Memorandum by CIPFA (AC 10)
CIPFA is one of the leading professional accountancy
bodies in the UK and the only one that specialises in the public
services. It is responsible for the education and training of
professional accountants and for their regulation through the
setting and monitoring of professional standards. Uniquely among
the professional accountancy bodies in the UK, CIPFA has responsibility
for setting accounting standards for a significant part of the
economy, namely local government. CIPFA's members work (often
at the most senior level) in public service bodies, in the national
audit agencies and major accountancy firms. They are respected
throughout for their high technical and ethical standards and
professional integrity. CIPFA also provides a range of high quality
advisory, information, and training and consultancy services to
public service organisations. As such, CIPFA is the leading independent
commentator on managing and accounting for public money.
1. INTRODUCTION
1.1 CIPFA is pleased to submit this memorandum
of comments to the Environment Sub-committee's inquiry into the
Audit Commission.
1.2 CIPFA's comments are based on the premise
that public audit is an essential component of accountability
in the public services, providing an independent external review
of both due process and performance in recognition of the special
obligations that attach to the conduct of public business and
accountability for public money.
1.3 In summary CIPFA's views are that:
— the current division of responsibilities
between the Commission and the NAO is appropriate;
— the Commission needs to ensure that
its core business is not neglected as its role is extended;
— the Commission should ensure that
its governance arrangements remain "fit for purpose";
— there is a continuing role for VFM
studies, particularly for cross cutting and "neglected"
issues;
— the Commission is well placed to
assume the role of an overarching and co-ordinating standards
inspectorate;
— the Commission should promote a "managed
inspection" approach with the emphasis on validating an organisation's
own self governance arrangements;
— the Commission should demonstrate
its own achievement of Best Value;
— it is important that there is a buoyant
market of public audit and inspection suppliers to help drive
up standards and control costs.
2. THE ROLE
OF THE
AUDIT COMMISSION
2.1 In CIPFA's view the two audit agencies
in England complement each other, with the NAO responsible to
Parliament at the national level for the audit of central government
services and the Audit Commission responsible at the local level
for the audit of locally delivered services. Thus, whilst the
Audit Commission is responsible for the audit of local health
authorities and trusts, the NAO is responsible for the audit of
the consolidated accounts of the NHS at the national level, relying
to a large extent on the work of the local auditors. Generally
CIPFA believes that this division of responsibilities is appropriate.
However it should be recognised that there can be some confusion
over the respective roles of the Audit Commission and the NAO,
particularly in the field of value for money audit work in the
NHS. In CIPFA's view such confusion is best addressed through
mutual cooperation and joint working.
2.2 This general view is largely endorsed
by the findings of the report of the 1995 Butler review of the
operations of the Audit Commission. Thus, although concerns were
expressed about the level of audit fees and the variable quality
of value for money work at local level, audited bodies generally
expressed satisfaction with the work of the Audit Commission and
local auditors. In particular, the review found that audited bodies
valued the independence of the Audit Commission `more than any
other strength. More than 40 per cent of stakeholders mentioned
it in the unprompted part of the questionnaire, a very high percentage.
. . The Commission is highly regarded and highly influential because
of its willingness to give straight messages however unpalatable
they may be to some of its stakeholders and because its messages
are not biased by vested interests'.
2.3 In CIPFA's view there is a risk that,
as the Commission extends its role to cover inspections, its clarity
of focus could be compromised in the minds of both the public
and its other stakeholders. The Commission needs to remain alert
to this possibility and take steps to guard against it. It is
also possible that confusion over the respective roles of the
Commission and the NAO could be exacerbated emphasising the need
for mutual cooperation and coordination of activities.
2.4 In CIPFA's view it is also important
that the Commission monitors the new approach to public audit
in Scotland in case any useful learning points emerge. The Public
Audit Forum could also play a useful role in bringing together
the various audit agencies, particularly as cross cutting issues
become more prevalent.
2.5 In considering in more detail its form
and functions it needs to be borne in mind that, although its
turnover has increased dramatically as a result of its inspection
role, the Audit Commission—excluding the District Audit
agency—remains a relatively small organisation in terms
of employee numbers.
2.6 CIPFA considers it important that the
Audit Commission should have sufficient "critical mass"
to maintain its status and influence—for example, through
the exercise of an acknowledged and respected public "voice"—and
the ability to recruit and retain high calibre staff. It is also
important that the Audit Commission should invest sufficient resources
to make a meaningful contribution to and influence effectively
technical developments in accounting and financial reporting,
and auditing, both in local government and the NHS.
2.7 Generally, CIPFA believes that the Audit
Commission has "added value" through its range of activities
over the years. However it is important that this is demonstrated
publicly. It is also essential that, as its focus widens, the
Commission does not neglect its core business, namely the financial
audit process at individual local authorities and NHS bodies.
It is equally important that its new inspection role is carried
out in such a way that the Commission's reputation is not harmed.
3. AUDIT COMMISSION—GOVERNANCE
AND ACCOUNTABILITY
3.1 In CIPFA's view, it is essential that
if it is to fulfil its functions effectively, and the public is
to have confidence in the use of public funds by public bodies,
the Audit Commission should be independent—and be seen to
be independent—of government. Whilst it is important that
in all its activities the Audit Commission follows "due process",
consulting all relevant interests, and is accountable for its
decisions, it must be able to speak without fear or favour. In
practice, this means it must have the power to criticise the implementation
of those central government policies that impact on the framework
within which audited bodies are required to operate. Clearly,
this does not mean that the Audit Commission should be able to
frustrate the objectives of government policy, but it does have
a potentially important role as constructive critic. In CIPFA's
view, it is essential that this independence is not compromised
by the funding arrangements for the best value inspection regime.
3.2 Again, in the light of its new inspection
role, it is important that the Commission's own governance arrangements
remain "fit for purpose". In CIPFA's view existing arrangements
should be reviewed to ensure that this is the case.
4. ROLE OF
THE AUDIT
COMMISSION IN
RELATION TO
"TRADITIONAL" AUDITS
4.1 The Audit Commission's traditional core
business is the financial audit of local authorities and, since
1990, NHS bodies. This is achieved by appointing either District
Audit or private firms. In CIPFA's view financial audit covers
how public money is accounted for and the overall financial health
of a public body.
4.2 CIPFA supports a "mixed economy"
of public audit suppliers, competing with each other on a level
playing field, as a way of driving up quality and controlling
costs. That presupposes the existence of a significant public
sector "player" and to that end CIPFA supports the retention
of the District Audit as a publicly-owned audit agency which can
compete with private sector firms for public audit work.
4.3 CIPFA recognises that the current relationship
between the Audit Commission and District Audit may create a perception
that conflicts of interest might exist. However, in CIPFA's view
the District Audit agency is now as distinct in operational terms
from the other parts of the Audit Commission as it can be without
it being established as a separate legal entity.
4.4 This perception could be overcome by
establishing District Audit as a formal arms-length agency, with
a separate legal identity and its own line of reporting to the
Commission through its Chief Executive, rather than through the
Controller of the Audit Commission. Under such an arrangement
the relationship between the agency and the Commission would be
seen to be clarified and the proper independence of the Audit
Commission to be reaffirmed.
5. ROLE OF
THE AUDIT
COMMISSION IN
RELATION TO
VFM WORK
5.1 In CIPFA's view VFM audit is distinct
both from financial audit and the new best value inspections in
that it looks at the arrangements in place to ensure that public
money is used in accordance with the 3Es. This in turn implies
both a consideration of outcomes and, on occasion, comments on
how other professionals manage the service they provide.
5.2 This means that the key question for
the Commission as it assumes its best value responsibilities is
how the traditional VFM study programme will "fit" both
with inspections and with organisations' own performance reviews.
In CIPFA's view this comes down to being clear about how considerations
of outcomes for users and reviews of management arrangements should
be "parcelled up" between VFM auditors and inspectors.
5.3 In CIPFA's view there will be a continuing
role for the Audit Commission's national VFM studies, particularly
of cross cutting issues, as these identify trends and issues which
local authorities and their auditors will need to take into account
in preparing and reviewing local performance plans. There is also
a role for VFM work in relation to issues that may otherwise be
"neglected"—such as the recent study into early
retirement.
6. ROLE OF
THE COMMISSION
IN RELATION
TO THE
BEST VALUE
REGIME
6.1 In CIPFA's view the key role of the
Audit Commission in relation to best value is to establish a clearly
defined framework of criteria against which the "best value"
judgement will be made. This framework should also identify the
mix of skills and competencies that best value auditors and inspectors
will need to carry out their role.
6.2 Although the Audit Commission nationally
has experience of working with inspectorates such as the Social
Services Inspectorate and OFSTED, joint working by auditors and
inspectors at the local level is not well developed. Whilst there
are established inspectorates for some local authority services,
the coverage is by no means comprehensive and this reinforces
the need for an overarching standards inspectorate to cover those
services not currently subject to independent inspection.
6.3 CIPFA is generally content that the
Audit Commission has largely assumed this role. However, this
development does have implications for the structure and accountability
of the powerful new regulatory body that has thus been created
(see paragraph 3.1-3.2).
6.4 Joint working between auditors and inspectorates
is a potentially very powerful "tool" but the respective
roles of auditors and inspectors in such joint inspections will
need to be clearly defined. CIPFA agrees that local appointed
auditors should have a pivotal role to play, not least because
they have access to a great deal of information about the finances
and performance of authorities and the "local knowledge"
that will be essential for such reviews to be effective.
6.5 It is also important, in this regard,
to maintain the principle of the "holistic" audit. The
Committee on Standards in Public Life (Nolan, now Neill, Committee)
in its inquiry into local public spending bodies, identified the
problems that can arise from "over-auditing" where a
particular public service body is subject to external review by
a host of auditors, inspectorates and other external review agencies
and noted "a consistent preference among the bodies themselves
for each to be externally audited as far as possible by a single
auditor who addresses the requirements of the various statutes
and funding bodies". It went on to state "we believe
that this is a goal worth pursuing as far as possible".
6.6 CIPFA endorses this view. In practice,
it assumes that it will be the responsibility of the Audit Commission
to co-ordinate and manage the process of joint reviews. However,
although it should be the Audit Commission that commissions such
reviews and identifies and appoints appropriate agencies to undertake
them, the rolling programme of joint inspections may in practice
be "driven" largely by local authorities themselves
through the timetabling of their own fundamental reviews.
6.7 CIPFA therefore takes the view that
the Commission should promote a "managed inspection"
approach where the emphasis would be on validating an organisation's
own self governance and assessment arrangements which, if they
prove to be sound, would reduce the "depth" of the inspection
subsequently needed. For example reliance could be placed on an
organisation's management services reviews and professional self-assessments
such as peer reviews. This approach will not only serve to avoid
over auditing but also help foster a partnership approach between
inspector and inspected.
6.8 It is particularly important that the
inspection regime itself gains respect and is credible. CIPFA
accepts that this will depend, at least in part, on an assessment
of the regime's own effectiveness. However there needs to be some
sort of quality control process—perhaps similar to that
applied to the Commission's appointed auditors. This process should
be both transparent and applied consistently to ensure that any
potential for conflict of interest is minimised.
6.9 In CIPFA's view there should ideally
be a coherent, evidence-based process that is applied consistently
and fairly to all inspected bodies. However, to be meaningful
and credible, this consistency of approach needs to extend across
the plethora of inspection and regulatory agencies. Given that
at present different inspectors have very different cultures and
approaches ranging from structured, formal evidence based regimes
to much more judgement based approaches, such consistency is unlikely
in the short term but should remain a priority goal.
6.10 In addition to consistency of approach
CIPFA also believes that co-ordination between the different inspection
agencies is vital otherwise there is a danger that the effectiveness
of inspected bodies will be compromised by the demands of different
inspection teams working to different timetables and in different
ways.
6.11 Managing the relationship between the
Commission at a corporate level and its "inspectors"
on the ground is an area which, in CIPFA's view, requires more
attention to ensure that there is a shared learning process.
6.12 Whilst local appointed auditors have
a pivotal role to play as they have access to a great deal of
information about organisations' performance they also have a
duty under the Code of Audit Practice to act independently of
both the Commission and the audited body when carrying out their
tasks. As a result it cannot be assumed that a "light touch"
approach would be applied following an inspection of a particular
area of activity—indeed any attempt to impose one would
run contrary to the Code.
6.13 In CIPFA's view, a positive way forward
would be to set out clearly the respective roles, responsibilities
and powers of the Commission and the local inspectors when conducting
an inspection, perhaps using the memorandum of understanding for
co-operation between the Benefit Fraud Inspectorate, Commission
and appointed auditors as a model. These memoranda could also
set out a protocol on information sharing to provide an assurance
that, where needed, effective "chinese walls" are in
place and to satisfy the requirements of data protection and confidentiality.
Such an approach would have the added advantage of making the
framework clear to all parties, including the organisations being
inspected.
6.14 There also needs to be a recognition
that inspections themselves can have a negative impact on an organisation.
In particular inspections can encourage a culture of dependency
—instead of getting on with things managers may decide to
"wait and see" what the inspector says. In extreme cases
this could result in stifled innovation. To avoid such an outcome,
the inspection process needs to be designed so that it is seen
as a positive, learning opportunity for all parties rather than
something to be "got through".
7. RELATIONSHIPS
WITH OTHER
BODIES
7.1 The potential proliferation of audit,
inspection and regulatory agencies could impose a potentially
significant burden and additional costs on the bodies subject
to review. This burden and these costs need to be recognised and
the potential problems need to be addressed. It is essential that
the processes are carefully managed and that the rights of the
various agencies are invoked sensitively on the basis of an objective
assessment of audit or regulatory "risk", if confusion
and duplication, and concerns about "over auditing"
are to be avoided. As a matter of principle, audits, inspections
and regulatory reviews should be coordinated with the activities
of other review agencies wherever possible, with as much reliance
as possible being placed on the work being carried out by other
agencies.
8. AUDIT AND
INSPECTION FEES
8.1 Clearly there is a concern among audited
and inspected bodies that the process should itself be seen to
offer "value for money" and to be reassured that the
Audit Commission is subjected to the same cost pressures, and
the requirement to demonstrate continuous improvement, economy
and efficiency, as other publicly-funded organisations. Equally,
however, there is a concern among suppliers that increases in
fees which fall below general inflation, and more particularly
the salary inflation experienced by them, will mean that the "risk
: reward" equation will become less attractive and firms
will continue to withdraw.
8.2 CIPFA believes it is important that
there is a buoyant market of public audit and inspection suppliers.
In CIPFA's view, the public audit process has been enhanced over
the years as a result of the involvement of the major accountancy
firms, not least as the "benchmark" against which the
quality and competitiveness of District Audit can be assessed.
The further withdrawal of firms would damage the credibility of
the public audit process and in the long term could potentially
undermine the Audit Commission itself.
8.3 As far as inspection is concerned it
is important to recognise that, as there is no equivalent of District
Audit, there is no mixed economy of suppliers to help drive up
quality and control costs. This could mean that inspection costs
will escalate more readily.
8.4 CIPFA considers the statement made in
the DETR's consultation paper Improving Local Services through
Best Value, that the total cost of auditing and inspection
of local government will not increase as a result of the introduction
of best value as optimistic. However, the implementation of best
value may also open up the market for performance reviews and
inspections to a range of other providers, including firms of
management consultants, which could encourage healthy competition.
Such other providers would, however, need to be accredited by
the Audit Commission and their work subjected to quality assurance
and control in the same way as that of the audit firms.
December 1999
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