Memorandum by PricewaterhouseCoopers (AC
30)
BACKGROUND
1. We are pleased to submit evidence to
the Sub-Committee's inquiry into the Audit Commission. Since the
merger of Price Waterhouse with Coopers and Lybrand in July 1998,
PricewaterhouseCoopers (PwC) has been the Audit Commission's (The
Commission) largest private sector audit supplier responsible
for the audit of approximately 13 per cent of all audit appointments
it controls. PwC is the Commission's appointed auditor for some
165 bodies in England and Wales, operating from centres of excellence
in London, the Midlands, Norwich, Manchester, Newcastle and Cardiff.
2. PwC is committed to providing audit in
the public sector. In addition to our work with the Commission
we have a wide-ranging client base which comprises clients from
all areas of the public and not for profit sectors. We believe
that the public have the right to expect the highest quality of
audit and assurance, from auditors of the public sector, that
standards of regularity, probity and Best Value are being met
and promulgated within the public sector.
SUMMARY
3. In summary, we consider that the Commission
has developed constructive relationships with its audit suppliers
working in partnership to deliver good quality audit services
to audited bodies. This partnership is evidenced by the consultative
approach typically adopted by the Commission in exploring the
way forward on development areas and ongoing issues of significance
to suppliers, such as fee consultations.
4. This paper provides a summary of our
thoughts on the following issues set out in your letter of 14
January:
— The Commission's use of the mixed
market and market testing.
— Fee levels and appointment arrangements.
— The role of the Commission and its
auditors in VFM studies.
— Views on the benefits to local authorities
of the whole audit process and how it could be improved.
— Views on the Code of Audit Practice.
— The accountability of the Commission.
THE COMMISSION'S
USE OF
THE MIXED
MARKET AND
MARKET TESTING
5. The Commission has the objective of operating
a mixed market, however the share of the market between the in-house
agency District Audit (DA) (in excess of 70 per cent) and the
firms has been stable for many years. The Commission annually
tests the market by putting a tranche of work (about 1 per cent
of the market) out for competitive tender. This has not resulted
in a change in the market share and, despite streamlining by the
Commission, the process is costly and onerous to suppliers without
resulting in benefits to audited bodies. This is evidenced by
the most recent market testing exercise which led to the maintenance
of the status quo, as the audited bodies who participated in the
test had no wish to change their auditor.
6. We consider that, given the current share
of the market between DA and firms, the number of suppliers currently
involved in the audit of principal authorities is about right.
The market cannot support a large number of suppliers. Suppliers
invest heavily in providing audit services for the Commission.
To justify this investment they need sufficient work to spread
their set up costs, the considerable cost of servicing the Commission
and to develop the expertise to deliver the audit, which provides
assurance about Best Value and VFM in addition to the financial
accounts.
7. Achieving a critical mass is therefore
important to suppliers at a national level to support the strategic
relationship with the Commission; and also at a local level to
support the appropriate skill mix to deliver the Commission's
audit requirements. We are concerned that the current configuration
of appointments in centres of excellence is sub-optimal for certain
suppliers and could result in suppliers pulling out of the market.
This position has been exacerbated more recently by the reduction
in the number of audits resulting from mergers within the NHS
and the introduction of Unitary Authorities in England and Wales.
In our view a further reduction in private sector suppliers would
be disadvantageous to the public sector and the Commission, as
it might not benefit from the wider and often global experience
that the firms bring to the Audit Commission audit.
8. We believe that the Commission and local
authorities benefit from the mixed market which assists them to
respond credibly to the challenge of change. The larger firms
are able to draw on a wider range of resources, increasing the
skills mix and experience, breadth and depth of the audit teams
working on audits. The experience of PwC post merger has been
that it can rapidly access expert opinion on any range of current
issues thus adding value to audited bodies. An example of this
is in the development of e-goverment. Large firms such as PwC
are among the thought leaders in this area and can transfer this
experience and knowledge to the Commission and audited bodies.
PwC is already implementing change in the public sector ine-government.
9. In addition, we believe that the development
of e-government and inter-agency working by public sector bodies
to address complex social issues and to improve the standards
of public sector services, will require audit approaches which
cope with paperless public bodies, e-procurement, new performance
indicator regimes and inter-agency intranets. The audit approaches
to examine these systems and specialist skills needed, are already
being developed and applied in PwC. However, to apply these requires
a client base sufficient for the investment in training for the
specialist public sector market to be justified. For many firms
the existing market share will not, in our view, justify the investment.
10. The Commission has a policy of rotating
audits and in general applies this to its private sector suppliers.
However the relative market share between DA and the firms prohibits
the Commission from true "rotation" of audit suppliers
at bodies audited by DA. To ensure that authorities benefit from
the challenge and ideas resulting from the mixed market the Commission
needs to move to a market share between its own supplier, DA,
and the firms of 50/50. To our mind this would:
— Ensure firms remain in the market
and bring their wider experience to benefit the Commission.
— Lead to equity in the treatment of
the firms and DA in relation to audit rotation.
FEE LEVELS,
APPOINTMENT ARRANGEMENTS
11. A core issue for suppliers is the need
to ensure that the economics of the business support continuing
involvement in the market and that fee increases, as a minimum,
match underlying costs year on year. Both the Commission and its
suppliers operate in an environment of increased risk and so suppliers
have been concerned with ensuring that the risk/reward ratio is
appropriate. These issues are particularly pertinent in the current
climate where there are competing demands for finite staff resources
and higher fees can be generated from the audit of organisations
within the private sector.
12. The Commission has tracked fee rates
against underlying salary costs for suppliers and this has shown
a considerable and growing discrepancy between audit fees and
the underlying costs. This gap has increased every year since
1991-92.
13. It has been suggested that market testing
demonstrates that current fee levels are appropriate. In practice,
prices for market testing will be set at the margin in the hope
of achieving improved economies of scale and cannot be relied
upon as an indicator for fees as a whole.
14. Recently the Commission in its approach
to Better Services for Vulnerable Older People cross cutting
reviews and Best Value has recognised the need to use higher graded
resources in areas of risk and has applied more realistic rates.
We applaud this initiative and are confident that it will help
to maintain the quality of audit.
THE ROLE
OF THE
COMMISSION AND
ITS AUDITORS
IN VFM STUDIES
15. We believe that following the introduction
of Best Value there will be a continuing role for VFM in local
government. Best Value and VFM seek to address different, but
complementary, aspects of the performance of local authorities.
We support the Commission's view that local authorities should
retain a VFM programme. There will be national issues which continue
to benefit from national review, such as those concerned in the
cross cutting reviews, in addition there will be a need for issues
to be addressed on a local basis. Our practice of using sector
specialists to carry out our VFM work ensures that we are well
placed to conduct such reviews.
16. We welcome recent developments in the
Commission's approach to value for money audit, in particular
the Acute Trust Audit Portfolio that will adopt a diagnostic approach
to identifying VFM risks. Looking forward we consider that it
will be critical for the Commission to ensure that its VFM programme
is closely linked to changes to service provision such as those
led by government e-targets with which local authorities will
be required to comply.
VIEWS ON
THE BENEFITS
TO LOCAL
AUTHORITIES OF
THE WHOLE
AUDIT PROCESS
AND HOW
IT COULD
BE IMPROVED
17. Our comments here concern the use of
local projects with audited bodies. We consider that local authorities
benefit from the development and application of local projects.
These allow auditors, through their knowledge of audited bodies,
to identify specific risks to the use of resources at a local
level and design a programme of value for money reviews best fitted
to address these risks. We consider that the Commission should
encourage the continued and increased use of local projects by
its auditors and audited bodies to meet these needs.
VIEWS ON
THE SCOPE
OF AUDIT
18. We have been closely involved in the
review of the Code with the Commission and we have no further
observations to make on the Code of Audit Practice.
THE ACCOUNTABILITY
OF THE
AUDIT COMMISSION
19. We have no observations to make in this
area.
January 2000
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