House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Tenth Report

AUDIT COMMISSION

RELATED ISSUES

56. The degree to which the public is able to access the findings of public sector audits was raised by several witnesses. The outcome of an audit of a local authority or health authority is summarised each year in an 'annual audit letter' (previously called a management letter). We found confusion about the status of audit letters and the extent to which local authorities are obliged to make them publicly available. Hollingsworth, White & Harden note that even the law does not provide much clarity, with different sections of the Local Government Finance Act 1982 apparently being contradictory on this point.[119] On balance the consensus is that audit letters are not of right required to be placed in the public domain, unless the auditor requests that the authority do so. However, as Hollingsworth et al explain "in practice, the audit letter is not published, but it normally comes into the public domain by being put on the agenda of a Council meeting".[120] The Audit Commission appears to support disclosure by local authorities as a matter of course, since it has signed up to the 'principles of public audit'[121] which stress openness and public accountability.

57. While local authorities are not required by law to make the audit letter publicly available, we found evidence which confirms that the vast majority do so.[122] Certainly most of the authorities we asked did.[123] However, we are concerned at the inconsistency of practice among local authorities. First, among those authorities which do make it publicly available, there are degrees of openness: some authorities may make only the audit letter available on request, others may publish it and, in rare instances, authorities may actively disseminate the findings of their annual audits. Second, at the other extreme are those authorities with something to hide, or who do not consult adequately with the local community, which do not need to make public the findings of their audit at all. We do not consider this to be acceptable. The Minister for Local Government and the Regions agreed with us on this point. She told us that "I do think they [audit letters] should be much more widely available"[124] and said "that is certainly something we ought to look at".[125]

58. We are of the view that the only way to secure a consistent approach across all local authorities is to introduce a statutory requirement obliging them to place the audit letter in the public domain. The introduction of such a duty was supported by the Audit Commission,[126] although other witnesses were against "imposing yet another statutory responsibility on local government".[127] Instead, witnesses argued that behaviour should be changed not through legislation but through codes of conduct and best practice.[128] We are not convinced that such steps would be adequate and accordingly recommend that the Government introduce a statutory duty on local authorities to place their full and unabridged annual audit letter in the public domain within 24 hours of receiving it, and make copies available to the public on request.

59. However, such provisions are irrelevant if the public is uninterested in the results of local authority and health body audits. It is an inescapable fact that public interest in local government is low. A number of witnesses told us that there is little interest in local authority audit information.[129] However, we agree with the Minister who said "I do not think we should expect all of the public to have lots of information about how every bit of the whole thing works. However, if they want to find that out it should be easy for them to find that out".[130] The information should be available to the public as a matter of course.

60. We recommend that the Audit Commission explore ways of further engaging the public in both the audit process and its outcomes through, for example, use of citizens' juries and other Best Value consultation exercises and by obliging local authorities to place their audit letter on the Internet.

Challenge

62. The arrangements as they currently stand appear to cause frustration both among those members of the public who want to object to an authority's accounts or audit,[131] and for those authorities facing objections. The main problem appeared to be the amount of time taken to resolve an objection.[132] Steve Bundred told us that it can take up to two years and it is not given the priority (by the auditor) it deserves. He commented that "in many instances the objection will allege impropriety by members or officers of the authority concerned, and hence the failure to resolve the objection speedily needlessly increases public suspicion that the allegation is well founded and can cause real distress to individuals".[133] Tandridge District Council also pointed to the cost of an audit investigation, which can run to thousands of pounds, even if the outcome finds that an allegation was spurious. [134] There are clearly compelling reasons for audit objections to be dealt with expeditiously.

63. However, we received other evidence to suggest that delays in resolving objections were not a widespread problem.[135] Mr Prince, of District Audit, defended the role of the auditors in the challenge process, telling us that "in general auditors do try to resolve them as quickly as possible".[136] Moreover, we were informed that where there were delays, there were usually valid reasons for this, such as the involvement of a number of different agencies including, for example, the Court of Appeal or the European Court of Auditors.[137]

64. Regardless of where the blame lay for delays, Cipfa warned us that the rights of the individual must not be forgotten. The Institute made the point that it was "very important to protect the rights of the individual member of the public to play a part in the process and to have powers to complain and make things happen, if he, or she, is dissatisfied. The fact that some of the people who take advantage of those powers and opportunities ... is probably a price we have to pay for having a system in which the individual has power".[138] The Minister recognised that is was important to achieve a balance between discouraging vexatious complaints and taking seriously legitimate concerns.[139]

65. We conclude that there are three key problems with the system of challenge. First, is the issue of timing. The inherent delays in the objection process currently serve to discourage electors launching challenges and can cast a cloud over the running of local authorities. The current situation where challenges can drag on for years must not continue. We therefore recommend that the Commission set a time limit within which auditors must resolve a challenge to an authority's accounts. This should be in the region of six months from when the objection was lodged.

66. The next problem is a perception that the system for launching challenges is not user- friendly. The system would benefit from greater clarity in order to avoid misuse or abuse of the challenge process and to provide clear guidance for individuals embarking on legitimate complaints. We recommend that the Audit Commission prepare a simple pro forma for completion by individuals intending to challenge an authority's accounts and an updated guidance note on the correct procedure. The system would also benefit from increased contact between district auditors and potential objectors in order to establish at an early stage whether concerns are valid. The Audit Commission should ensure that all auditors are properly prepared for their role in assisting potential objectors.

67. However, there is a need for a more fundamental review to streamline the challenge process and to avoid disillusionment with the system. We recommend that the Government launch a review of the arrangements for challenging local authorities' accounts. This review should cover the whole objection process, but should consider in particular whether those objectors who persist in launching spurious or vexatious complaints could be de-barred from doing so. The legal process for dealing with vexatious litigants may provide a useful model.

Independence and accountability

68. The Audit Commission is generally highly regarded, due in large part to its independence from central Government.[140] This is derived from the fact that it has not previously received direct funding from central government. The Commission is seen to deliver an 'objective' account, which is particularly important in achieving credibility for both its value for money work and for the collection and comparison of performance indicators. Several witnesses explained the importance of this independence. Cipfa made the point that the Commission must be free, where appropriate, to criticise government policy—"it does have a potentially important role as constructive critic".[141] Dr Josie Brooks of the Southampton Institute argued that one of the Commission's strengths was that it has "managed to avoid being embroiled overly in party political differences, particularly those between central and local government".[142]

69. Several witnesses stressed the importance of the Audit Commission continuing to act independently, notwithstanding the grant-in-aid it will now receive for Best Value inspection.[143] The danger that the Commission may now be more vulnerable to pressure from the Government must be recognised and guarded against.

70. Related to the need to ensure that the Audit Commission continues to operate independently is the issue of its accountability. We discussed in the inquiry whether the arrangements for ensuring the accountability of the Audit Commission were adequate. These arrangements, which are somewhat "complex,"[144] are currently as follows:

the Commission is financially accountable to the Comptroller and Auditor General and its accounts are audited by the National Audit Office;[145]

as a DETR part-sponsored Non-Departmental Public Body, with Commissioners appointed by the Secretary of State, the Audit Commission is accountable to Parliament through Ministers;

the Commission produces annual reports and is subject to quinquennial reviews by the DETR; and

a Code of Audit Practice, which is approved by both Houses of Parliament every five years, sets out standards with which the Commission's appointed auditors must comply.

71. Despite these safeguards, a number of commentators have, over the years, argued that there is a need to make the Audit Commission more visibly accountable for its work and use of resources. Dr Josie Brooks pointed out the anomaly of having a non-elected Non-Departmental Public Body—the Audit Commission—advising, guiding, steering and regulating elected local authorities.[146] We accept that there may be an argument for the Audit Commission and its work to be more effectively scrutinised. The issue is what is the best forum for such scrutiny. There seemed to us to be two main options.

72. The Chairman of the Public Accounts Committee, the Rt Hon David Davis MP, suggested that a new parliamentary select committee should be established to "take up the work of the Audit Commission, follow up on it, take evidence on it, report on it and make sure a year or two later something had happened".[147] He felt that such 'follow-up' work would be especially useful in the context of the Audit Commission's national value for money studies, which, while often very valuable, sometimes do not filter down to change behaviour in local authorities. A number of witnesses compared the Audit Commission to the National Audit Office, whose reports are scrutinised and followed up by the Public Accounts Committee.[148]

73. However, the Minister for Local Government and the Regions alluded to "constitutional problems"[149] in making the Audit Commission (which reports on local government) more formally accountable to Parliament. She told us:

150

74. We agree that drawing a parallel with the National Audit Office is problematic—it does not make sense for Parliament to formally hold to account, albeit indirectly, the actions (or inaction) of local authorities which have been voted for by local electorates. In addition, we consider that scrutiny can be taken too far and there is a risk of creating a situation described by Mr Harbord of the London Borough of Hammersmith and Fulham of "the inspectors inspecting the inspectors who are inspecting the inspectors".[151] We therefore do not see that there is a strong case for establishing an additional Parliamentary select committee to oversee the work of the Audit Commission.

75. Another option is for this Committee to be charged formally with this task. We are content to look at the Audit Commission and other relevant bodies on a periodic basis. However, our workload is such that we would have some difficulty in undertaking a more systematic and regular scrutiny of the Audit Commission, not least because the DETR has over 30 Non-Departmental Public Bodies whose work we need to follow.

Intervention in local services

76. The Audit Commission and auditors may be called upon, at times, to undertake work not originally considered to be within its remit. Some witnesses had concerns about auditors' role in triggering 'intervention' in local services. The principle of intervention—whereby the Government appoints an external body to take over the running of a local authority service where that authority is perceived in having failed in its duty of Best Value—has now been enshrined in legislation.[152] Under the Local Government Act 1999, the Secretary of State has powers to intervene in a local authority "where there is clear evidence that an authority is failing either to discharge its functions adequately or failing to meet its statutory obligations".[153] One of the 'triggers' for the use of these powers will be a recommendation from an Audit Commission appointed auditor or Best Value inspector.[154] The criteria to trigger intervention by the Secretary of State are:

serious service failures in an authority that could result in danger or harm to the public;

persistent failure by an authority to address recommendations made by inspectors; and

serious failures in a number of services in an authority, which reveal fundamental weaknesses in an authority's corporate capacity to manage services and make improvements.[155]

77. Many in local government are uneasy about the prospect of intervention and about the rules and procedures governing its use. The Local Government Information Unit told us that "if inspection becomes the arbiter of whether best value has been achieved, authorities might be in danger of losing the focus on the things that matter to the communities they serve".[156] We accept that there may be a need for the Government to intervene in exceptional circumstances, but we have grave doubts about the role of auditors and inspectors in this. This was referred to by Steve Bundred who said:

157

78. The private audit firms denied that they were concerned about this,[158] but we share Steve Bundred's concerns that a role in 'triggering' intervention is very different from the traditional audit remit and that in practice auditors may find themselves unprepared for this new activity.[159] We are worried that auditors and inspectors will be put in a difficult position vis à vis their role in referrals and that this will result in a gradual politicisation of the audit process. We recommend that the Government make it clear that the role of auditors and inspectors is to highlight problems only and that the decision on whether to intervene will made by Ministers.

Examining inputs

79. During the Inquiry, witnesses argued about whether the Audit Commission should comment on the issue of grant distribution within the local government finance system. The Audit Commission is asked to make comparative judgements of local authorities' performance, but it does not in any way relate this to the level of resources they have available. It may comment on the effective deployment of resources within a local authority as well as the stewardship of its finances, but it shies away from expressing a view on the whether the system of grant distribution is fair. As a result differences in authorities' performance are never attributed to differences in grant allocations.

80. However, there are two problems with the Audit Commission assuming such a role. First, most witnesses argued that it would be difficult for the Audit Commission to offer a view on the individual grant entitlements of local authorities because this might be seen to compromise or politicise the Commission.[160] Mr Roots of the City of Westminster told us:

161

81. The Audit Commission also argued that this was essentially a political matter in which it should not be involved:

162

82. However, some witnesses felt that the Audit Commission could should make the most of its independent status to highlight the "major issues facing local authorities", including the grant distribution mechanism.[163]

83. Second, there is not a clear relationship between the performance of local authorities and the resources available to them. The fact that some authorities deliver better services with less resources than others serves to prove this point.

84. We agree with the Commission that the grant distribution to local authorities is an issue for the Government to determine. We also recognise that local authorities' performance is not always a function of grant. However, we consider that more needs to be done to present the full facts alongside an assessment of an authority's performance. The Commission should set out clearly the level of resources available to authorities, in terms of Revenue Support Grant, fees, charges and Council Tax. Perhaps one way of achieving this would be to include comparative performance data for authorities with similar budgets and problems. This does not need to embroil the Commission in a debate over the adequacy or otherwise of the grant distribution mechanism.

119 Hollingworth, K, White, F & Harden, I, 1998, Audit, Accountability and independence: the role of the Audit Commission Legal Studies, Vol 18 No 1, March 1998, p93 Back

120 Hollingworth, K, White, F & Harden, I, 1998, Audit, Accountability and independence: the role of the Audit Commission Legal Studies, Vol 18 No 1, March 1998, p93 Back

121 Public Audit Forum, October 1998, The Principles of Public Audit Back

122 Audit Commission, Technical Release (LG TR10/99), 21 May 1999, Public Availability of Management Letters and Q545 Q422 Back

123 Q254, Q393 Back

124 Q545 Back

125 Q547 Back

126 Q423 Back

127 Q255-see also Q339 Back

128 Q104, Q339 Back

129 QQ 61, 97, AC27a Back

130 Q554 Back