Examination of Witnesses (Questions 160
- 179)
TUESDAY 1 FEBRUARY 2000
MR STEPHEN
FREER AND
MR VERNON
SORE
Christine Butler
160. Alright then I will put it more bluntly.
Should it be a competitive tender?
(Mr Freer) I think, effectively, it is competitive
tender, although it is described more often as market testing.
Chairman
161. Come on, the real phrase is, you smiled
when I said "fiddled", let us get it on the record.
(Mr Freer) I was shocked when you said "fiddled".
Christine Butler: And hurt.
Mrs Dunwoody: Then we had better go over that
bit again.
Christine Butler
162. There are disagreements here. Local authorities
and private sector audit firms disagree with your view here; they
say that District Audit audits too many authorities and that there
should be a larger element of competition. You do not agree with
that, do you?
(Mr Freer) Right; first of all, I think, we are very
much in favour of a mixed market, and it is true to say that the
largest single player in the existing mixed market is undoubtedly
the District Audit Service. We would like to see more players
in that market, and that is why the issue about firms withdrawing
and the issue about whether the rates are set at the appropriate
level, those are very important issues and we ought to be trying
to draw in new players. Then I think we come to the issue of market
testing or competitive tendering to decide who undertakes which
audit; our view is that there ought to be a limited amount of
that, it would be just inefficient to run the whole system having
every authority going through an expensive competitive tendering
process, so there ought to be an element of that. And then I think
we rely upon the networks within the market for information about
the outcomes of market testing exercises to spread to other authorities;
and, I think, very obviously, if authorities feel that there is
a better deal likely to be on offer, if they volunteer to be part
of the next wave of market testing, then they will be putting
their hands up as volunteers.
163. It is interesting to know why you are saying
what you are saying. Can I just touch on a point that Mr Olner
raised a little while ago, and that is to do with the relationship
between the auditor and the audited: do you agree with the five-year
appointment?
(Mr Sore) Yes, I think, on balance, we do. Local authorities
and health bodies are very complex organisations to audit; the
audit requirement that the Code of Audit Practice puts upon public
sector audit goes much wider than a commercial audit, and there
are aspects of public sector audit where you do need a reasonable
amount of time to get—
164. So you are saying that in four or five
years' time they might get it right, but they would not in the
first couple of years; come on now?
(Mr Sore) No, I am not saying that; no, there are
different aspects to the audit. In terms of what one might call
the `core audit', financial audit of financial statements, one
would expect any auditor appointed by the Audit Commission to
do a very good job in the first year of appointment. But, in terms
of understanding, and I am going now a bit wider into areas like
management arrangements, Value For Money work, you do have to
build up a wide picture of the authority, and so a five-year appointment
term, in the first place, that can be extended, I think is appropriate,
provided, and the Commission do ensure this, that the work of
the auditor is reviewed; and the Commission has its own quality
control review process, to make sure that that is going on.
Christine Butler: In other words, handle with
contempt, I would interject. The Chairman wants to move on.
Mrs Ellman
165. Will the Audit Commission's independence
be compromised by its role in Best Value?
(Mr Sore) I think, from CIPFA's point of view, there
is a possibility that the perception will be that, because the
Audit Commission is receiving a direct grant from Government,
and this is, I think, the first time this has happened, and is
not recouping its expenditure through fees, there may be a possibility
that some in local government will see this as an encroachment
on the Commission's independence. And I think it is obviously
for the Commission to answer how they will allay that fear, but
I suspect that through the Commission's own governance arrangements
they will make sure that that perception is not given.
166. Does CIPFA have a role in assessing what
is happening?
(Mr Sore) CIPFA does not have a direct role, in the
sense that, obviously, as a professional body, under a Royal Charter,
training and educating public sector accountants, our role in,
if you like, scrutinising the work of the Audit Commission, that
is not our prime role, we are a commentator and many of our members
work for the Audit Commission, the District Audit and for the
firms. And so, inevitably, we have to have a view.
167. But should you have a role, if there is
any question of compromising the independence of the Audit Commission?
(Mr Sore) I am not quite sure what our locus would
be in that.
Mrs Dunwoody
168. If all your members bitched about the same
things, in the same way, at the same time, she is asking you,
would you do something about it?
(Mr Sore) I think the problem is that we get mixed
messages from our members.
169. Oh, impossible.
(Mr Sore) Yes; so if everybody came to us with the
same complaint I think we would go to the Audit Commission, to
the Controller, and have an open discussion with him on the issue;
there are those lines of communication which are always open.
170. What really is important is, if there were
sufficient serious common elements, I think the Committee would
want to know, because we are moving into different territory,
and if it was perceived by your members that there was a conflict
of interest, this is really what we are getting at, how would
you proceed then?
(Mr Freer) The detail, I think, is difficult to predict,
because it is hypothetical. But, certainly, in those circumstances,
we would want to draw attention to the failure of the system,
or the potential failure of the system; and, of course, that would
be not only in the interests of our members who happen to work
in the industry, as it were, but also in the interests of ensuring
that there is a good, sound system of public audit that can be
relied upon by us all, because having that system and having that
assurance is very important.
Mrs Ellman
171. So you see yourselves as part of enforcing
that?
(Mr Freer) In the ultimate, as I have indicated, if
we felt that the system was breaking down in some way, or not
functioning properly, then we certainly would draw attention to
that.
172. Should the Audit Commission continue with
Value For Money studies, as well as with Best Value?
(Mr Freer) We would say, yes. First of all, it has
a duty to carry out Value For Money studies, and that is still
on the Statute Book and has not been removed by the new Best Value
responsibilities; however, what is a matter of judgement is the
extent and scale of Value For Money work that is undertaken. I
think, the latest publications from the Commission suggest that
Value For Money audits will be reduced in volume as the new Best
Value inspection activity builds up. But our view would be that
there should always be a Value For Money role, and the reasoning
for that, I think, is principally to do with the fact that the
way in which the inspection responsibilities of the Commission
are going to be undertaken is largely about reviewing inspections,
or reviews, that have been carried out by local authorities, and
assuring the authority and other stakeholders that the review
has been conducted well and effectively and is robust. Now, in
a way, that is not new, original work, it is simply reviewing
what someone else has done, and we think that there is a place
for the Commission to continue to do new, original work, in the
way that it has over the years with Value For Money studies. And,
of course, that is, in many ways, where it has built its reputation,
with a touch of controversy here and there, but on the whole it
has developed a very good reputation in those areas and we think
that should continue to be built on.
173. If Value For Money was working properly,
would you still need Value For Money studies, as a separate activity?
(Mr Freer) Frankly, I would say, yes. This is one
of the great lessons of Best Value, really, that even very good
organisations will always be able to improve further. So, even
if individual authorities were really functioning well and doing
their own Value For Money work, and so on, I think there would
always be a place for another agency, periodically, to give an
independent view about a particular area.
174. And would you say the same about central
government?
(Mr Freer) Yes, I would.
Mr Benn
175. Does the `managed inspection' approach
work, in your opinion?
(Mr Sore) Our understanding, at the moment, is that
the `managed inspection' principle has been piloted; obviously,
it is early days yet, in terms of the whole thing being rolled
out. I think we would very much like to see a managed inspection
working, because it would reduce the costs of the overall regime;
it would also, I think, help to build some confidence in local
authorities that the Best Value Inspectorate was not always going
to come in and re-perform a whole review, but would have confidence,
subject to a certain amount of testing and review, that the review
carried out by the authority would be done properly. So we will
encourage it, yes.
176. Do you think, from the pilot projects so
far, it is sufficiently clear to those involved on what basis
it is decided to have a lighter touch?
(Mr Sore) Our reading of the commentary on this is
that there is still an element of confusion about this and that
there is a tendency perhaps for the inspectors to come in and
feel they have to do a whole review again, or to do a very large
amount of it again. And I think the key here is the implementation
of the principle of public inspection, which says that the amount
of inspection should be proportionate to risk; and I think that
is quite an important principle, but I do not think, yet, it has
been quite worked out how that would apply across the board.
177. Risk of what?
(Mr Sore) My understanding is, proportionate to the
risk, possibly, of service failure, or something of that sort;
so that a Best Value inspector would take a view of the management
arrangements of the entire authority, look at how services were
being managed, look at current data performance indicators, and
come to a view, on that basis, as to the extent to which either
the review should be re-performed, or whether they should just
rely on a review that has been performed.
178. How do you ensure that, to the extent one
moves towards self-assessment by local authorities, their undertaking
that work is sufficiently strong, robust, and actually does the
job?
(Mr Sore) I think that, as it develops, and the methodology
of inspection will undoubtedly develop, I would see it going down
a road where there will be certain key indicators, or, in terms
of methodology, adopted by the individual authority, in reviewing
its service, that the inspectors will be able to come to a view,
on an evidential basis, over a period of time, as to what has
been a thoroughly-conducted review, the extent of external evidence
that that review took in, the recognition of existing performance
data, etc., and comparative data which the Commission has put
out over a large amount of time.
179. Finally, do you feel comfortable with the
fact that we seem to be moving away from locally-elected members
deciding what is good enough, in terms of service, to auditors
and inspectors, in effect, taking on that role?
(Mr Freer) I do not see it in those terms. I think,
what we are moving into is an area where there is a recognition,
really, on both sides of the central-local relationship, that
all services can be and need to be continually improved, and that,
in order to get that continuous improvement, that progress, we
need contributions from agencies, like inspectors and Audit Commissions,
writing reports, and so on, but we also need to galvanise a major
contribution, the major contribution, from within the public body
itself. And I think the big question, really, that we will answer
over the next couple of years, will be about whether we get that
balance between the internal forces for change and progress and
the external stimuli right.
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