Memorandum by the Department of the Environment,
Transport and the Regions (AC 15)
THE COMMISSION
1. The Audit Commission for Local Authorities
in England and Wales was established on 1 April 1983. It was given
responsibility to oversee the audit of local authorities and related
bodies (see Annex A for a current list of audited bodies), and
to promote value for money in local government. It was responsible
both for appointing the auditors to each audited body, and for
prescribing through a Code of Audit Practice the way in which
audits were to be conducted. An appointed auditor could be either
an officer of the Commission, or an appropriately qualified firm
or individual. It was also able to carry out studies to promote
value for money in service provision.
2. In 1990 the Audit Commission assumed
responsibility for the audit for the National Health Service and
its title was formally changed to "The Audit Commission for
Local Authorities and the National Health Service in England and
Wales" ("the Commission"). Subsequently, the Commission's
local government value for money role was extended on several
occasions, including joint working arrangements with OFSTED, and
managing a regime of performance indicators. In 1999 the Commission
was given new duties in the local government best value regime,
and a new role of assisting the Commission for Health Improvement.
THE COMMISSION'S
CONSTITUTION AND
STRUCTURE
3. Under the statute the Commission is a
body corporate. Originally it comprised of a minimum of 13 members
and a maximum of 17 members, including a Chairman and a Deputy
Chairman. On assuming responsibility for NHS audit its membership
was increased to a minimum of 15 and a maximum of 20.
4. Appointments are made by the Secretary
of State. In practice, the Secretary of State for the Environment,
Transport and the Regions traditionally takes the lead, sharing
responsibility jointly with the Secretaries of State for Health
and Wales. Under the devolution arrangements there is a requirement
that in respect of one member—the traditional nominee of
the Secretary of State for Wales (see paragraph 5 below)—the
National Assembly must agree the appointment. The Assembly is
to be consulted on the appointments of the Chairman and Deputy
Chairman.
5. Successive Governments have followed
a policy whereby members of the Commission are drawn from three
groups. These groups are first those with practical experience
of local government, secondly with NHS experience, and a third
group who are termed "generalists" and who are drawn
from a broad range of backgrounds, including business, consumer
interests, academia and the trade unions. It is from this latter
group that the Chairman and Deputy Chairman have invariably been
drawn. One member, usually with a generalist background, has traditionally
been the nominee of the Secretary of State for Wales.
6. Appointments are made in accordance with
the guidance usually published by the Commissioner for Public
Appointments. Members are appointed for terms of three years and
often serve a second term. Further terms may be served if a member
is appointed as Chairman or Deputy Chairman. A full list of current
members is at Annex B.
7. The Commission is responsible for appointing
its own staff and for determining their remuneration, pensions,
allowances and gratuities. The Commission operates its own pension
scheme, which is in the public sector transfer club. The Commission
appoints its chief executive who is known as the Controller of
Audit. This appointment requires the approval of the Secretary
of State. Other appointments are made by the Commission alone,
which is empowered to appoint such persons as it considers necessary
to carry out its functions.
8. Since November 1994 the Commission has
adopted the structure of grouping together its employees appointed
as auditors (see paragraph 20 below) and their support staff in
an arms length agency, the District Audit Service. This agency
is the Commission's in-house audit supplier. In response to the
new best value duties, the Commission is now establishing within
its structures a Best Value Inspectorate, which will include a
Housing Inspectorate. The Commission has also established a new
office in Cardiff in recognition of its responsibilities in Wales.
THE ACCOUNTABILITY
FRAMEWORK
9. Under the statute the Commission is required
to publish an Annual Report, and to send copies to the Secretary
of State who is required to lay them before each House of Parliament.
The Commission is also required to submit its statement of accounts
to the Secretary of State for it to be transmitted to the Comptroller
and Auditor General. After examining and certifying the statement
of accounts, the Comptroller and Auditor General lays it before
Parliament together with his report on the statement. The Secretary
of State has, with the approval of the Treasury, directed the
form of these statements. At Annex C[3]
is a copy of the Commission's Annual Report, statement of accounts,
and accounts direction for the year ended 31 October 1998 (since
1997 the Commission's financial year has run from 1 November to
correspond with the audit cycle).
10. The statute also provides for the Secretary
of State to give the Commission directions as to the discharge
of its functions. There is also a specific power for the Secretary
of State to require the Commission to direct an extraordinary
audit of an audited body by an auditor or auditors whom the Commission
has appointed.
11. The Secretary of State has never used
these powers of direction. The Commission must have a large degree
of independence to do its job properly. Independent audit in the
public sector is an invaluable safeguard for the citizen. The
Commission is independent of the bodies for whose audit it is
responsible. It is equally important that there is, and perceived
to be, a substantial degree of independence for the Commission
in its relationship with the Government.
12. Accordingly, in June 1994 the then Government
and the Commission agreed a Joint Statement of Responsibility
and Accountability (Annex D)[4].
This sets out the relationships within the statutory framework
between Parliament, the Secretary of State, Government Departments,
and the Commission, identifying the roles and responsibilities
of each in relation to the Commission and its functions. This
Statement provides the accountability framework for the Commission.
13. The Government has accepted this Joint
Statement. It intends, however, with the Commission to review
the Joint Statement in the light of the report of the Financial
Management Policy Review (FMPR)—see paragraph 18 below.
This up-dating and review of the Joint Statement will also take
into account the new best value responsibilities which the Local
Government Act 1999 has given to the Commission.
14. The Secretaries of State for the Department
of the Environment, Transport and the Regions (DETR), for Health,
and for Wales are joint sponsors of the Commission and each is
answerable to Parliament for those aspects of the Commission's
work which relate to their particular responsibilities. The Commission
is classified as an executive Non-Departmental Public Body (NDPBs).
The Secretary of State for the Environment, Transport and the
Regions is the principal sponsor of the Commission and takes the
lead (after consultation with his or her colleagues) in all matters,
which do not relate to the specific departmental interests of
his colleagues.
15. Within the accountability framework
established by the Joint Statement, the Commission prepares annually,
in addition to its Annual Report and Statement of Accounts, a
medium term corporate plan. When preparing the Plan it consults
with the Secretaries of State and other interested bodies.
16. As for all NDPBs the responsible Departmental
Accounting Officer must be satisfied with the financial and other
management controls applied by the Departments in relation to
the Commission, and more generally, that those applied by the
Commission conform with the requirements both of propriety and
good financial management. In practice oversight of the Commission's
financial management arrangements is undertaken by the Accounting
Officer of DETR on behalf of the three sponsoring Departments.
He has appointed the Commission's Controller of Audit as the Commission's
Accounting Officer, who is answerable to Parliament for ensuring
that the resources available to the Commission are used properly
and give good value for money.
17. In relation to the Commission's new
best value responsibilities the Secretary of State is empowered
to pay grants to it. The financial and management arrangements
for these grants relating to England are set out in the Grant
Memorandum and Grant Notification letter (see Annex E)[5].
There will be separate arrangements for Wales. The Commission's
Accounting Officer is responsible for ensuring that the amount
of any such grants received by the Commission are applied in accordance
with the Memorandum and that value for money is obtained.
18. As for all NDPBs, the Commission is
subject to a Financial Management Policy Review every five years
in accordance with the guidance for such reviews published by
the Cabinet Office. Previous FMPRs were carried out in 1987 and
1992. A review is currently underway; the report of the first
stage Prior Options Review was published on 17 December 1998.
This concluded that the Commission should continue to perform
its current functions and that it was a suitable body to take
forward the Government's best value work in local government.
A team from the School of Public Policy, University of Birmingham,
jointly with Aston Business School, is carrying out the second
stage review looking at the internal structures of the Commission
and it is expected a final report will be given to Ministers by
February 2000.
THE COMMISSION'S
FUNCTIONS
19. The Commission's primary functions are
as follows:
— to appoint auditors for audited bodies
in England and Wales, and, subject to satisfactory performance
may re-appoint them; the auditors are responsible for auditing
the accounts, and in relation to bodies which are best value authorities
for auditing the best value performance plans;
— to prescribe through Codes of Practice
(subject to Parliamentary approval), the way in which auditors
carry out their functions;
— carries out studies to promote value
for money in the provision of services by audited bodies; and
— from 1 April 2000 to carry out inspections
in best value authorities.
Financial Audit
20. Auditors may be members of District
Audit Service, the Commission's in-house audit supplier, or members
of a private sector firm who have the necessary professional qualifications.
The Commission's consistent policy has been that around 70 per
cent of auditors appointed are members of the District Audit Service,
with the remaining 30 per cent from major private sector firms.
At present six firms are involved in audits appointed by the Commission.
The ratio between District Audit Service and the private firms
is kept under review at regular intervals and the Commission seeks
to attract new audit suppliers into the market.
21. Audit appointments are made by the Commission
on such terms and conditions as it may determine. It has a power
to set a scale or scales of audit fees to be payable by the audited
body. Statute provides that the fee paid is the same regardless
of whether the auditor is from District Audit Service or a private
sector audit supplier. Fees are usually set on an hourly basis
and the final audit costs are then determined by the length of
the audit, which is set after discussion between the auditor and
the audited body.
22. The Financial Management Policy Review
in 1993 recommended that the Commission considers how fee competition
might be wedded into other aspects of its selection process, and
that a number of representative audits be put out to tender to
find the market price for audit work. The Commission has taken
these recommendations forward. A number of audits are now made
under the Fee for Audit process whereby a fixed fee is agreed
between the audited body and the auditor prior to the commencement
of the audit. The Commission now also Market Tests a number of
appointments each year by inviting District Audit and private
sector suppliers to tender for the work.
23. The Commission has a duty to prepare
and maintain a Code of Audit Practice (Annex F) [6]prescribing
the way auditors are to carry out their functions. The Commission
must also prepare a Code of Practice on the audit of best value
performance plans (see paragraph 34 below). These Codes, which
must be revised at least every five years, do not come into force
until approved by a resolution in each House of Parliament. The
Commission monitors the quality of audits to ensure the requirements
of the Code have been followed. New Codes (for the best value
work, the first such code) are being prepared and it is intended
to present them to Parliament in March 2000.
24. Under the statute auditors are independent
of the Commission, and have their own statutory duties to perform.
It is for each appointed auditor to decide for him or her self
how to exercise the powers available to them having regard to
the Code of Audit Practice and in accordance with their professional
judgement. The Commission has no power to intervene in any individual
audit, or to seek to influence the auditor in any way, although
they can offer professional guidance or arrange for such guidance
to be made available.
25. Given this advisory role, the Commission
is able to receive from individual auditors information about
their audits. Statute prohibits the Commission, just as it does
for auditors, or any person acting on its behalf, from disclosing
information obtained in the course of an audit. There are exceptions;
information can be disclosed with the approval of the person providing
that information, or in certain other very limited and clearly
defined circumstances (for example, criminal proceedings).
26. Any person who breaches this provision
is liable on summary conviction to imprisonment for a term not
exceeding six months or to a fine, or on conviction on indictment
to imprisonment for a term not exceeding two years or to a fine
or both. The provision is tightly drawn and limits information
the Commission or an auditor can provide to the Secretary of State
about an individual authority.
Value for Money
27. Auditors duties with regard to probity
and regularity issues are long standing. With the establishment
of the Commission in 1983 they were given an additional duty to
satisfy themselves "that the body whose accounts are being
audited has made proper arrangements for securing economy, efficiency
and effectiveness in the use of resources". The practice
is that around 30 per cent of the traditional audit undertaken
in audited bodies is devoted to "value for money work".
Much of the work of auditors here is involved in following up
with audited bodies the recommendations from the Commission's
national studies (see paragraph 28) to determine a local action
plan. They also review local progress in taking forward recommendations
from earlier studies to determine the overall level of savings
achieved. The Government expects the amount of this traditional
value for money work to reduce as the best value regime develops.
28. The Commission also has a power to undertake
or promote comparative studies designed to enable it to make recommendations
for improving economy, efficiency and effectiveness in the provision
of local authority services and for improving financial and other
management of bodies subject to audit. It has arranged for national
studies to be carried out to identify good practice, which it
has then disseminated to audited bodies and auditors in reports
and detailed guidance for follow up action. The Government expects
the Commission will in future develop this work programme in conjunction
with best value developments, including the output of inspections.
The Commission has also, where appropriate, made recommendations
to central government where it considers that changes centrally
can bring about improvements in the local delivery of services.
29. Individual bodies can themselves request
that auditors or the Commission undertake value for money studies
provided they are prepared to meet the costs involved. Generally
such work will be discussed beforehand by the authority with its
appointed auditor, who would normally take the lead. However,
the Commission can decide to make alternative arrangements.
30. Since 1990 the Commission has been given
a number of additional functions to help and assist other specialist
bodies and inspectorates established to secure efficiency improvements
in different services provided by local government. These powers
have enabled the Commission to use the experience and expertise
gained from its own vfm work to inform and assist the work of
these professional inspectorates to ensure that all aspects of
the specialist services are covered. The specific inspectorates
they work with are OFSTED, Social Services and Benefit Fraud.
They can also do work for the Housing Corporation in the registered
social landlord sector. Before undertaking any work for these
bodies the Commission must reach an agreement with the Secretary
of State or the body itself on the financial support to be payable
to cover its input. Such arrangements are normally the subject
of an agreed protocol between the Commission and the body concerned.
In Wales the Commission undertakes joint review work with Estyn
(Welsh OFSTED) and the Social Services Inspectorate in Wales.
Performance Indicators
31. The Audit Commission was given new powers
in 1992 in relation to the collection and publication of performance
information in local government. They give directions to audited
bodies requiring them to publish such information about their
activities in any year which will enable effective comparisons
to be made between different bodies and standards of performance
year on year. The bodies concerned must then ensure relevant information
is collected and recorded and is subsequently published. Auditors
check that authorities do publish the information in an acceptable
form and within the timetable set. Audited bodies here include
local authorities, police and fire authorities. The Commission
collects the relevant data from audited bodies and publishes it
in a form that enables comparisons to be made between the performance
of similar bodies.
Best Value
32. The Audit Commission on its own, and
in co-operation with the specialist inspectorates, has developed
considerable expertise and experience in reviewing the efficiency
and effectiveness of service performance in local government and
acting to promote improved delivery of services. The Government
accordingly decided the Commission was ideally placed to play
an important role in relation to the new duty of best value. The
Commission's powers to do this work were included in the Local
Government Act 1999 and specifically covers the audit of best
value performance plans and the conduct of inspections of services
in best value authorities.
33. Appointed auditors will audit the annual
published Best Value Performance Plans of all best value authorities.
Auditors must check plans have been prepared in accordance with
published guidance, recommend how they should be amended to reflect
any requirements on such bodies, recommend any procedures to be
followed by an authority in relation to the plan and recommend
to the Commission whether it should carry out an inspection in
accordance with the provisions of the 1999 Act. The auditor will
also be able to recommend to the Secretary of State that they
should take action in accordance with their powers under the 1999
Act to require an authority to prepare or amend a plan, to follow
any special procedures in relation to a plan, to carry out any
review of specified functions. This could lead to the Secretary
of State issuing a direction against an authority.
34. In exercising oversight of this work
the Commission will prepare a code of audit practice for auditors
in relation to best value and undertake quality control of the
audit work. The Commission will also set a scale of fees to be
paid by authorities for this work. Auditors will have powers to
obtain information that they need to enable them to complete their
audit work.
35. The Commission will also appoint inspectors
to conduct inspections of best value authorities under the requirements
of the 1999 Act. The Commission will be required to operate within
any directions issued by the Secretary of State on the timing
and conduct of inspections. To take forward this work the Commission
is establishing a new Best Value Inspectorate, incorporating a
Housing Inspectorate.
36. The Best Value Inspectorate will in
practice be responsible for the inspection of those services not
covered by the specialist inspectorates already established, eg
the Social Services Inspectorate, the Benefit Fraud Inspectorate.
The Commission is expected to work with these other inspectorates
to co-ordinate best value inspection work across authorities.
The Commission are members of the Best Value Inspectorate Forum
which has been established to facilitate such co-ordination in
different inspections, inquiries and investigations.
37. In line with the audit of Performance
Plans the Commission will also set fees for inspection and provide
guidance to inspectors, and generally oversee the inspection process.
To enable inspectors to be able to complete their work they have
powers of access to authorities and can obtain any information
considered necessary for the inspection. Inspectors will be acting
as the officer, servant or agent to the Commission. On completion
of the inspection the Commission will need to publish a report.
Finance
38. In recognition of its independence,
the Commission was established on the basis that it would be largely
financed through fees charged to audited bodies for the work undertaken
for them by their appointed auditors. The statute required the
Commission to so manage its affairs that its income from fees
and otherwise (for example publication sales) would, taking one
year with another, be not less than its expenditure properly chargeable
to its income and expenditure account. Accordingly, the Commission
must meet the costs of national value for money studies as an
overhead to be covered out of audit fee income. Where the Commission
undertakes work at the request of other bodies—for example
OFSTED (see paragraph 30 above), its costs are recovered from
that body.
39. The Commission's practice has been to
review annually its scale of audit fees. As part of this review
the Commission consult audited bodies and more widely on its proposals
for future fees. Whilst Government is one of the consultees the
decisions on the fee scale is for the Commission alone.
40. The Local Government Act 1999 introduced
a new power for the Secretary of State to pay grant to the Commission
in respect of any expenditure incurred by the Commission, or to
be incurred, under that Act (ie on best value, both in respect
of work on performance plans and on inspections). A similar power
exists for the National Assembly for Wales to provide support
in relation to best value work the Commission undertakes in Wales.
41. The Secretary of State is making grant
available of up to £5 million in 1999-2000 to enable the
Commission to undertake necessary preparatory work on best value.
The Government intends that the level of grant contribution should
recognise both the Commission's independent status and the extent
to which best value, in particular inspections, need to reflect
national policies. In future years the Secretary of State intends
to provide grant to the Commission towards the cost of its best
value work, the remainder of this cost being met from fee income
charged on the work undertaken in individual best value authorities.
CONCLUSION
42. The Commission has important roles in
public sector audit. It is responsible for the auditing arrangements
of two major sectors—local government and the National Health
Service. Since its establishment, it has been at the forefront
of value for money work. Building on this experience and practice,
the Government has now legislated to give the Commission major
new roles at the centre of its agenda to modernise local government—key
responsibilities in the best value regime including those of inspection
of local services. Whilst this new work represents a major development
for the Commission, necessitating new structures, new ways of
working, and changes to its existing value for money responsibilities,
its core public sector audit roles remain at the heart of its
responsibilities.
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