Memorandum from
the Audit Commission
1. The Audit Commission has until recently undertaken
four major roles: audit, inspection and assessment, value for
money studies and data matching.
2. This memorandum draws on evidence from the
Commission's work, which focuses on local public services, and
addresses the final two points from the inquiry's terms of reference:
- What, if any, arrangements for the oversight
of local authority performance will be necessary to ensure effective
local public service delivery.
- How effective and appropriate accountability
can be achieved for expenditure on the delivery of local services,
especially for that voted by Parliament rather than raised locally.
SUMMARY OF
RESPONSE
- Devolving decision-making to the local level
presents both opportunities and risks.
Localism gives the public the opportunity to have a greater say
over the delivery of council and other local services in their
area. It gives local services more freedom and flexibility to
respond appropriately to local needs. As well as benefits however,
localism has risks, such as the risk of unacceptably poor provision
for vulnerable people. (Section 1.)
- Transparency is a necessary component of localism.
Robust data can inform decision-making, improve choice and allow
the public to hold elected representatives and public servants
to account for the performance and the value for money of services.
It supports probity and good governance and underpins open democracy.
But transparent data must be fit for purpose, and local bodies
responsive to feedback from the public. Data is often of a poor
quality and can be difficult to compare meaningfully. (Section
2.)
- Transparency adds to, but cannot be a substitute
for, public audit as conducted under the
three well-established principles intended to protect taxpayers.
Auditors provide specialist professional judgement on behalf of
the public because of the principles that:
- auditors are appointed and their fees set independently
from audited bodies, and therefore can speak without fear or favour;
- auditors' work covers not only the audit of financial
statements, but also aspects of corporate governance, including
regularity (legality) and propriety (probity), and use of resources
(value for money); and
- auditors report aspects of their work widely
to the public and other key stakeholders. (Section 3.)
- Transparency alone is unlikely to identify
serious failure. It can prevent and detect
some problems such as extravagant expenditure, but transparency
alone is less likely to reveal gradual deterioration of services,
particularly those services out of the public eye. Incidents of
failure in public services will inevitably occur. During the Commission's
existence, we and our appointed auditors have uncovered many examples
of serious irregularity and failure. We therefore recommend that
any structure of service delivery and accountability must include
a clear system for seeking to give early warning of failure and
allow action to avoid or mitigate it. (Section 4.)
SECTION
1: OPPORTUNITIES AND
RISKS OF
LOCALISM
3. The government stated in The
coalition: our programme for government that
it would promote the radical devolution of
power and greater financial autonomy to local government and community
groups (Ref. 1).
4. The Commission agrees that devolving decision-making
to the local level has the potential to improve outcomes for local
people and to engage them more in the development of local services.
We have stated consistently throughout our work that local bodies
should aim to provide locally-focused services that respond to
the needs of their populations.
5. However, while localism has the potential
to bring about local improvements, the different parts of the
emerging localist structure will have different risks - for example,
appointing elected police commissioners; the new role of GP commissioners;
elected mayors and free schools. The administrative and accountability
arrangements developed to support each of these reforms should
reflect these differences. The points raised in this submission
would therefore have a greater or lesser degree of significance
in each area of reform.
Opportunities
6. The Commission's
recent research has shown that reform targeted by local bodies
rather than national government is often more effective. For
example, councils found the numerous national schemes to mitigate
the recession confusing. Local interventions were typically quicker
and more effective, but too few national schemes used the local
knowledge and targeting that councils can provide (Ref. 2).
7. Our work has shown
that targeting local services is more effective where councils
engage with their communities. For example, councils get better
outcomes for young people not in education, employment or training
(by reduced lifetime costs and increased well-being) by engaging
with young people in order to understand how to best support them
(Ref. 3).
8. Decisions on priorities
and entitlements are likely to be better where local politicians
are accountable for them. For example,
setting charges to encourage or discourage people to use services
and, through concessions, targeting services at particular groups.
In choosing how to use charges, local politicians make an important
political decision about the services that users should pay for
and the services subsidised by taxpayers. Because of the visibility
of these charging decisions, local politicians can easily be held
to account for them at the ballot box (Ref. 4).
9 Localism also brings
opportunities through devolving responsibility to community
groups. Local ownership and management of assets, for example,
can help the establishment of local voluntary groups. However,
there are obstacles to be overcome. While some councils are enthusiastic
about community transfer, others have judged it to be too great
a risk. Though manageable, there are real risks in putting valuable
assets in the hands of groups that may not be able to own or manage
them. In addition, nearly half of councils do not have accurate
data in relation to the efficiency, effectiveness, asset value
and running costs of their land and buildings (Ref. 5).
Poor information therefore compromises the ability of many authorities
to manage their assets effectively.
Risks
10. Devolution also
brings potentially greater risks:
- Without a common performance management framework,
the public will not be able to take a view on the standard of
services in their area compared with others,
including those other places most like theirs, where comparison
can be particularly helpful. Commission research has found that
council data analysts are often not expert and sometimes do not
receive enough training and support. This results in data that
is too often inaccurate and not fit for purpose. If the quality
of data available to local citizens is poor, it reduces the capacity
of local people to hold public servants and elected representatives
to account (Ref. 6).
- Councils may not share notable practice.
There are some voluntary schemes to encourage councils to share
learning, but their effectiveness is not yet proven. Until the
introduction of independent assessment, there was little sharing
of good practice across local government. The Commission's 2007
study on innovation found that, where sharing examples of successful
innovations with other organisations took place, improvements
occurred elsewhere (Ref. 7).
- Duplicating roles and services can lead to
poor value for money and waste. Some roles
may be more suitably designed or managed at a higher spatial level
(regional or national). For example, our research with the NAO
on collaborative procurement found that public bodies are incurring
unnecessary administration costs by acting alone. National and
regional markets for some goods and services exist (for example
energy), which provide opportunities for local bodies to negotiate
their prices collectively (Ref. 8).
11. Localism also poses a
risk around a postcode lottery, or variations in the level or
cost of services experienced by service users in different geographical
locations. Distinctions exist between:
- Intended and transparent
uneven service outcomes. For example, our 2007 study on
charging found that locally determined charges for swimming pools
vary significantly (between £1.68 to £4.75 for adults).
This variation is intended, transparent and typically accepted
by the public, who support more flexibility and local control
for local services (Ref. 4).
- Unintended or hidden
uneven outcomes in services where users have little or no choice,
such as social care. Variation in personal services for vulnerable
people is often invisible, because they may not always be able
or willing to scrutinise the personal services they receive. Individual
service inspections can serve to highlight where services are
failing to meet acceptable standards.
12. There is a risk that some areas may set low
levels of provision[60]
for this second category of services. The public considers national
levels of quality and cost to be desirable in such cases (Ref.
4).
13. Our
research has also found that a defining feature of success
in local areas is the quality of leadership rather than the administrative
system in place. The government has proposed the 15 largest
cities in England should have elected mayors. Commission research
has shown that elected mayors enjoy high levels of local visibility
and can use their personal mandate to provide clear leadership
on important issues. Despite the fears expressed by some that
the elected mayor model concentrates too much power in one person,
we have not detected evidence that it has weakened standards of
governance. Where the mayor publishes and explains decisions,
for example on the internet, the model provides for transparent
and accountable local decision-making (Ref. 9).
14. Successful
leadership builds consensus around priorities and motivates public
service workers to tackle the hardest challenges. Where local
leadership is weak, and unable to build consensus or motivate
workers, we have found that plans developed to tackle local priorities
lack ambition and responses to critical inspection findings can
be slow or inadequate (Ref. 10).
15. As the government
devolves more power to the local level, we therefore believe that
it should also develop accountability frameworks to ensure the
effective scrutiny of local bodies. Ideally, such a framework
would hold local bodies to account not just for their stewardship
of public money, but also for the outcomes they achieve. It is
important the public has access to independent, neutral and professionally
judged information. Without the assurance independent verification
of information brings, it will be difficult for members of the
public to judge the services in their area.
SECTION 2: TRANSPARENCY
16. Government commitment
to greater transparency of information is clear. We agree the
public should have access to as much information as possible.
Encouraging better use of information by and about public services
has always been a priority for the Audit Commission (Ref. 11).
17. We have found
through our audit and research that transparency supports:
- Choice. Information
can improve the decisions of those choosing the services they
use, for example, schools or hospitals, and members of the public
engaging in democratic processes. In recent years people in the
UK have experienced greater choice in public services. National
information such as Directgov, and local information such as NHS
Choices, support the public in making choices, offering tailored
information about services.
- Accountability. Good
information enables people to hold those responsible to account
for the performance and value for money of local services (Ref.
11). It changes the behaviour of public servants, making them
think twice before spending money or claiming expenses. Councils
are sometimes using new technology to encourage communication
with residents - helping them exercise voice. Publication also
encourages improved service performance on its own. For example,
publishing information on individual surgeons' heart surgery success
rates in the UK led to improved performance. This was not because
of the public using the information, but because the doctors used
it as part of the analysis of their practice (Ref. 12).
18. However, putting
large volumes of data online does not automatically result in
positive outcomes. Information will only result in greater
choice and accountability if it is RQP - Relevant, of good Quality,
and well Presented (Ref. 13):
- (R) Information put
into the public domain needs to be relevant to the people who
will use it. Providing an ability to compare information, for
example about public bodies' performance, opens up additional
uses for information, but it is useful only if it is defined carefully.
- (Q) The underlying,
raw data needs to be accurate, complete, reliable and high-quality.
There's no point in publishing reams of information if the underlying
data is of a poor quality. Building data assurance in from the
start is important. As is communicating data quickly, to ensure
it is relevant.
- (P) Presenting information
in an easy-to-understand and comparable way and communicated by
methods that the public is likely and willing to engage with is
important. Third parties may in future be able to process raw
data and present it in an accessible format. However, the market
for such "data mashers" has yet to develop, and some
third parties will wish to add their own interpretation to raw
data, rather than present it in a neutral format.
19. For transparency
to be effective, the public has to be willing to use information,
and public bodies have to be responsive to what the public says
about that information - all the time, not just at election time.
20. However, the current
position is far from perfect. Our work has found:
- Significant errors in public information.
In 2008-09, fewer than 5% of councils
had excellent quality data (Ref. 6). The risk with
all data is that if you put poor quality information in, you get
poor quality information out. Financial data is typically more
accurate than performance data, because professional accounting
standards are uniform. Breaching accounting standards can lead
to penalties and the law says a specific individual must sign
off data quality (Ref. 11). However, performance
and other information is as important to citizens as financial
information. Because its accuracy rarely gets the same attention,
it can lead to poor management and represents poor accountability
(Ref. 14).
- Poor organisational arrangements. As
part of the 2008-09 use of resources assessment, our auditors
considered whether organisations produce relevant and reliable
data and information to support decision-making and manage performance.
The assessment concluded that 87 of the 150 single tier and county
councils and 152 of the 201 district councils met only minimum
requirements or below. Only three single tier and county councils
and one district council were performing excellently in this area
(Ref. 15). Our 2009 report on data quality in the NHS showed
that, despite recognising the need to improve data auditing and
review, few boards were taking the issue seriously (Ref. 16).
Producing and using good quality data entails having the right
culture, people and systems to support it, but many local bodies
do not.
- Manipulation. Risks
of manipulated data, offering a biased picture of reality, do
exist. Our work on payment by results has found no evidence that
NHS trusts are manipulating the system to secure unwarranted payments
(Ref. 17), but there is clearly a risk that such gaming
could happen. Our latest exercise found an error rate of 11% in
clinical coding entries by NHS trusts but credited this
to mistakes rather than gaming (Ref. 18). New arrangements
should ensure that people do not have both the incentive and the
ability to manipulate data.
- Lack of public trust.
The public response to the launch of data.gov.uk in January 2010
showed that citizens lack trust in government data (Ref. 19).
- Lack of context or explanation.
Public bodies that are already publishing their spending data
often describe that spending vaguely. Without any contextual information
it is difficult for members of the public to decide whether spending
described only as "items purchased for resale", "Lpc
expenditure", "materials purchase", or "resources"
represent value for money. The information currently published
only gives a limited view of spending and does not relate it to
performance. It excludes the true cost of activities, including
salaries and internal overheads, so sheds little or no light on
value for money.
SECTION 3: INDEPENDENT
AUDIT
21. In the absence
of effective transparency to date, external audit in the public
sector (public audit) has played an important role in identifying
financial and performance failure, and the problems with propriety,
legality and value for money.
22. The Commission
is strongly of the view that the fundamental principles that underpin
public audit in the UK are enduring and need to be reflected in
any new accountability arrangements. Transparency should complement,
not replace, public audit.
23. Those responsible
for spending public money are accountable for its use. The accountabilities
attached to public money are special, because:
- it is raised by compulsory levy - principally,
taxation - so tax payers do not have the "exit option"
that shareholders in the private sector have;
- it can only be used for the purposes intended
and authorised by law;
- those dealing with public money must be able
to demonstrate to citizens that they have conducted themselves
in accordance with the highest standards of integrity and probity;
and
- there is often little, if any, choice of service
provider, so citizens rely on external scrutiny to act as a spur
for improvement.
24. Citizens, as taxpayers and users of services,
must have confidence that public money is safeguarded, handled
with absolute integrity, properly accounted for, and spent wisely,
and that public business is conducted in accordance with proper
standards. Effective external audit helps create such confidence.
25. To be effective, public auditors must be
- and be seen to be - independent of the organisations that they
audit so that they cannot be improperly influenced by them.
26. The three principles of public audit are
grounded in practice that developed over many years to safeguard
public money. They were codified in 1998 by the Public Audit Forum,
which brings together all the public audit agencies in the UK.
The principles are that:
- (a) auditors are appointed independently
from audited bodies;
- (b) auditors' work covers not only the audit
of financial statements, but also aspects of corporate governance,
including regularity (legality) and propriety (probity), and use
of resources (value for money); and
- (c) auditors may report aspects of their
work widely to the public and other key stakeholders.
FIRST PRINCIPLE
OF PUBLIC
AUDIT
27. The first principle
in particular is long-standing. Independent appointment dates
back to 1864, when a select committee recommended that the appointment
of auditors in local government should be completely independent
of the bodies under audit. In 1976, the Layfield Committee of
Inquiry into Local Government Finance concluded that it was wrong,
in principle, that any public body should be able to choose its
own auditor.
28. The independence
of auditors must be safeguarded, so that they:
- can carry out their role freely;
- cannot be influenced by the audited body; and
- can report without fear or favour, because they
are not at risk of losing the appointment if they act or report
in a way that is unwelcome to the audited body.
29. Under the current
system, the Commission appoints auditors on behalf of the local
and national taxpayer. It also has a statutory duty to set the
level of fees. This ensures that those responsible for the stewardship
and use of public money are not involved in appointing and remunerating
those responsible for scrutinising how it is spent and providing
assurance to tax-payers.
30. This is particularly
important where public bodies have tax raising powers and the
auditor must report publicly on failures relating to probity,
governance and value for money, and has powers to challenge the
legality of transactions.
SECOND PRINCIPLE
OF PUBLIC
AUDIT
31. The second principle
is that auditors' work should cover not only the audit of financial
statements, but also aspects of corporate governance, including
regularity (legality) and propriety (probity), and use of resources
(value for money).
32. Absence of market
disciplines means that there are not the same pressures on public
sector bodies and their managers to make best use of scarce resources.
There is no "bottom line" other than the tax demand
and electoral pressure.
33. By assessing whether
public bodies have made arrangements to ensure the proper conduct
of their financial affairs and to manage their performance and
use of resources, public auditors ensure that public servants
are not only accountable for what they do, but also how they do
it.
34. The public, quite
rightly, expects public business to be conducted in accordance
with due process and to conform to high standards of propriety.
By reporting on legality, probity and value for money, public
auditors help to maintain confidence in those to whom responsibility
for spending public money is entrusted and in their effective
stewardship of funds, and publicly highlights concerns where necessary.
35. By offering an
assessment of whether money is being used efficiently within an
organisation, public auditors give the public a broader picture
on which to base their voting decisions. Their professional value
for money judgments complement those of "armchair auditors",
giving the public a greater ability to hold local bodies to account
for their performance as well as their spending.
THIRD PRINCIPLE
OF PUBLIC
AUDIT
36. Independent appointment
allows auditors to speak without fear or favour, and so underpins
their wider powers and the principle of public reporting - the
third principle of public audit.
37. Reporting in public,
whether through the annual audit letter, public interest reports,
or (in local government) formal audit recommendations, which the
audited body is required to consider and respond to in public,
allows auditors of local public bodies to discharge their accountability
to the tax payer, on whose behalf they are appointed and act.
38. The Secretary
of State confirmed in his announcement of the abolition of the
Commission that:
Auditors will retain a duty for reporting issues
in the public interest. They will be able to undertake special
investigations where they, the local government sector or any
continuing inspectorates such as Ofsted in the case of children's
services, or Care Quality Commission on adult social care, raise
concerns about a council. Following any such investigations auditors
will report locally and be able to make recommendations to the
council, the sector, inspectorates, and if necessary to government.
39. There is a significant
risk that these existing reporting powers may become inoperable
in practice. This is because:
- Some local authorities have, in the past, made
great efforts to prevent their auditors issuing public interest
reports, including trying to get them replaced. For example, in
the high profile and long running case in Westminster in the 1980s
and 1990s, legal representatives for some of those under investigation
sought to have the appointed auditor replaced, requests that the
Commission refused. Only the fact that the Commission had stood
behind the appointed auditors (and underwritten their costs incurred
in investigation) enabled them to do so. In future, where the
auditor has a direct contractual relationship with the body and
has an associated financial incentive to retain the appointment,
we think there is a risk that auditors will be unwilling to jeopardise
the commercial relationship with the body by reporting in public
in this way.
- Given that the body itself will now be meeting
the auditor's costs directly, there is a risk that auditors' ability
to discharge their wider functions will be constrained by the
level of the fee they are able to negotiate.
40. These considerations
are also likely to apply to the exercise of the wider range of
auditors' special powers and responsibilities, such as dealing
with electors' objections.
SECTION 4: MECHANISMS
TO IDENTIFY
FAILURE
41. Public auditors
have uncovered several cases of serious public service failure
over the last century. However public services are delivered and
held to account, incidents of failure in public services will
inevitably occur.
42. It is unlikely
that these will be identified through greater transparency, or
through narrowly focused (not public) audit. Example of types
of failure include:
- Serious and ethical irregularity in the conduct
of public business in an otherwise well performing body.
We have found a number of examples of fraud and poor governance
resulting from devolved budgeting arrangements. This includes
irregularities that came to light at Whalley Range High School
in Manchester, when during an investigation by the appointed auditor
in 2004-05, evidence was found of nepotism, mismanagement and
illegal payments, concluding that there was a significant breakdown
in standards of governance and accountability at the school (Ref.
20). This was despite
the school continuing to achieve good exam results.
- Performance failure. Following
repeated evidence that Doncaster Council was not well run, we
undertook a corporate governance inspection that resulted in action
by central government. The evidence leading to the inspection
included a poor rating for children's services for two years and
assessment of poor prospects for children and young people. The
inspection concluded that there was a culture of poor governance
at the Council. It recommended that the Secretary of State for
Communities and Local Government use his powers to issue a Direction
to intervene and set out steps to improve the Council's performance.
- Financial failure.
Where it exists, concerns over systematic financial management
failures are raised by appointed auditors who, through their independent
appointment, are able to speak without fear or favour. For example
the District Auditor at Liverpool City Council found an inadequate
financial position. £20 million of funding for the Capital
of Culture celebrations saw the Council's overall budget shortfall
rise to £62 million. Statutory powers were used to make recommendations
and force the Council to respond in public. The District Auditor
then worked with the authority to set a legal budget and plan
a way out of the difficulties (Ref. 21).
ACTING ON
FAILURE
43. Any system put
in place should be able to assure that public bodies will be responsive
to concerns raised by the public.
44. There was clear
service failure at Basildon and Thurrock University Hospitals
Foundation Trust, where low standards of hospital hygiene led,
in November 2009, to the Care Quality Commission (CQC) criticising
the hospital for filthy wards, poor care, and a death rate that
was 30% higher than the national average (Ref. 22). With
the situation as bad as this, it should not have taken a CQC report
to highlight that there was a problem; it was obvious to patients,
their friends and their families.
45. Local people experiencing
a service are best placed to identify that improvement is needed.
An effective shorter feedback loop allows interested parties to
highlight issues. But it is important that public bodies respond
quickly and constructively when concerns are raised.
46. Most information
that is currently published to support transparency tends to be
available after the event, often with substantial delay. It is
therefore currently a poor way of identifying potential and impending
failure. There should be robust scrutiny of both the accuracy
of data and the timeliness of its publication to support decision
making.
47. The public needs
an assurance that incidents of failure will be learned from. The
scrutiny process should assess whether local service plans include
adequate arrangements to learn during implementation, thereby
creating a system that reduces the prospect of repeated failure.
48. The ballot box
is an invaluable tool for holding councils to account, but is
not a substitute for professional scrutiny of services and standards.
The ballot box is also unable to offer a route to rapid change
if it is required, in the face of service failure.
49. The Commission
believes that it is vital that the scrutiny system for local authorities
should protect local taxpayers and service. Any successor regime
to the Commission's should provide essential safeguards
for the independence of auditors, so that they have:
- complete professional discretion in the way they
exercise their functions;
- the resources that they need in order to do so;
and
- protection against dismissal.
50. The Commission
also believes that for strong and successful localism to be achieved
there is a need for accountability of performance as well as spending.
51. Any system put
in place must also seek to mitigate the risks of service failure
by warning of potential failure and requiring local authorities
to take action when it occurs.
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Ref. 19 Data Source: http://newsforums.bbc.co.uk/nol/thread.jspa?forumID=7431&start=45&edition=1&ttl=20100922151802
Ref. 20 Audit Commission, Public
interest report: Manchester City Council,
Audit Commission, 2005.
Ref. 21 Audit Commission, Annual Audit and
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2008.
Ref. 22 Care Quality Commission, Inspection
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Commission, 2009.
October 2010
60 For example, poor quality services, or services
with limited coverage or inadequate safeguarding. Back
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