Audit and inspection of local authorities - Communities and Local Government Committee Contents

Examination of Witnesses (Questions 1-54)

DAVID WALKER, PROFESSOR DAVID HEALD AND PROFESSOR STEVE MARTIN

7 FEBRUARY 2011

Q1   Chair: Good afternoon. Welcome to all three of you to the first evidence session of our inquiry into the audit and inspection of local authorities. To begin with, and for the sake of our records, may I ask all of you to introduce yourselves and say who you are?

David Walker: I am David Walker and I am a contributing editor to Guardian Public. For the record, I was until October managing director of communications at the Audit Commission.

Professor Martin: I am Steve Martin, Professor of Public Policy and Management at Cardiff Business School.

Professor Heald: I am David Heald, Professor of Accountancy at the University of Aberdeen Business School.

Q2   Chair: You are all most welcome.

To begin with, I put a very difficult question that I am sure you won't have anticipated: did the Audit Commission deserve to be abolished?

Professor Heald: In my view, no. There are some fundamental issues about public audit that Parliament has to deal with. I think the abolition of the Audit Commission has thrust those on to the agenda in a way that might not otherwise have happened. There is some evidence that the Audit Commission has lost its stakeholders. If you look at some of the responses from local government, they have not been at all sympathetic to the Audit Commission. That is probably much more to do with the assessment activities than the actual audit activities. It was very interesting that, when the Audit Commission was thoroughly rubbished at the time of the announcement in August, under a freedom of information request I asked CLG what evaluations had been done of the performance of the commission. I was told none. I went to internal review and was sent two documents, which were reviews of the performance of the board, not the Audit Commission. There has been a fundamental failure by Government in terms of the review of the Audit Commission. The other issue is that Parliament has also failed in the context of thinking about public audit. The issue about the status of the National Audit Office has been on the go for two and a half years. The provisions to make it a corporate body fell at the wash-up. It is quite remarkable that when the Government want something done in a hurry, it gets done, but when things are fundamentally important to Parliament and the discharge of public accountability, they do not get done. I keep drawing a contrast with what happened in 1983 when the National Audit Act establishing the National Audit Office was passed. I think that now Parliament almost accidentally has come to a point when those issues cannot be avoided any longer.

David Walker: Absolutely. The case could be made on the basis of evidence. Go back to a decade ago when your colleague in the House of Lords, Lord Sharman of Redlynch, produced a report that implicitly concluded that there was a strong case for rationalising audit in England. What I have tried to say in my evidence is that the way in which the Communities Secretary went about his work was questionable, but he had an absolute right to examine the functioning of a body which, since it was created in 1983, had gone through a number of transformations, not necessarily all for the best. I think there was at the least a very strong case for a review, and possibly that review coming to a conclusion, but that should have been an evidence-led review.

Professor Martin: There is a serious danger of agreement breaking out among your witnesses. I certainly agree with David Heald and to some extent with David Walker. Our evidence, unpopular though it has been sometimes with local government, is that even the assessments of local government, about which perhaps people have most doubt, have been effective in a variety of ways. Therefore, it is quite possible to argue that there were diminishing marginal returns with repeated inspections of local government and that the commission over-reached itself in a number of ways. It is certainly the case that it lost some friends, and the debate in the run-up to the election became a rather tetchy affair in public, although privately I found that senior officials in the commission were much more reflective than it might have seemed from the outside.

Nevertheless, I believe that its abolition leaves quite a big gap. I know much less about audit than my two distinguished colleagues, but in terms of the assessment and inspection of local government, I think that is reflected in the evidence I have already given to you. There are a number of ways in which CPA and then CAA even in its first year had really beneficial effects in terms of the kinds of things for which we have been looking in our research.

Q3   Bob Blackman: Obviously our questions we will touch on audits, inspections and so on but, looking specifically at the Audit Commission, one of the issues of concern is the costs and activities that the commission got up to. Mr Walker, I think that during the year 2009-10, when you were there, you paid £2.3 million to employ 48 staff in your department. That sounds to me like an awful lot of money given what we are talking about generally speaking in the professional auditing area.

David Walker: I will make this point once. I think that, as a Select Committee, you have better things to do with your time than re-warm answers to a set of parliamentary questions that your colleagues have been asking since at least autumn 2009. The answer given on all occasions was: "operational matters for the Audit Commission". If the Government of the day did not like what the Audit Commission was doing, they had various remedies, including changing the commissioners, which would have been a rational way, and changing the chairman of the commission, which is a normal practice with arm's length bodies. Other than that, the commission was subject to a series of questions of that rather aggressive kind.

To answer your question directly, a large organisation needs to have a communications function, particularly one that endeavours to communicate with the general public about difficult issues. The year that you are talking about was one in which we were trying to render to the public—you may not like CAA but it was an existing programme—a detailed set of assessments of how the local service economy in the local areas of England was functioning. We can debate whether that was insufficient or too much, but the case for spending on public relations and communications is surely unassailable.

Q4   Bob Blackman: So do you think that is a good use of public money?

David Walker: I think it is a necessary one. Parliament enjoined the Audit Commission to do various things, including communicate with local authorities and the public. I fail to see how it could have done that without the expenditure of a reasonable sum of money. If you look at the evidence that the Department for Communities has itself collected to compare the spending of the Audit Commission on communications with that of other arm's length bodies within its so-called family, you will find that the commission's spending is reputable.

Q5   Bob Blackman: But do you personally feel that that was a reasonable use of public money for that purpose?

David Walker: I repeat that it is a necessary use of public money given the statutory obligations placed on this body. We had no choice in exercising of the will of the institution of which you are a Member to carry out communications functions to try to reach out to local authorities and elected members. We had a special programme to try to tell councillors what we were doing and about things of interest in their wards and areas, and to tell the public what we were doing. We had no choice but to carry out that obligation.

Q6   Bob Blackman: There are a couple of other areas. I think there was the Eurorai dinner, which cost £14,000. It is very nice to entertain auditors from across all of Europe, but to me that seems like a difficult decision to justify when it is public money.

David Walker: Again, I will make this point once. The Select Committee system of this House depends upon the good will of people who come here voluntarily to give evidence and help you with your inquiries, which we hope will lead to better public policy and delivery. To use me as a guinea pig or a stalking horse for partisan attacks seems to be, to me, a waste of your time, but let us leave that aside. The Eurorai dinner to which you refer was a European auditors' event that is organised in succession by the audit organisations in membership of the organisation in different years. As has been reported, the Audit Commission's direct expenditure on this event amounted to some £5,000. If you are saying that national audit bodies—including the NAO, which engages in such activities—should never engage with other national audit bodies then, yes, you will say that expenditure was worthless. If, however, you believe there is learning to be got from other jurisdictions and that we can see something that other people are doing from which we might extract value, it seems to me that, on this occasion, £5,000 was not a lot of money to spend.

Clearly, in the light of the attention paid by the Evening Standard, which is obviously your source for this story today, it looks bad in austerity for there to be a dinner of any kind. Recently, however, I have been round the back of the House of Commons across the road and seen your fellow Members engaging in dinners, which I imagine were paid for either by the public purse or people who wish to secure objects from you. If you as MPs had cleaned the Augean stables thoroughly, you might be in a position to say that a small expenditure on a dinner was completely illegitimate. Until you have done that, I suggest that your criticisms are to be qualified. But I go back to the main point: that particular event had to do with the bona fide activities of the Audit Commission as a national representative body in the audit field.

Q7   Bob Blackman: But the clear point that is being made here is that the rationale for the Government to abolish the Audit Commission is that it has over-reached itself, that it has become a body that does not safeguard public money in the way it should that and it costs too much money to deliver the audit service on which everybody depends.

David Walker: Those are all empirical matters. If we had seen—so far we have not—a plan from the Communities Department that said that proper public functions, which you will be debating in your Committee, could be achieved at a cost that is demonstrably less than the annual running costs of the Audit Commission, your case would be proven. We have yet to see that evidence. In normal public business, it would have been good to see some of that evidence prior to the decision being taken to abolish the Commission so that, instead of headlines in newspapers and press releases, we had some decent figures to go on to say that the costs of this operation were x, and they could be x minus £50, £100 or whatever. The figure of £50 million, which was inserted into the public domain last August, was plucked from the ether. There is no extant empirical basis for that figure. Indeed, in papers submitted by the Audit Commission to the Communities Department, which you will probably have seen—let me add that I do not speak on behalf of the Audit Commission, which does not employ me—the costs of winding down the body could mean that any savings from abolition might well be deferred for 10, 15 or 20 years, even if then.

Q8   George Hollingbery: I hope to turn down the temperature slightly, if I may. The evidence you present about the haste with which the announcement was made and the potential damage that that might have done, particularly in the absence of clear plans, as is asserted—all of us would agree that there is not necessarily an absolutely clear plan—is pretty unequivocal. Can you develop a little how much that has damaged the current capacity of the Audit Commission? I would like you to tease out, if you can, audit versus inspection and the process of replacement of the Audit Commission. There are two separate things: the ongoing work of the Audit Commission, retaining staff and so on and so forth—both functions—and, on the other side, the actual process of replacing it with something else. How much has that been damaged and why? You develop it somewhat in your evidence, but perhaps you could take it a little further.

Professor Heald: The direct question has to be put to the Audit Commission. Organisations that are to be abolished run the danger of leaking their key personnel in the period and becoming fragile. Some of the papers submitted to the Committee make it obvious that the time scale might be longer than originally set. Whether the Audit Commission can hold the audits together—I will talk about audit, not inspection—is an empirical matter that it is probably better placed to answer. Obviously, it has the framework agreements with the private sector in place, which is 30% of them, but then there is the question of the 70%. There is obviously a danger that the people who would be doing the in-house part of the Audit Commission activities will be more worried about their future than about delivering present things.

Given where we are now, what worries me most about the evidence I have seen is the lack of recognition that it is a fundamental principle of public audit that public bodies do not appoint their own auditors. That was categorically established at the time of Sharman, who was appointed as a result of the Standing Committee on the Government Resources and Accounts Bill when the then Chairman of the Public Accounts Commission, Robert Sheldon, and David Davis, the then Chairman of the Committee of Public Accounts, made a big issue at great length about the fact there were executive non-departmental public bodies that appointed their own auditors. The Government appointed Sharman and then accepted his conclusion. That was really the high point of the principle that public bodies do not appoint their own auditors. That principle was breached at the time of the creation of foundation trusts when, because of disputes within Government that never really got into the public domain, the power to appoint auditors was taken away from the Audit Commission. The power to set the audit framework was given to Monitor and foundation trusts were given the power to appoint their own auditors. What people ought to have seen then was that this would become a rolling stone, and now it is local authorities. There is going to be an issue about GP commissioners and police commissioners. There is a really fundamental issue that people who spend public money, especially when they do not actually raise that money themselves in taxes, should not be responsible for appointing their own auditors. That is the fundamental issue to address now.

Q9   George Hollingbery: How much do you think there is a genuine chance that that relationship between the inspected and the auditor can become too close?

Professor Heald: There is an important distinction to be drawn about what the Audit Commission did. The Audit Commission regulated audit in the sense it established the audit codes for health and local government. It appointed auditors, and it also acted as a buffer between the auditee—the local authority—and the audit firm. It removed a lot of the issues of liability that a private firm would face. For example, if a private firm were to raise a public interest report on a local authority, it had indemnities from the Audit Commission. The Audit Commission ran its procurement very sensibly in that it put together bundles of local authority audits. The reason why the Audit Commission was established in the early 1980s was that there had been scandals and a fear that auditors were too close to local authorities.

I find it very odd that all the documentation seems to believe that audit fees will come down. The only academic study I know of is by Basioudis and Ellwood in 2005. They very much praised the managed competition audit regime run by the Audit Commission. Therefore, I think the fundamental issues are, first, to keep to the principle that public bodies do not appoint their own auditors, and preferably repair where damage has already been done, and then think about the regulatory function. There seems to be some enthusiasm for putting the Audit Commission in-house practice into the private sector. The Financial Reporting Council seems to think, bizarrely, that that would help to create the fifth major audit firm, which it has been trying to create for some time, but it will also create a remarkable oligopoly of public audit in the private sector.

Q10   George Hollingbery: Mr Walker, you are particularly polemical in your evidence.

David Walker: I thought that your first question was about the transitional arrangements and whether there was a potential danger. Let me address that, again stressing that my experience of the Commission is now dated and in no sense do I speak for colleagues past. My sense as an observer of the public sector is that there is a risk that auditors who are enjoined to produce public interest reports, if they see things happening in the local public space that worry them, might pull their punches during a period when they are distracted. David just mentioned the creation of an in-house audit practice. I would imagine that is absorbing quite a lot of time and energy at a time when, whatever side you may be on in terms of the Government's unfolding policy agenda, you would wish there to be some quizzical eyes on local expenditure, health and education. I imagine that Andrew Lansley might have wished for a more robust Audit Commission in existence during a period when some fundamental changes are occurring in the local financing of health. That is not the case. So there may be some risks to local public expenditure during the period when, potentially, the Audit Commission is less attentive than it would have been.

Q11   George Hollingbery: Turning to the second part of my question, you are polemical in your assertion that damage has been done by the ministerial whim, as you describe it, of abolishing the Audit Commission without having consulted widely. Has abolishing it in this way done long-term damage to the potential replacement process?

David Walker: Without wishing to flatter you, to some extent you have it in your hands to repair that process. I think it is evident from the Government's own evidence to you that thinking that should have been much further advanced has not taken place. The thinking that might have been in place prior to 13 August 2010 was not in place. In some sense, the field has been left to you, if you can, to try to put together some of the pieces that at the moment lie, as it were, in shards on the floor. That will be difficult because you are one Committee and clearly we are talking about an arena that is covered by a number of other Committees of this House and other parts of the public sector.

Professor Martin: I think we have already discussed the fact that this was not really an evidence-led policy decision; it was one that happened very quickly. I guess there is some merit in that. We are used to parties that promise localism while in opposition and then rapidly turn round and start to centralise things. As a symbolic gesture that the Secretary of State was serious and meant what he said, perhaps there was some merit in pulling the rug on the CAA, if I can talk about the assessment side for a minute, but one would hope that it was based on some evidence. Though I have struggled to find it, it simply is not there—it is based on anecdotes. If it is on the basis of a discussion about £5,000 on a dinner here and there, that really is not evidence-based policymaking, as I would define it anyway.

Therefore, I think that in this interregnum we risk losing the area focus that the Audit Commission brought through CAA and, to a lesser extent, through CPA. The danger is that we go back to what might be called a silo-ed approach to inspection and we focus on particularly vulnerable groups, as if non-vulnerable groups do not matter and whether they are getting ineffective, inefficient and poor quality services is of no concern. I worry about that possibility. If the field is left to Ofsted and the Care Quality Commission, nobody is looking any more at the impact on areas of joint working, or maybe the lack of it, in the new environment between agencies. The second thing to say is that at a time of austerity, it would be all too easy for local authorities simply to struggle to balance their books, and the absence of a counterweight in terms of questions about whether they are providing decent and adequate services is a concern.

Q12   George Hollingbery: Presumably it is even further complicated by localism itself. The commissioning of services out and third-party bodies providing all kinds of things produces a unique challenge.

Professor Martin: Yes. Third, if we had an alternative model in place before we jettisoned the previous one, that might have been a more sensible way to proceed. As David alluded to, I have been waiting and waiting for the LGA and others to come up with an alternative framework. I visited its website this morning and noted that it had had further discussions in the last week about how it will support councils to regulate themselves. It found that councils feel they will need support and funding to do that. I would not have thought that was a huge surprise. Therefore, there remain big questions about whether we are talking of regulation by the sector or by individual councils. Who will foot the bill for that? Will local authorities now simply have to pick up the tab for the alleged £50 million as they have to regulate themselves? I would like to see much more about the alternative framework for local accountability, and at the moment I struggle to discern that either in the Government's statements or the LGA's announcements.

George Hollingbery: That is very useful. Thank you.

Q13   James Morris: To concentrate on the alternative framework that you are discussing, irrespective of discussions about the abolition of the Audit Commission or not, the Government's policy driver is to leave accountability for local spending much more in the hands of local people. To focus for a moment on the audit side, do you think there is a legitimate argument about how the audit function could be reduced, the nature of the way in which audit is done, and how it can be oriented towards making local people the primary point of accountability rather than a heavily top-down centralising body?

Professor Heald: Are you talking about audit as opposed to inspection?

Q14   James Morris: I am just focusing on audit.

Professor Heald: There are fundamental differences between private sector audit—I am not talking about whether the audit is done by a private or public sector auditor—in the corporate sector and audit in the public sector. Audit in the corporate sector is essentially about whether the accounts give a true and fair view of the position of the company. Given the move of Government to accruals accounting and now to IFRS, that is very much a similar function in the public sector, because basically the UK follows IFRS with relatively small modifications. To go back to the time of Gladstone, there have been important additions to that, particularly about regularity and probity. Public audit of itself has always had a broader remit. The big change over the last 30 years has been the expansion of value-for-money auditing. So if people talk about narrowing the scope of audit, one needs to be very clear about which parts of that will go. Reading the evidence you have received, there are a lot of people who want rid of value-for-money auditing. I make two points about that. First, if the so-called centralised view of value for money is rejected, one thing we can expect is a lot of locally commissioned value-for-money reports acting as cheerleaders rather than anything else, particularly if there are no comparable data. The same kinds of issues about non-audit services for local authorities that we get in the corporate sector—

Q15   James Morris: If I may cut across you, do you agree that in the past 30 years—perhaps in the 1980s when the Audit Commission first started up—there was a legitimate concern about some aspects of audit and the performance of local authorities was generally seen as being quite poor, but we now have a situation where the general standard of probity and performance in local authorities is very high? Therefore, is there not an argument that from a policy perspective we need to reduce that level of centralised inspection and audit so that we move forward to the next stage, and that we do not need the heavy-handed approach that we needed 25 years ago?

David Walker: Personally, I think that is absolutely on the right tracks. In the age of austerity, to use the cliché, there are a number of ways in which the cost—some would say the burden—of audit could be reduced. The thinking is that the professionalism of auditors lies in financial probity, regularity, and fair and true assessments. Let's try to keep them on that track and strip away what has accrued over the past 25 years—certainly during the lifetime of the Audit Commission—with the wider effort to subject them to a performance management regime on the one hand and value for money on the other. I am afraid I have never been entirely convinced that auditors necessarily possess expertise in value for money. In the private sector, that is not what auditors do. I have never been entirely clear at what point the public and the Audit Commission thought that auditors could take on what would turn out to be some rather tricky judgments that arguably should remain within the purview of the people elected by the public to look after local authorities—i.e. councillors.

Professor Martin: I am not well placed to talk about audit as I think I have already made clear but, try as I might, I remain sceptical about the idea of local people taking on a role that has been left to professional auditors or inspectors until now. There is a variety of reasons for that, but it runs counter to the local political culture in most parts of the country.

We have done research to look at whether local people say they would like to have greater involvement, and typically 20% to 25% of those who respond to household surveys say they do. When you ask how they would like to become more involved, it is probably filling in a survey once a year about how they feel about their rubbish collection or something like that, so the capacity and willingness of the local population to get closely involved in scrutinising these sorts of issues is very limited at the moment. Secondly, we all know that there are certain groups who are more inclined to do that than others. Therefore, people over 65 are more likely to want to get involved and people in socio-economic groups A and B are more likely to do that. Third, there is still a huge misunderstanding about what it is local government is responsible for and how it is funded. I think that most people assume that the council tax pays for most local government services, which simply is not the case.

Therefore, there is a whole job to be done, first, to raise awareness among the public about these issues and, secondly, somehow to stimulate an appetite to get closely involved. I think that without comparative data, which is how most people consider whether they are happy with performance, it will be quite difficult to do that. What question will I reasonably want to ask of my local authority? I might want to ask: are things getting better over time? I am not sure how I am going to know that yet under the new regime, whatever that is. I might want to ask: are things as good here as they are over there? It is certainly unclear to me how those comparative data will be available and who will provide them. Thirdly, I might want to know: can I trust this source of information, is it independent and has it been verified by somebody? It is still unclear to me how that will be provided.

I think there are questions about appetite, capacity and the kind of evidence that will be available to people to enable them to do that. When we looked at the Oneplace website last year, we found that 1% of the 1,000 or so in the representative sample of local residents across the country who were interviewed said they had actually visited the website, which the Audit Commission put up specifically for the purpose of providing information about how good local public services were in a particular area. It seems to me to be a fantasy.

Q16   Simon Danczuk: Mr Walker touched on the issue of public interest reports. The Secretary of State has implied that they will continue in the brave new world of local government audit—or a dog's dinner; call it what you what you will depending on your perspective. Is there a need for public interest reports? How might they work in this brave new world? Who will commission them and how will they be delivered? Will they have any real value?

David Walker: This seems to me to be a point of departure in terms of where one takes the argument. If you are a localist who believes that legitimacy has been given to elected local councillors because they have the courage to stand for election and secure the assent of local people, you could quite clearly argue that an auditor had no right to blow a whistle and that is a job for the local political system—local newspapers, opposition councillors and so on. However, if you believe—this is a view that has been taken by this institution since before Queen Victoria came to the throne—that local expenditure is precious and demands constant invigilation by experts, you would say that there probably needs to be a state capacity to blow the whistle.

I suppose that one of the practical questions now is: who might be best placed to do that—a revamped National Audit Office or some other body? One of my problems with a 100% private provision of audit would be the risk that private auditors—we have the example of the banking system on our doorstep—would never be enthusiastic about blowing the whistle and potentially losing future revenue for their firms. Therefore, there are two questions. One is whether the principle of whistle-blowing and public interest reports is answered; and, secondly, if we are to have that, who will do it?

Q17   Chair: Are there any further comments on that?

Professor Heald: This goes back to my earlier answer to the point that the Audit Commission protected the private auditors—the regulatory function of the Audit Commission protected the private auditors. I do not know the numbers, but in the evidence there is reference to fewer public interest reports since foundation trusts were established. You might usefully look into what the pattern has been.

The other point I make is that localism is all the fashion, but one of the things one must remember is the extent to which local authorities are funded by money voted by Parliament. Parliament will have an interest. What is quite remarkable is the way in which everybody seems to want to shuffle new functions on to the National Audit Office without Parliament having been consulted. It seems to me very important that if the National Audit Office is to acquire any more functions, it should be done explicitly by Parliament rather than by mission creep on the part of the National Audit Office. Under the previous Government, I kept criticising the fact that the then Comptroller and Auditor General had taken on the role of auditing the assumptions underlying the macro-economic forecasts when I doubted whether the National Audit Office had that capacity. What the National Audit Office does is a question that Parliament should decide. We should not get to the position in which there is no alternative and therefore Parliament must give that power to the National Audit Office.

The other point is that the United Kingdom is one of the forerunners in the world in imminently publishing Whole of Government Accounts, and the Comptroller and Auditor General must sign them off. If one has serious failure, either because local bodies cannot cope with public spending cuts or because of institutional upheaval, and we start to get back to the position whereby accounts are incredibly late, it will create significant problems for the Comptroller and Auditor General in the context of Whole of Government Accounts. Parliament and its officers, like the Comptroller and Auditor General, retain a responsibility for the whole of public spending. I think that is a quite fundamental point.

Q18   Chair: Professor Martin, do you need to add anything?

Professor Martin: No, thank you.

Q19   Mark Pawsey: We have heard your criticism that the Government's decisions have been made in haste and that you believe there is an absence of a detailed alternative, but, Mr Walker, you told us that there is now an opportunity for us to create a new framework. To move the discussion a little further forward, what would you define between you as the principles that need to be retained within a new system? Would you set a minimum requirement or a series of models that different authorities can choose to use? Where do we go from here?

Professor Heald: I do not think there should be a choice of models for authorities to use. As far as I am concerned the Sharman principle holds: public bodies should not appoint their own auditors. That would be my real bottom line. There is now an issue for Parliament. I was a member in Scotland of the Financial Issues Advisory Group that considered financial accountability to the Scottish Parliament—actually before the Scottish Parliament was created. There was a very substantial discussion in the advisory group about whether Scotland should have an equivalent of the Audit Commission and also of the National Audit Office. We came to the view, after quite a lot of discussion, that Scotland was just too small to have two audit bodies. Although we were conscious of the constitutional argument that local government had its own accountability, we thought that having two audit bodies would be too complicated. There is a rather odd structure in place, which has actually worked quite well in practice. Therefore, one of the inhibitions for unifying public audit in the UK has been the sense of the separate democratic mandate of local authorities.

I would certainly argue that Parliament should think very carefully now, having got to this position, about whether there should be two separate bodies. What I do not want to see happening is the National Audit Office being lumbered with a lot of additional powers that will deflect it from its major mission. It has to be something that Parliament itself decides. This has significant implications for the National Audit Office that it is important for Parliament to understand. If, as the Minister says, the Audit Commission does not have to have its own employees doing audit, why does the National Audit Office need its own employees? Why could not all of that be contracted out? Equally, if we do not need value-for-money audit in the local authority sector, why do we need it in the central Government sector? We come to a point where Parliament can have a fundamental debate, very much like what happened in 1983.

David Walker: I agree entirely with that. It must be for you to answer whether public expenditure, particularly under the movement towards Whole of Government Accounts, is to be considered a unity, or whether we think of it as a bit here and a bit there and so we can have separate audit regimes. If you do not mind, I was struck by a phrase in the annual accounts of Rugby borough council, which says: "Central Government has effective control over the general operations of the council. It is responsible for providing the statutory framework within which the council operates, provides the majority of its funding in the form of grants and prescribes the terms of many of the transactions that the council has with other parties". As long as that is the case—I think that is a reasonable description of it—David's strong assertion of the need for a unified audit regime, however practically organised, is a compelling one.

Q20   Mark Pawsey: But if the proportion of funding from central Government falls, does it not mean by implication that the amount of input from central Government should equally fall?

David Walker: Absolutely. I think that if Eric Pickles' review turned up a new model so that 80% of local expenditure was raised locally as opposed to 20%, the intellectual case for local authorities to choose their auditors would become strong, if not compelling. At the moment, however, we are not there, and I wonder whether we will ever get there.

Q21   Chair: Why? Surely, from the public's point of view, it is their money.

David Walker: If the local public are the principal source of that money, it is the local political space in which accountability and value-for-money questions, and indeed audit arrangements, are to be addressed. As long as that money comes from central taxpayers through distribution systems including the non-domestic rate, surely it is for the central part of our state—the legislature—to assure itself that that money is spent according to law. That is the basic purpose of it.

Q22   Mark Pawsey: How would you define the minimum requirement, which is the bit by which it would not reduce at all—the bare minimum where we would expect central Government to involve themselves in the affairs of local government as far as concern audit and inspection?

David Walker: Let's see whether there is any genuine move to increase the proportion of local expenditure raised through local taxation. Unless and until that policy changes, I think that this is an academic discussion. We really have to deal with where we are, which is that local expenditure is willed by national taxpayers and channelled through this body.

Q23   George Hollingbery: NNDR is almost certainly going to become an even larger part of local councils' revenues, and local councils may well get control of how much they raise. Therefore, I think your question is somewhat answered. Certainly, it seems that a lot of that money will be coming locally. However, is not the ultimate extension of your argument that local taxpayers ought to be in charge of appointing the auditors?

David Walker: Indeed; discussions have taken place along those lines. If the precedent that David Heald quoted of foundation trusts is prayed in aid and if the example of academy schools is on the table, it will be hard to say to councils that they should not have the right that the governors of schools or the trustees of further education colleges have. Obviously, there are those who find it problematic that such autonomous bodies have the audit arrangements they have but, as things stand, for them to have choice of auditor and for local authorities not to have it, were they to secure more autonomy in their funding, would be difficult to argue.

Professor Heald: I do not accept my fellow witness's point. The principle that public bodies do not choose their own auditors applies irrespective of whether they are funded by local or central taxes. The point I made earlier was that if you are in a position where they are funded mostly by local taxes, the argument about having a separate local authority audit regime, as we have always had in the past, becomes stronger. I was not making the argument of merging the Audit Commission's responsibilities with those of the National Audit Office. I was saying that this was an opportunity to discuss them.

Q24   Mark Pawsey: But in that scenario who would decide who the independent auditor should be? Accepting your premise that the body itself should not choose the auditor, who would choose: local people, or would Government impose it?

Professor Heald: You need some kind of audit regulator. It could be done either by an expanded National Audit Office, although there are dangers in going in that direction as I pointed out, or by some kind of residual Audit Commission.

Q25   Chair: Professor Martin, do you want to add something?

Professor Martin: No.

Q26   Stephen Gilbert: Perhaps we can drill down a bit on some of the last points you made. Professor Heald, I take your point very strongly that the auditor can never be independent if appointed by the local authority; you could never guarantee that level of independence. I would appreciate a comment from all the witnesses about that. The Government have said they will put in place stringent safeguards. Can you imagine what those safeguards could be while allowing local areas to appoint their own auditors?

Professor Heald: Without departing from my point of principle, I presume the safeguards will be in terms of things like non-audit work. That would be one of the issues. There would also be issues to do with liability insurance. They would probably be the major issues. The point I made before is that one of the functions of the Audit Commission was to protect the private sector auditor as well as its own staff. One of the reasons why I am sceptical about audit fees going down is that the private audit firms and whatever happens to the Audit Commission in-house operation will have to buy insurance in the market. This means that some councils may find it very difficult to get auditors. My prediction is that if one went to a position of councils choosing their own auditors, there would be a remarkable rush to hire the big four for the same kind of reputational reasons that other bodies, including universities, do so at present. One of the things the Audit Commission and Audit Scotland have tried to do is build up alternative providers in a managed market.

Q27   Stephen Gilbert: Therefore, notwithstanding the point of principle, which accept is a very legitimate viewpoint, you can imagine a system of safeguards that enables the auditor to have independence when he or she goes into the local authority and undertakes the inspection and audit?

Professor Heald: It depends on what you are covering. One point I have already made is that if you get rid of centralised VFM where there is an attempt to build comparable data, what you will get is a lot of cheerleading reports about how wonderful your particular authority is, just in the same way universities and public bodies get economic consultancies to show what an enormous economic impact they have on their areas.

David Walker: I am sorry to interrupt. That may be a true criticism of a university or foundation trust, for example, but surely the very nature of local government is its contestability. You will have things called opposition councillors who have a vested interest in subjecting the auditor to the rigours of cross-examination. To that extent, the local political space, just as at the centre, should at least in theory provide an opportunity for pluralism and checking the quality and probity of auditing in a way that the auditing of private companies—in a different context—and other autonomous public bodies does not.

Professor Heald: One other point I come back to is that the power to object to local authority accounts is very little used at the minute. Certainly, there is some suggestion that it should be abolished. That seems very odd at a time when people talk about armchair auditors and publishing everything over £500 because if anything was to stimulate the use of that power, that would seem to be it, whereas the emphasis seems to be on a power to object to the appointment of the auditor. Except on issues like non-audit services, it is difficult to see how you can get a valid objection to somebody on the list of approved auditors. Obviously, objections are very time-consuming and costly for the auditor, particularly if they are argumentative or technically difficult.

Q28   Stephen Gilbert: That point may come up in a little while.

Mr Walker, you indicate that you can see the potential that, because local government has the political space—because there are opposition parties and administration groups, and because it is contested—you could outsource this function to local areas and still provide a significant level of security of independence.

David Walker: The critical question for us all, but particularly to you in your deliberations, is whether local authorities are trustworthy. To use language that to people who are localists immediately sounds patronising, why are not local elected members as capable of rigorous examination, whether it is on taxation or expenditure, as Members of Parliament or Members of the House of Lords? If we believe that local government is and should always be in a relationship of tutelage to the centre of government, the nature of the regulation of local government audit is very important. If, however, you believe that councillors are capable of autonomous decision-making about taxing and spending, it is quite legitimate to ask about the practicality of who appoints auditors, but it seems to follow from that that audit appointment should be left to local decision making.

Q29   Chair: Should there be an additional requirement, or at least an indication of good practice, if we get to the point of councils appointing their own auditors, that perhaps there must be an audit committee on which there are people who are independent of the council, maybe even with an independent chair, who would do the appointment and have final say over the dismissal of an auditor?

Professor Heald: There is no statutory requirement for audit committees, but some authorities have audit committees with independent chairs, or with a member of the opposition as the chair of those committees. But you can imagine the kinds of argument that will arise. The localist argument is that the councillors are elected people. In many local authorities, it will be very difficult to find lots of people who are technically qualified to sit on the audit committees of local authorities and potentially get themselves into a position of considerable personal risk.

David Walker: I am not sure that audit committees are a remedy. Ultimately, I would have to vest faith, in your case, in the political economy of the city of Sheffield to be able to produce a conversation that would subject the decisions of extant councillors to interrogation, examination and rebuttal as necessary. If an authority were in the control of a single party for ever and ever—there has been examples of that in the past on all sides of politics—it might pose problems, which arguably the Standards Board, now abolished, might have answered, but leave that aside. Most local authority areas are subject to the give and take of politics. I am not sure why the give and take of politics should not be as effective a deliverer of decent decisions about audit as specialist committees, particularly those involving the appointment of people who have no standing other than their proclaimed independence.

Q30   Bob Blackman: Often when audits take place, the local newspapers come in and trawl all over the accounts. That acts as a means of allaying fears, if there are fears, or exposing any problems. Is that not an alternative route forward?

Professor Martin: I am glad you have raised that and that my colleagues have raised the issue of councillors. I thought that earlier we were in danger of having a debate that was about either top-down performance management by Ministers or armchair auditors. I think there are other players somewhere in the middle of this mix. To the extent that we are saying it has to be either of those two, we really are saying we do not trust local councillors to do the job they are elected to do and that there isn't adequate media scrutiny. If we take councillors themselves plus a series of intermediaries, which might include the media and a range of voluntary and user representative groups—not your average citizen, but people with the time and capacity to get the knowledge that is needed to hold authorities to account—that is where the alternatives to the previous regime are likely to be found, so I agree with you.

Professor Heald: Obviously, traditionally, the local media have played an important role in this, but one of the significant issues is that local authority accounts are very complex. It is not just that they have become more complex as accounting has become more complex with the move to international financial reporting standards, but there is also a dichotomy between the bottom line of the IFRS accounts and the council tax numbers. That is something that Parliament should think about. There are lots of adjustments and add-backs to make sure that things such as depreciation do not come through and hit the council tax bill. One of the things that distracts the attention of councillors and members of the public from the actual audited financial statements is the fact that they are not the numbers that determine what the council tax bill is—that is what hurts. I think there is scope for thinking through all the paraphernalia of legislation about the way local authority accounts are dealt with. Obviously, it is partly to do with the way the Treasury counts public spending numbers.

David Walker: But all those points apply to the expenditure and accounting of central Government. Whole of Government Accounts, national accounts and Government budgeting are three sets of numbers that do not cohere one with another. That is a point to make, but it is by no means applicable to local government.

Chair: That is a very fair point having looked at the accounts for the CLG and its estimates.

Q31   Heidi Alexander: What is your view on whether the demise of the Audit Commission will result in greater competition in the audit market and reduced fees, and how we can obtain value for money in local authority audit in the new world?

Professor Heald: I think you have to distinguish between audit doing less and bringing fees down because auditors do not do as much, for example on the value-for-money side and inspection side. I can push that aside for the moment. Anything one does is speculation. My speculation is that there will be upward pressure on fees. The evidence I have seen is that the Audit Commission managed the market quite well through its framework agreements, pulling in new firms, bundling sets of audits and a certain amount of cross-subsidisation within the bundle. Therefore, there is a danger that audit fees will go up quite sharply for some authorities. It may be that local authorities that are geographically remote or regarded as politically risky are particularly hit.

To repeat a point I made before, one of the things that one will find is that people will want the big four. Given that all the major authorities will want to be audited by one of the big four, you might get more concentration. There is much less reason for audit concentration in the public sector in the UK than there is in terms of UK corporates. UK corporates are very internationalised; you need an enormous network of international representation to be able to audit a big UK corporate, but there is also a reputational factor as to why 99% of the FT100 is audited by the big four. I think that unless the matter is managed well, we will see more concentration and audit fees probably going up.

Q32   Heidi Alexander: What do you think should happen to counter that?

Professor Heald: The managed market should be kept. One of the functions of the Audit Commission—the same applies to the Wales Audit Office and Audit Scotland—was that its ability to manage the market depended partly on having its own in-house provider, so the fact that it had the experience itself and could do its own internal costings made it much easier for it to manage the market. I do not agree with putting the Audit Commission practice into the private sector, certainly as one unit, but whatever is decided on that issue, one needs to keep managing the market—one needs a credible market manager.

David Walker: If I may add to that and endorse the point, unless we think about the content of audit, the scope for savings is inherently limited. We should be thinking about the content of audit, particularly the question of whether auditors should do value-for-money and financial resilience questions, which are not part of the usual audit package. Then there is the rather technical question about the relationship of internal and external audit, which we have not touched on. There are clearly ways in which internal audit regimes that are regarded externally as reliable could reduce the cost of external audit. If we are to trust local authorities more, perhaps their internal controls could carry some of the weight that is presently carried by external audit.

I suppose that the answer to your question is that as things stand, with public audit being defined as it is, there are too few bodies around. Given the likely division of the market, it is easy to see how cost pressures could put up the price of audit in the short and medium run.

Professor Martin: I suspect that you make the savings by cutting back on the assessment and inspection side that we have had until now. There is a variety of ways to do that. One is simply not to do it any more and run the risk that services decline, or something horrible happens to a user somewhere. There is that risk-reward ratio to be evaluated. Another way of dealing with the assessment and inspection side is to think about the key tasks involved in that. You can divide them up into three. Somebody has to determine what the standard should be—what is a good, adequate level of service. It might be left to local councillors to decide what is appropriate in their areas, so Ministers may no longer have to do that.

Having done that, you need to gather information that enables you to know whether standards are being met. It is quite conceivable that the local government sector could do that for itself, although there are questions about the reliability of those data and the willingness of that sector to take on the costs of doing that. Third, there is intervention, or some kind of remedial action, where things are not going well. Again, there is a variety of stakeholders who could take on that role. You could leave that simply to the local authority itself. In theory at least, you could leave it to the sector, or you could have a central body doing that. I think I would be asking questions about whether we need any form of external assessment of services and, if we do, who is best placed to do that in a set of changed circumstances. You could partition the role in a variety of ways.

Professor Heald: From a local government perspective, I would be most concerned about the fact that there are reputational risks to the sector from the failure of individual councils. I would be very worried that the failures of individual councils would hit the reputation of local government and that one would just see central Government removing functions from local authorities.

David Walker: There is a tendency to exaggerate the cost of audit itself and to marry audit with various other inspectorial functions. Off the top of my head, I would imagine that the annual cost of audit to the London Borough of Lewisham, which has a budget of about £400 million, is probably no more than £120,000 or £150,000. Obviously, what adds to the cost is preparation for and receiving inspections and, at least until it was abolished, the performance management regime of the Audit Commission. They certainly added to the cost, but audit as audit represents a very small fraction for a major authority. There is a different set of equations in district councils, where you could argue that audit is too large in terms of the budget, but I think that for a major city authority, audit is not financially terribly significant.

Q33   Mike Freer: I turn back to the advent of the armchair auditor crawling all over local authority accounts. I want to paint two scenarios and I shall be interested to know whether you think I am too pessimistic. First, there are local authorities who are scared to spend money because of the wrath of the armchair auditor. For instance, if my memory serves me, the Children Act required local authorities to link their IT systems to their own social services teams, hospitals and the police. Of course that costs money. Then you get the headline "Council spends £50,000 on IT" and the armchair auditors and local papers scream blue murder, yet when a child is damaged or hurt, the council is criticised for not investing in IT. How do we square that circle? I have some scars on my back from my own local authority. Where armchair auditors use section 16 of the Audit Commission Act to challenge accounts, are we not then giving a charter to people who are obsessive and narrowly focused simply to harry and pursue the local authority on a very narrow issue, rather than a genuine army of auditors scrutinising £500 spent on this, that and the other?

Professor Heald: I sympathise with your first point. Personally, I would not have given great priority to publishing raw expenditure data, partly for the reasons you have set out. One of the things professional accountants do is process information and what we need to do is make things much more intelligible to people. The research I have done myself suggests that the objection power is not much used in those places. It is sometimes used by obsessives, but you can see that to take that away from electors might be seen as an important issue.

Clearly, on the armchair auditor point and your question about a particular spend on IT in connection with children's services, councils will spend a lot more time thinking how they label things because of the fact that it flashes up on a screen. I do not mean they will mislabel things, but people will think much more about whether the short description makes any sense in the public domain, so there will be considerable compliance costs. Obviously, this is driven in part by the availability of web technology. It used to be quite difficult to get local authority accounts sent to you as an academic accounting researcher. Most authorities now post them on the web. I think we should wait and see, but it is not a substitute for professional audit.

David Walker: I confess a certain amount of hesitancy in riding to the rescue of Eric Pickles, not that he needs me to, but it is very early days. It is only since 1 January that there has been a requirement on all local authorities in England to produce itemised transactions down to the level of £500. Clearly, there will be a period of adjustment when the green ink brigade will pore over them, but after a period of time it will probably settle down and we are likely to see web applications and technology producing a more sophisticated rendering of such figures.

It is easy for me to say this, but you stood for election. Politics is partly about education, isn't it? Elected politicians—central or local—are in the business of what might be called fiscal education. They tell people that whether they want to reduce or increase the size of Government, there is a case for doing it, and that there is a trade-off between taxation and the services that taxation buys. Surely more information is a potential way to enrich that conversation. Clearly, there will be lots of scars in the process, but ultimately we have to believe, don't we, that more information will make democracy more effective?

Q34   Mike Freer: I understand the point but I am not convinced there is an army of armchair auditors waiting to pounce on a council's website. There will be some, particularly those who have time on their hands, which means that they may have slightly more of a skewed interest, if I may put it as diplomatically as that.

Professor Martin: You will have heard from my earlier answer that I have lot of sympathy with that. If we were determined to be positive for a moment, this new era might mean that councillors have to do much more of what David has just described and explain the reasons for the decisions they have made in terms other than just, "Central Government has handed out the money and has told us to do this, that and the other and to respond to this top-down performance framework." I suspect that the sector is about to get some of the benefits and also the challenges of a sector-led regulatory framework, if that is what we actually see in place. That will require local councillors—or officers if councillors cannot or will not do it—to engage in a dialogue even with the awkward squad about why they have made the decisions they have made, particularly if you put that alongside some of the provisions in the Localism Bill, such as the ability of a relatively small minority of the population to trigger a non-binding referendum. I think those kinds of things could reinvigorate local political discourse, which will be an interesting and positive side effect.

Q35   Bob Blackman: Moving away from audit to performance management and inspection, people would argue that at the moment there is almost micro-management and that there are enormous amounts of data on performance management for people to study. The alternative that seems to emerge as a start is a sector-led type of performance management. What is your view on how successful that will be as an alternative?

Professor Martin: It is very hard to answer that in the abstract. It depends on whether we can come up with a system in which local people have any confidence and on whether, if it is the sector that leads, it is willing to get down and dirty in those cases where there is a need to sort out a serious or persistent failure, and that comes back to the reputational risk that David was just talking about.

I have the pleasure of living in Wales. The experience of the Welsh performance framework over the past 10 years, where it really has been that the Welsh Local Government Association has been looked to to intervene in difficult cases, is not too promising. Therefore, the ability of a membership organisation to intervene in some of its own members, if I may put it that crudely, is a serious question for us to answer. What happens to those members who are in the process of thinking about disaffiliating under a sector-led regime?

I think there is a whole bundle of issues around what is meant by "sector led" and how effective it can be. As I hinted earlier, fundamentally are we talking about councils relating themselves, which sometimes seems to be what the discussion is about, or about local government bodies, or the local government family, regulating one another in some more corporate way? I do not know that we have the answer yet even to that question.

Q36   Bob Blackman: One of the arguments put is that the process we have had leads to continuous improvement. People examine how well they are doing and compare themselves with others. Is there a risk that all that will go completely out the window and people will happily coast along thinking everything is okay?

Professor Martin: It might be difficult to coast in the current financial circumstances. Perhaps one too-cynical argument is that we do not need the driver of inspection—if I can use that phrase—any longer, and if you are still standing in two or three years' time, you are probably quite a well managed local authority. I can buy into that. Therefore, at a time when there were large real-terms increases in spending on local public services, perhaps it was right to scrutinise what was happening to that central Government largesse. In the current climate, perhaps that is less necessary, but as I articulated earlier, my concern is that some authorities will simply cut and look for efficiencies, and worry far less about quality of service.

Q37   Bob Blackman: Should there be a position emerging where there are a small number of key performance indicators with which every authority should compare themselves so the public can see how authorities x and y are doing in these five areas, rather than the enormous number of different regimes that seem to have been forced on local government?

Professor Martin: My personal view is that there is a good case for that. However, those kinds of plans usually run into objections from local government professionals, all of whom want some performance indicators in their areas. While corporate policy officers, chief execs and perhaps even finance directors would sign up to that, I think the moment you take away from a highway engineer or planner her or his PIs, you begin to run into those professional kinds of lobbies. Therefore, my answer is yes in theory. It will be interesting to see whether or not the local government sector is up for that.

Professor Heald: If I may disagree with one point that has just been made, I think that the present climate is much more dangerous. When authorities face very big spending cuts and certain parts of the public sector are undergoing institutional upheaval, it is the wrong time to withdraw inspection. I think that peer review, which is one thing people stress as part of self-regulation, is important. I did some work on the use of resources assessment, which is a subset of comprehensive area assessment. One thing that was quite clear was that there was a good deal of collaboration and peer review going on within the broader framework. People were discussing it with each other. Again, to come back to a period of big spending cuts, I can imagine the political leadership of a council becoming unnerved by its officers spending a long time out of the office in somebody else's authority.

The final point I make is that, at the end of the day, Parliament and the National Audit Office's Comptroller and Auditor General will want satisfaction that the money is being properly spent and accounted for. It also depends on what you mean by self-regulation. The problem of self-regulation, taken literally, is whether Parliament would have sufficient confidence in the system. If Parliament does not have sufficient confidence in the system, the danger for local authorities and local bodies is that it will just seize back the function.

Professor Martin: To be clear, I was articulating—maybe in too flippant a way—the view that cuts and financial austerity might drive improvements. I am not at all confident of that, so for me the removal of inspection from all but, say, education and children's services is a huge gamble.

Q38   Bob Blackman: Is there any risk, with authorities now either sharing services or contemplating doing so, that the auditing and inspection regime for those might become confused?

David Walker: Absolutely. You need to have this conversation with your party colleagues in Westminster, Hammersmith and Fulham, Wandsworth, and Kensington and Chelsea who have led the way in proposing some radical service-sharing arrangements. Presumably, they would reply, "We are content that the local democratic process, possibly involving a merger of some of these boroughs, would be sufficient to secure the accountability needed." I have to repeat that, in a sense, that is one decision that you as a Committee will have to confront. Do you believe, as the Government seem to believe, that radical localism is on the cards and that we can and must entrust responsibility to local elected members, or do we need to retain, despite the abolition of the Audit Commission, a regime that may embrace performance indicators but certainly does not look that different from the previous regime? Are we not at some kind of junction here? If one decides that localism is the zeitgeist and the wave of the future, one can quite safely get rid of the Audit Commission, but not only that—why have five PIs? Why do you need any PIs if you are prepared to trust elected local government?

Professor Martin: I think you need five PIs so that local people can make some kind of comparative assessment, if they are to have any say in the thing at all. Otherwise, how else do you achieve it?

David Walker: I think the Government's answer would be—far be it from me to speak for the Government—that voluntary organisations that work in more than one local area, data mashers and Dr Foster-type bodies would all swim in and provide the comparative data that arguably a bureaucracy has previously provided.

Q39   Chair: Are you not convinced?

Professor Martin: I am lost for words.

Q40   Heidi Alexander: I want to turn the discussion to the advent of serious service failures in authorities. In a new inspection-light regime, what do you see as the key critical safeguards that need to be in place to identify where service failure is happening or is likely to happen, and then the intervention required? What do we need to put in place given this new inspection-light regime?

Professor Martin: It seems to me that even the most localist Government that I can imagine will not be willing to abandon some of the most vulnerable groups to the ravages of localism, if I may put it like that. The postcode lottery and the public's tolerance of that is yet to be tested, but I suspect that the public expect to have fairly similar services in different parts of the country. I think the Government will propose—I guess we would support that—the idea of some minimum basic standards for particularly vulnerable groups. After that, if we go down a sector-led approach, it is up to the sector to set the standards and to have the right detection mechanisms in place. The truth is that I do not know what they are until they have been more clearly specified by the architects of the new regime.

Q41   Heidi Alexander: Do you anticipate that the sector-led approach will be enough and effective in terms of a local authority's corporate responsibilities and ability to govern?

David Walker: We have some evidence. You may or may not take oral evidence from the Audit Commission—it will give you chapter and verse—but the story is that in the case of the metropolitan borough of Doncaster between approximately the end of 2008 and last year, attempts through sector-led peer reviews to help elected members and the mayor to cope failed, so an external intervention was necessary, which was finally signed off by the present Secretary of State. I make the observation that as an employee of the Audit Commission I was never entirely clear that, as an audit body, it was entirely apt for such governance review and so on, but your point stands. The need for it was undeniable. Things had gone badly awry in that particular place, and support, help and external intervention of some kind was necessary. Therefore, I suppose the answer to your first question must be that we lack sight of what that regime could be. I am not at all assured that an employee of KPMG or Deloitte, however intelligent, could ever have the standing to make the kind of subtle political intervention that an external public body would need.

Professor Martin: I go back to what I said earlier. There is a difference between gathering the information that enables you to identify a problem and taking some kind of action to address it. Both of those are quite difficult to do from the inside.

Q42   Simon Danczuk: There is an argument that CAA helped to encourage local agencies to work more closely together. What will be the impetus for that now CAA has gone?

David Walker: Briefly, one of the sadder aspects of the change of government—I do not say this with any partisan spirit—is that that impetus towards joined-up working, both at the centre and locally, has dissipated. That is not to make a case for the retention of CAA, which had lots of issues around it, but there seemed to be a real push for social services departments, education departments and corporate centres to come together and work across boundaries. That seems largely to have gone. I fear the answer to your question is that local authorities will retreat further into themselves in many cases, and into departments within them.

Professor Martin: I agree entirely with that answer and so will other agencies. Therefore, you would expect health perhaps to pull back into its silo, and that the police, fire and rescue and the probation services will do likewise. Talk of joined-up solutions or services, and perhaps even the elimination of duplication in the way that I understand was intended in some of the Total Place pilots, seem to be off the agenda for now. It is not clear what it is that will put that back on the agenda.

Q43   George Hollingbery: I am very surprised to hear you say that. Government Ministers who have sat before us here have said totally the opposite. On what are you basing that assertion? I put that to both Mr Walker and Professor Martin. We have heard it asserted any number of times by the Government that they are very keen on the Total Place idea and on co-operation between services, with the breaking down of silos and forcing Government Departments to work together at a local level. I do not recognise the picture you paint.

Professor Martin: I suppose that what I am observing is the loss of impetus for that. What are the incentives now for very hard-pressed local public services to work together?

Q44   George Hollingbery: In my locality, a number of projects are happening because they are hard pressed locally, to some extent, but clearly there is also an agenda in government to continue with the Total Place theme at least. That is my understanding anyway, and certainly the Government are on record as saying so.

David Walker: Total Place would have led to a financial dimension—some kind of budget, or even a shadow budget—that allowed services in a given area to see that there were ways to transfer money around. That did not happen. We may say that the fact that the name's changed is not important, but the important element of Total Place was an attempt to say that there is a common pool of public expenditure in an area and that savings might be made if that pool were genuinely shared among a variety of bodies—not just departments of the same local authority, but between the local authority and other public agencies. To the best of my knowledge, the impetus that had been building seems to have disappeared.

Q45   George Hollingbery: Not three weeks ago, the Minister for Decentralisation sitting in your very chair said precisely the opposite. He said he was waiting for innovative plans to come forward from local government and other public sector employees to do exactly what you wish they would do.

David Walker: That is one Department that, as I say in my evidence, has not always been the best at securing joining up here at the centre of government. I wonder whether he would genuinely say that he had purchase on the policies and delivery of the Department of Health, the Home Office and the Department for Education. That is as much where things need to be joined as locally. The movement behind that seems to have disappeared.

George Hollingbery: I did ask him exactly the same question.

Q46   James Morris: One of the manifestations of comprehensive area assessment is the Oneplace website. Mr Walker, I think you said earlier that we are living in a time of social networking and information circulation, and that people and citizens look to be able to take information and use it in the way they want to use it. Was not one of the weaknesses of the Oneplace website and the approach that the information was too static and that it existed in an information hierarchy? There was no way that I, as a local resident of Sandwell or Dudley, could go to it and manipulate the information in the way I wanted. Was that not one of the weaknesses of the CAA approach?

David Walker: To be fair, it was launched in December 2009. With the best will in the world, we had only a matter of months to begin. The plan certainly was to move into all kinds of accessibilities and manipulations. You might tell your colleague that one of the purposes of the expenditure under the communications rubric was related precisely to programmes of software and IT to try to make static data—you are right—capable of being manipulated much more easily. I hope that, with time, we would have made some progress on that. But you are absolutely right that all of us in the political class—politicians and journalists—have to take a pace back and see what the public themselves can do off their own bat. One of the cases for the release of data under the previous and present Governments is to allow some freedom of approach, provided that there are still standards that allow genuine comparability and ensure that the data provided are reliable.

Professor Martin: The research that we did on CAA flagged up that those people who went to the Oneplace website were pretty happy with the information they found there. Therefore, while your question feels intuitively right, people were not demanding the data in very different forms. Maybe they have not become demanding enough yet, but the challenge was, first, to raise awareness of the existence of this information and, secondly, to stimulate any desire to go and look at it. It was not the case that people looked at it and said it did not tell them what they needed to know.

Q47   Simon Danczuk: I want to put a question about the impetus for local working that is related to your point but is broader than the website. Taking the example of Rochdale, where I am an elected Member, that was identified with a red flag as being particularly poor in terms of skills development among people in the locality. That is not just for the local authority to address; it is for the Department for Work and Pensions, economic development organisations, etc. A number of agencies in the locality have presumably started to address that. What will be the impetus for that in the future? Who will be saying that skills are an issue in Rochdale in the future, or whatever it might be? How will that be flagged up in future?

Professor Martin: I fear that that is almost a rhetorical question because the answer is that I do not know—I do not know whether my colleagues do. I fear that there will not be the same impetus. I know the Rochdale example and that they were very upset to be given that red flag. They argued with some justification that the problem of worklessness was not unique to your borough and that they were doing everything they could to address the problem. Nevertheless, I think that awarding a red flag focused attention on it. It required them to ask questions of themselves and to give an account in the local media about what they were doing. Therefore, fair or unfair, the red flag provoked a discussion and debate, and redoubled attempts to deal with that issue. I simply do not see what will provide that in the future.

Q48   Mark Pawsey: One of the roles in which the Audit Commission was involved was to provide national reports, including studies on value for money. In the present economic climate, it is more important than ever that we get value for money out of our local authorities. With the demise of the Audit Commission, how will that role be taken up? Will the independent auditors we have spoken about be capable of carrying on that work? Are they likely to want to do that work as part of their role? Where does that go from now on?

Professor Heald: That raises a number of issues. Obviously, the private sector auditors within the existing system are carrying out value-for-money works specified by the Audit Commission for which the Commission is taking the legal and liability risks. The private sector auditors might be willing to do value-for-money work, if they are commissioned by some national regulatory body.

Q49   Mark Pawsey: Which national body is likely to do that?

Professor Heald: That comes back to the fundamental question I raised before about whether Parliament is going to address the whole structure of public audit. If one decides not to address the structure of public audit, I suspect that one needs some kind of residual Audit Commission with a regulatory function. I am deeply sceptical about the proposed scattering of the different functions across a range of bodies. It is not at all obvious to me, given the differences between public and private audit that I emphasised before and the general lack of interest of most of the accountancy institutes in the public sector, that those registration bodies are the appropriate vehicle. Private sector firms will do what they are paid to do. What I worry about is that you get the collapse of the nationally comparable value-for-money studies and a plethora of cheerleading reports about how wonderful whichever authority one is talking about is but without a solid database. That would create reputational damage for the sector and not help the National Audit Office.

I think there is a suggestion in the evidence to this Committee by the Department for Communities and Local Government that the National Audit Office can step in, but the National Audit Office's value-for-money work in areas such as health and education was solidly underpinned by the work done by the Audit Commission. That underpinning has been taken away, so there is a broader question about the role of the National Audit Office and, if it is not the National Audit Office, whether the body that takes the regulatory role from the Audit Commission has sufficient powers and competence to satisfy the Comptroller and Auditor General.

Q50   Mark Pawsey: But would not an advantage be that there would be a value-for-money comparison between public and private sector in a way that does not exist now?

Professor Heald: It depends on what we mean by value for money. I interpreted it as meaning value for money for council services. The audit bodies that contract out part of their work make assessments about the value for money of the audit provision by their own in-house provider and by the private provider, but that is a narrower question.

Q51   Mark Pawsey: But there would be data available to compare the value for money of services within local authorities and other external bodies if we had the big four carrying out audit, for example. Do you not see that as an advantage?

Professor Heald: If one is talking about value for money from local authority services, because one has large numbers of local authorities, the key question is whether one can do studies at a sectoral level to get comparisons, because one probably learns as much from the comparison between authorities as one does by looking at individual authorities. Therefore, the question becomes: who is to commission and pay for that work? That is quite different from a value-for-money study undertaken by the auditor for a client local authority. As I think I mentioned earlier, one of the other issues that will come up is the question of non-audit services, because that has been very strongly policed in the local authority sector by the Audit Commission.

David Walker: It is worth observing that, historically, it was never clear where NAO and Audit Commission value-for-money studies began and ended. The NAO did Sure Start, which arguably follows money into local space, and the Audit Commission sometimes did studies that seemed as if they were looking at Whitehall. Often the best work—for example a fantastic study about obesity in children—was a joint effort by the two bodies. In future, as long as the expertise is captured, it is not really terribly important who does it, but the NAO, accepting David's misgivings about overloading that organisation, surely would be the receptacle for national studies.

Q52   Stephen Gilbert: How will Ministers here be able to see what impact their policies have on local government across the country?

David Walker: Again, that is a way of rephrasing the question that has been before us this afternoon: do we believe that local authorities have autonomous capacity to tax, spend and do policy, or do we believe that they are necessarily to some extent agents of central Government—of this institution, the House of Commons, and of the Executive? If we believe the latter, clearly the Government need an apparatus of inspection and to some extent performance management, but we are here today because this Government decided that they wanted to get rid of that apparatus for performance management. Therefore, in a sense, your question has already been answered to the extent that the Government no longer want to have—correct me if I am wrong—such a capacity to follow through policy. It believes that is a matter for local adjudication.

Professor Martin: In part, the question owes something to the written evidence I submitted. While I agree with David, presumably you will want to hold Ministers to account for the decisions they have made, so the question becomes not necessarily whether local Government has improved as a result of these decisions, but whether there is evidence that the particular decisions we have been talking about today were justified over time. I am afraid that I raise the question but I do not have the answer. I raise it because I think it is an important one. We had plenty of information about the impacts of its policies, which was not always very well used by the previous Government. It seems to me that we are now in danger of swinging to the other extreme and having no idea in three or four years' time whether or not the kinds of concerns that you have been raising with us today are valid.

Q53   Stephen Gilbert: And that would weaken Parliament's ability to hold Ministers in CLG to account.

Professor Martin: I just do not see how you will be able to do that. We will be descending to the level of discussions about spending on pot plants, days at the races and that sort of thing. We will be reliant on anecdote from here and there, and perhaps these cheerleading reports to which David alluded. There will not be the firm evidence base that you would need to ask intelligent questions of Ministers.

Professor Heald: Projecting forward three or four years, one of the things one might know is whether there are significant service and authority failures. The other thing would be what happens to audit fees and whether one gets the narrowing of the scope of public audit that I talked about before. What worries me is that there is a kind of withdrawal of central Government from data collection, which might be useful for a time, in terms of being able to deflect blame and say it is nothing to do with them, but it would also tend to mean that the early-warning systems about where problems lie might fail. Therefore, one of the things in three or four years' time might be the fear of a much more sudden failure. Some of the people giving evidence to you just do not think that financial resilience is something that should be included within the remit of the audit. I notice that the Department does not take that view, but one thing that the Audit Commission system did was to signal weak performance. Research I have done myself shows that you can see the way in which there were changes of management teams in poor-performing authorities. You can see people moving from well­performing to weak-performing authorities. That background evidence of where people are will not be there, so the shocks will come.

Q54   Chair: Finally, I would like a brief response from each of you. In light of our general discussion, would reform have been a better option than abolition as far as the Audit Commission is concerned?

Professor Heald: Yes, but the significant point is that one had to think about what that reform should be. I have been deeply concerned by the way in which the changing legal status of the National Audit Office has been dealt with by Parliament. I very much worry that when the Government want something done in a hurry, it is remarkably easy to get it through Parliament, but not with respect to things that refer to the management of Parliament and Parliament's housekeeping—we see that expenses have done reputational damage to Parliament, and failures about public money could do reputational damage to Parliament. Therefore, I would have liked to see debate of the kind we have been having this afternoon about the scope of audit and who should do it. I think we have now reached the point where that debate has to take place. I think the sensible thing to do would be for the Government to withdraw the national audit provision in the Budget Responsibility and National Audit Bill, which is presently stuck in the Lords, and have a full public audit Bill that deals with the whole thing, probably preceded by a proper Green Paper or White Paper.

Professor Martin: In terms of the assessment and inspection side, I would argue for an evidence-based assessment of the options. Therefore, one should not have prejudged whether it was reform or abolition, but taken a sensible look at the alternatives before leaping to the conclusion reached in August.

David Walker: With the proviso that of course no public body has a right to permanent existence, there were all kinds of ways in which—given the relationship between centre of the commission and the district audit service as was and the audit practice as it is now—cleansing and cheapening could have been effected and a number of the problems with which the Government are now confronted and which we have explored in part today could have been avoided.

Chair: Thank you all very much indeed for your evidence. It was very interesting.

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Prepared 7 July 2011