Examination of Witnesses (Questions 1-54)|
DAVID WALKER, PROFESSOR DAVID HEALD AND PROFESSOR
7 FEBRUARY 2011
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.
I am Steve Martin, Professor of Public Policy and Management at
Cardiff Business School.
I am David Heald, Professor of Accountancy at the University of
Aberdeen Business School.
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?
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.
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
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 publicyou may not like
CAA but it was an existing programmea 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 bodiesincluding the NAO, which engages in such activitiesshould
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
David Walker: Those
are all empirical matters. If we had seenso far we have
nota 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 seenlet me add
that I do not speak on behalf of the Audit Commission, which does
not employ methe 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 assertedall of us
would agree that there is not necessarily an absolutely clear
planis 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 forthboth functionsand,
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
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 togetherI will talk about audit, not inspectionis
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
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?
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 auditeethe local authorityand 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.
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 thereit 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.
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
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?
Are you talking about audit as opposed to inspection?
Q14 James Morris:
I am just focusing on audit.
There are fundamental differences between private sector auditI
am not talking about whether the audit is done by a private or
public sector auditorin 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 yearsperhaps
in the 1980s when the Audit Commission first started upthere
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 costsome would say the burdenof 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 yearscertainly during
the lifetime of the Audit Commissionwith 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 authoritiesi.e. councillors.
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 auditor 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 systemlocal
newspapers, opposition councillors and so on. However, if you
believethis is a view that has been taken by this institution
since before Queen Victoria came to the thronethat 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 thata 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 auditorswe
have the example of the banking system on our doorstepwould
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?
Are there any further comments on that?
This goes back to my earlier answer to the point that the Audit
Commission protected the private auditorsthe 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
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
Professor Martin, do you need to add anything?
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?
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 Parliamentactually
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 caseI think
that is a reasonable description of itDavid'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
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 statethe legislatureto 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 allthe 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
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
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.
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
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?
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.
Professor Martin, do you want to add something?
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?
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?
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 companiesin a different contextand other
autonomous public bodies does not.
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 spacebecause
there are opposition parties and administration groups, and because
it is contestedyou 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
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?
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.
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 everthere has
been examples of that in the past on all sides of politicsit
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?
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 groupsnot your average citizen, but people
with the time and capacity to get the knowledge that is needed
to hold authorities to accountthat is where the alternatives
to the previous regime are likely to be found, so I agree with
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 isthat 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
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?
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?
The managed market should be kept. One of the functions of the
Audit Commissionthe same applies to the Wales Audit Office
and Audit Scotlandwas 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 marketone
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.
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 bewhat 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.
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?
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
politicianscentral or localare 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
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.
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 councillorsor officers if councillors cannot
or will not do itto 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?
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
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?
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 inspectionif I can use that phraseany 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?
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.
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.
To be clear, I was articulatingmaybe in too flippant a
waythe 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 thatwhy have five PIs? Why do you need any
PIs if you are prepared to trust elected local government?
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 befar be it from me
to speak for the Governmentthat 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.
Are you not convinced?
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?
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 proposeI guess we would support thatthe
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 Commissionit will give you chapter and versebut
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.
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 governmentI
do not say this with any partisan spiritis 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.
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.
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 dimensionsome kind
of budget, or even a shadow budgetthat 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 bodiesnot
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 datayou
are rightcapable 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
classpoliticians and journalistshave 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.
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
I fear that that is almost a rhetorical question because the answer
is that I do not knowI 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?
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?
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
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?
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?
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 workfor
example a fantastic study about obesity in childrenwas
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 Governmentof
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 havecorrect me if
I am wrongsuch a capacity to follow through policy. It
believes that is a matter for local adjudication.
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.
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.
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.
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?
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 housekeepingwe
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.
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 whichgiven the
relationship between centre of the commission and the district
audit service as was and the audit practice as it is nowcleansing
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.