. Poachers turned gamekeeper?
(Mr Freer) In some cases.
Christine Butler
159. Could I ask you, do you think that local
authority audits should be opened up more to competition?
(Mr Freer) There is competition, there is market testing
at the moment.
Chairman: It is fiddled, is it not?
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