Examination of Witnesses (Questions 262-299)
DAI HUDD, AND CHRIS ROUND
21 MARCH 2011
Q262 Chair:
Good afternoon, and welcome to our fourth evidence session on
the inquiry into the audit and inspection of local authorities.
For the sake of our records, could you introduce yourselves,
and say who you are and the organisation you represent?
Dai Hudd: Thank
you. I am Dai Hudd, Deputy General Secretary of Prospect.
Chris Round: I
am Chris Round; I am Branch Chairman of the Audit Commission branch
of Prospect.
Q263 Chair:
I would just say sorry at the beginning for the fact that we have
slightly fewer members than we normally have. We have something
quite important going on in the House this afternoon, and obviously
some members have found it necessary to be there rather than here.
There has been a lot of speculation about why the
Government made the decision to abolish the Audit Commission.
What do you think were the true reasons?
Dai Hudd: Can I
open and then I am sure Chris will add some personal perspectives
as an employee of the Audit Commission? The announcement on Friday
13 August took us all by surprise. Clearly the Audit Commission,
for reasons of what it does, occasionally gets into the public
domain, but the announcement of the abolition came us a shock.
We sought immediate meetings with the Minister and indeed officials
to get some background to the decisions, and all we effectively
had was the press release by the Minister, Eric Pickles, which
is scant on detail and pretty high on rhetoric, if I can put it
that way. We did not get a meeting with the Minister until 10 November,
and that followed a parliamentary question asking the Minister
why we had not met. That meeting—I was not present, but
Chris was—again was fairly scant on detail and there were
no actual proposals as to what should happen as a consequence
of the decision, or in fact any detail of the evidence on which
the decision was based.
Coming directly to your question, we can speculate
in relation to why we believe the Audit Commission is where
it is but, actually in terms of information and evidence on which
the Minister made that decision, at the moment we are left pretty
much in the dark.
Chris Round: From
the staff point of view, the announcement came as a complete surprise.
Prior to this, the Government had announced the abolition of
the Comprehensive Area Assessment reviews, and the Government
always made it clear before it was elected that it was looking
at this and was seeking to abolish them, so that announcement
did not come as a surprise, but the announcement to abolish the
Audit Commission came as a complete surprise to staff. As to
the reasons given—that it would save £50 million
of public expenditure—none of the staff were clear where
that figure came from or what it was based on. As far as we can
see, there has been no thought as to the consequences of abolishing
the Audit Commission, and staff are still very much left in limbo
wondering what is going to happen to them, and as yet no firm
decisions have been made.
Q264 Chair:
In terms of the savings, have you done any analysis of what you
think the savings will be?
Chris Round: We
do not know where the Secretary of State got his figure of £50 million
from. It appears to be based on the corporate expenditure, the
centrally directed expenditure of the Audit Commission, but that
would not all be saved if the Audit Commission is abolished,
because some of that would relate to the running of the audit
practice. In addition to that, a lot of that expenditure would
have been saved anyway, as a result of the abolition of the Comprehensive
Area Assessment. Where those figures came from, I do not know.
The Chairman of the Audit Commission in previous evidence
estimated that the net savings might be no more than £10 million.
I have no better figures than those. The Audit Commission
would have the more accurate figures, I believe.
Q265 Mark Pawsey:
The Government did speak about a more localist agenda and allowing
councils and authorities to get on with things. When that happens
and there is no Audit Commission to monitor what they are
doing, what do you think the major loss will be? How will people
recognise a difference?
Dai Hudd: Can I
answer that and then perhaps Chris can supplement that as well?
A lot of talk in political circles has been about the Total Place
and, I have to say, in terms of a taxpayer and as a union official,
I can see the logic in that. If you look at Wales and Scotland,
they have been able to take a broader view of public services.
We think the Audit Commission and some of the work they
have been doing in auditing across various parts of the public
function could be the facility of developing that concept, so
that localism becomes stronger, not weaker. We think part of
the problem is, without a common perspective across all functions
of the public sector that the Audit Commission would provide,
it would undermine that principle, not support it. I do not know,
Chris, whether you have any comments.
Chris Round: The
Audit Commission has always been dedicated to delivering local
audit to its client councils, and staff have very much been geared
to doing that. In terms of your question of what would be lost,
what would be lost would be the ability to challenge local authorities
for some of their actions. To believe that armchair auditors,
as the Secretary of State has suggested, could take the place
of a proper audit and inspection regime is not likely to be very
successful.
If you take an example like the Westminster saga
with Dame Shirley Porter and the gerrymandering allegations,
it is difficult to see how armchair auditors could have raised
that issue and successfully pursued it. It is difficult to see
how auditors, without the background support of a central Audit
Commission, could pursue that sort of action. For much of the
period of that case, the Audit Commission kept reserves of £12 million
to fund legal action and potential liabilities. It is difficult
to see how private accountancy firms would wish to pursue action
in the same way with the same potential liabilities, without the
support of an Audit Commission centrally.
Q266 Mark Pawsey:
You are suggesting that individual bodies could not decide the
level of audit and inspection that they themselves should undergo.
Chris Round: I
am sure that most bodies, given the choice, would want to reduce
the level of the audit to a minimum, but this is public money;
it is not like a private firm, where you have the choice to invest.
We all have to pay our council tax to our local authorities or
our taxes to central Government, which funds a lot of the local
services we have. This is not a matter of choice, and public
sector audit is fundamentally different from auditing a private
company.
Q267 Mark Pawsey:
In terms of the role that Audit Commission staff have been undertaking,
has it been their assessment that the role they have been undertaking
has been a fundamental and important role within the Government
sector?
Chris Round: We
certainly believe that.
Q268 Simon Danczuk:
My question is around independence and whether, with the new structures
that are going to be put in place, you feel that auditor independence
will be threatened by the fact that they will be appointed locally.
At the same time, there is that contrast with the fact that private
practice audits a lot; there are different aspects of the public
sector that already choose their own independent auditor. Just
your thoughts on that issue, please.
Chris Round: I
think we go back to the premise that this is not like auditing
a private company. These are public bodies and this is public
money; none of us have any say in whether we pay it or not. There
is a fundamental difference there from the start. I believe firmly
myself, and I believe the majority of staff in the Audit Commission
believe, that the appointment of independent auditors is very
important, because it does provide that independence and that
ability to challenge big organisations, quite often political
organisations. An independent regulator has that ability to challenge.
I think if the local authorities were given the power
to appoint their own auditors, there is a danger that that independence
would be lost. If we go back to some of the major cases, would
a private sector company or an auditor appointed under contract,
knowing that that contract could be terminated, be so willing
to challenge an authority in the way that the Audit Commission
now can? I personally do not think so.
Dai Hudd: If I
can just add a supplementary point, the politics of this need
to be understood as well. It is fairly clear that different local
authorities made up of different political complexions quite rightly
will have different sets of priority. That is part of a modern,
mature, democratic society. However, how public money is spent
has to be calibrated, I believe, so that the public can judge
beyond politics whether or not it is getting a fair bang for its
buck. Without the role of organisations like the Audit Commission,
any form of comparison as to public worth in terms of services,
across a potentially wider range of providers in the future than
we have now, needs to be underpinning that, I believe, as part
of that process.
Q269 Chair:
In terms of independence, could you not put safeguards in? An
authority appoints an auditor but could only appoint them for
a limited period of time. You could even perhaps ensure that
there were independent members on the Audit Committee that did
that appointment. If the Government is going to go ahead, aren't
there certain safeguards that you can build into the system?
Dai Hudd: This
is the concept of rotational contracts. There are two question
marks I would have over that. Firstly, that may very well mean
that a good auditor that is producing good quality work may lose
the contract by dint of the fact that they are not part of the
rotational chain. The other difficulty with that is, if that
is happening right across the country, the concept that I was
referring to earlier about comparisons across local authorities,
which may have very different political objectives but still underpinning
that have to have the value of public money and public worth,
would potentially be lost. Whilst it may have a superficial attraction,
I am not quite sure in practical terms it would deliver the benefit
that people think it might.
Q270 Bob Blackman:
Under the old regime, something like 25% of audits were conducted
by private firms anyway, under the direction, admittedly, of the
Audit Commission. Many of those—I can tell you from
when I was a local authority leader—had a private firm come
in and do the audits. They discovered things that they thought
should not have been done in particular ways that the Audit Commission
had missed. It is not always true to say that the Audit Commission
is doing things in exactly the right way, so why shouldn't private
firms actually be better at finding out some of the problems inherent
in local authorities?
Chris Round: I
am sure that quite often auditors will take over an audit and
find things that the internal audit provider has missed. I do
not think that is the point. If you take again the Westminster
case, the auditor that pursued that case, the district auditor
John Magill, worked for Price Waterhouse.[1]
The point was that the Audit Commission provided the support
and took on some of the liability for pursuing that case, and
that is what I cannot see in the new regime that is proposed,
whatever form it takes at the moment.
Q271 Bob Blackman:
Is your case then that there should be protection for private
auditors that may pursue this, rather than just the position that
it has to be done by the Audit Commission?
Chris Round: Yes.
Dai Hudd: I think
your question, if I may just follow up, is one more of balance.
There is a proper debate to be had about the balance and role
of the private sector in this work. We have major doubts over
the idea that in some way abolishing the Audit Commission would
automatically open the door to greater private sector provision,
but the argument about whether or not there is a sufficient mix
of auditing being done under the auspices of the Audit Commission
currently is a fair debate.
Q272 Chair:
One question that you raised in your evidence in terms of the
Audit Commission's role is about the intelligent customer, which
is an issue that a number of authorities have found very difficult.
Once they have contracted everything out and then have to come
to retender next time, they are not quite as able to formulate
the tender documents with the degree of expertise that they probably
had once upon a time.
Dai Hudd: I can
see for some people of a particular political persuasion that
a great rush towards—if I could put it this way—the
private sector has attractions. I do not share their argument
but I can understand why that may be. One of the great problems
with that is, if you lose that expertise, your ability to manage
that process and particularly manage competition—bearing
in mind this market is so dominated by four very significant players—to
the point that you become beholden to private sector competition,
it not being a servant to the public—public good being the
master—is a great danger. We think it is quite a danger
in this particular area. There is an inquiry going on in the
other place looking at this very issue as we speak, and this deliberation
that you are considering today has been quoted in some of the
evidence there.
Q273 Mike Freer:
Do you not think that using more private-sector firms appointed
directly by councils will actually drive down audit fees?
Dai Hudd: There
is not a lot of evidence that we have seen to suggest that bringing
in greater private-sector involvement will necessarily drive down
costs. My view is that is a debate over which I am agnostic.
I could argue neither that it will nor that it won't. It is
your colleague Mr Blackman's point: it is the mix of the involvement
of the private sector in this auditing area, albeit with the Commission
having the ability to set the standard by which that happens,
and the performance is a key point. Therefore you will be able
to see whether the private sector can drive down the cost.
The other thing again, coming back to the Chair's
comment, that you need to be very careful of is, bearing in mind
this is a potentially enormously lucrative part of work, there
will be the move to loss leaders. There is a question people
need to ask about the greater involvement of the private sector.
There has been criticism for at least the last five or six years,
by many different groups, of the dominance of the four big players
in this area over the auditing world. If markets work so well,
why aren't more players entering that market? There has to be
something structurally around the market of auditing that allows
four preeminent players to dominate the market in the way
that they do. I think there are great dangers to simply opening
out to the private sector as a whole, but in part a greater involvement
is something that we, as a union, would not necessarily oppose.
In fact, there might be some merit in doing that for crosscomparison
purposes.
Q274 Mike Freer:
Is there not some evidence that things like Foundation Trusts
and FTSE 100 companies have actually driven down audit fees,
certainly in the last few years?
Chris Round: If
you compare local authorities of the same size as equivalent FTSE
companies, the audit fees in the private sector are considerably
greater for the FTSE companies. The Audit Commission over the
years has acted as a regulator of prices, by the very fact that
it can act as a bulk purchaser, etc. With things like the Foundation
Trusts, there is some evidence that the fees, where private-sector
companies have won those audits, have been higher than if the
Audit Commission inhouse staff had won those audits.
Q275 Mike Freer:
Hasn't there been some criticism of the Audit Commission, because
the fees went up in the last few years, when in fact most audit
fees in the private sector went down? They were countercyclical
during the recession. There was commentary, certainly in my own
local authority, complaining of them going up when most private
sector audit fees were going down.
Chris Round: There
can be a confusion between the audit fees, and the audit and inspection
fees. Now that the Comprehensive Area Assessment has ceased,
the Audit Commission fees are reducing considerably.
Dai Hudd: We would
not deny that inspection costs did go up. The previous Government,
for its own agenda, brought in that inspection regime. As Chris
quite rightly said, if you look at the total costs in terms of
the Audit Commission, they went up. We would argue that
those are proportionately significantly higher in the area of
inspection than they were in the area of audit.
Q276 Simon Danczuk:
How do wages and conditions in the Audit Commission compare
with those in the private sector?
Chris Round: When
we have done surveys of our pay terms and conditions, we have
normally compared them against the public sector and the private
financial sector. We have used companies like Hay-MSL to do these
sorts of surveys, and our salaries have always been broadly comparable.
Dai Hudd: In total
reward terms, and that is including all aspects of employment,
you could not argue that there is a lag, nor is there a gain,
in relation to the Audit Commission and comparable private-sector
practitioners.
Simon Danczuk: It is very
similar, is it?
Dai Hudd: Very
similar, but the reward package is made up differently.
Q277 Simon Danczuk:
Briefly on that, how is it different?
Dai Hudd: For example,
the pension regime in the Audit Commission is not similar to those
in the private sector, although by and large private-sector salaries
will be higher. If it would help, I am pretty sure we could probably
dig out the comparative reports to let you see those. In broad
terms, the total reward package is pretty similar.
Q278 Simon Danczuk:
My second question is around people leaving the Audit Commission.
Has there always been a high turnover? I presume it is high
now; people are leaving. Some have been moved out and some are
moving out. Has it always had a high turnover of staff or not?
Chris Round: No,
the Audit Commission traditionally has had a very low turnover
of staff, particularly on the audit side. Most people have been,
for want of a better term, dedicated public sector auditors and
have stayed with the organisation.
Q279 Mark Pawsey:
I think it is Prospect's position that the Audit Commission
should be retained in its existing form. Is that right?
Dai Hudd: I would
not quite say "in its existing form". We think there
is a powerful argument for the retention of an Audit Commission.
Our view is there is scope for reform. Clearly now inspection
has gone, and that was very much a policy by the previous Government.
That is no longer; that has an impact on the Audit Commission.
There are initiatives this Government is taking around things
like the Big Society, bringing a more diverse range of people
and organisations into public service, so we think there is scope
to reform the Audit Commission to respond to those challenges.
There is the issue of the greater involvement of the private
sector. Those are areas where we think there is a lot of scope
for worthwhile and constructive debate and discussion. We would
not argue for it in its current form.
Q280 Mark Pawsey:
It does say on your website under "News and campaigns",
"Scapegoating public servants who have done nothing to bring
about the financial deficit shows that the Government is tackling
the symptoms of the deficit but not its cause." Aren't you
just, as you would expect of a trade union, doing your best to
preserve your members' jobs?
Dai Hudd: In broad
terms, I have no difficulty with the statement you have just read
out but, in the particular, we have always as an organisation
engaged in the merits of the individual arguments. We have gone
along with different models of ownership in public and private
over the last 20 years, let alone in recent years. I do
not demur for one second from that broad statement on our website,
but we will always look at the merits of the argument in individual
areas. The conclusion we have come to, in terms of the Audit Commission,
is there is scope for reform. In fact, we have probably said
that before the announcement was made in the way that it has.
We just simply think this is a very blunt approach and one that
is inappropriate, and may yet have unintended consequences.
Q281 Mark Pawsey:
One form of reform is becoming a mutual. What is the view of
your members of that?
Dai Hudd: We would
look at it. We would look at a mutual, provided there was a significant
stakeholder involvement of the people who work in the Audit Commission.
One of the difficulties with the concept of mutual is the Cabinet
Office, as with another hat on quite a lot of the initiative is
by Francis Maude. There is not a lot of flesh on the bones of
what this mutual model may look like. On the one level, I think
that is good because it allows for debate and discussion. On
another level, it is tantalisingly frustrating, because we are
not able to put a model forward to members that they can look
at, see and engage in. In broad terms, a mutual approach that
had strong stakeholder involvement of the people involved, with
the reform agenda that I described earlier, we think could present
a package that responds to a lot of the criticisms of the Audit
Commission going forward.
Q282 Mark Pawsey:
If there is a degree of uncertainty at the moment, are you finding
staff leaving the organisation? What is the rate of staff turnover?
Chris Round: At
the moment, the majority of staff are staying with the Audit Commission.
The problem is the continued uncertainty. Until some sort of
decision is made by Government as to whether it will support a
mutual, that uncertainty is allowed to continue and we could lose
staff. The Audit Commission did a survey of its staff to ascertain
support for some form of employeeowned practice that would
preserve the public-sector values that most of us hold, and there
was 83% support among staff for that, so I think there is quite
a lot of support among staff.
Q283 Mark Pawsey:
If staff were to leave, where would they go? What sorts of skills
do they have that would be marketable within the jobs market?
Chris Round: Most
of them are qualified accountants with a lot of experience, so
some staff would be highly marketable, I would have thought.
Q284 Mark Pawsey:
Would there be opportunities for them in the private sector?
Chris Round: I
imagine there would be for some, yes.
Dai Hudd: Could
I just follow that up? We have done some anecdotal surveys of
our members, more in science and engineering, I have to say, than
this particular field. When people face redundancies, only one
in four remain in the discipline from which they were made redundant.
Most people, if they are made redundant, tend to look at broader
career changes. Bearing in mind a lot of these people will be
well trained and academically well qualified, the ability for
them to switch careers is probably easier than it would be for
people who have less of an academic background. You cannot make
an assumption that this process would inevitably flood the market
so that the private sector can then flourish. There is not a
lot of evidence to suggest that that may happen.
Q285 Mark Pawsey:
Does it follow then that, if the private sector picks up the work
that the Audit Commission is currently doing, your fear may
be that some of the people who have some skill and expertise in
carrying out public-sector audit may no longer be involved in
public-sector audit by the time the private sector comes to recruit?
Dai Hudd: That
may very well be the case. For example, in teaching at the moment,
even though there are cutbacks, teaching particularly of mathematics
and other areas is in high demand. People may well make a complete
switch of career and go into teaching mathematics, for example,
something for which academically their background would well place
them. What I am simply saying is you cannot make an assumption
that these people bleeding into the labour market would automatically
go to the nearest private-sector provider that does similar to
what they do. Our evidence tends to suggest that that does not
necessarily happen.
Q286 Mark Pawsey:
If the private sector does take on this work and it is recruiting,
your members would be ideally placed.
Dai Hudd: Providing
you have the activity happening simultaneously, which may well
happen, and people know what their options are, which they may
know naturally. The announcement was made on 13 August,
and we are now seven months down the line before we will get another
meeting with the Minister. The last one was pretty dysfunctional,
in the sense that the Minister was not particularly well briefed
and was not able to respond to questions on pensions and so on.
If the next one is that position, people will leech into the
marketplace and make their own decisions. If opportunities in
the private sector, if that were the route the Government were
to take, are available at the time when skills become available
in the marketplace, that may happen, but I strongly suspect that
this has been planned so that is highly unlikely.
Q287 Simon Danczuk:
I had a supplementary question around the idea of going to a mutual.
I get the impression that you guys are supportive of that. You
said that a survey of members suggested well over 80% were in
favour. What as a trade union—you have loads of members
in there—are you doing to try to make that happen?
Dai Hudd: We are
in discussions, as I say, with Francis Maude and the Cabinet Office
to tease out that idea from them. In fact, we have meetings coming
up with the Cabinet Office Minister to try to understand more
fully what this means in terms of a mutual concept. In this area,
for example, there are significant liabilities, not just pensions
in terms of staff. The nature of their work means, for example,
the potential dangers of future litigation in the wider world
are quite high.
Q288 Simon Danczuk:
With all due respect, I get the impression you are waiting for
Francis Maude to tell you what might happen in terms of a mutual.
My question is about: why aren't you being more proactive? Why
do you not approach Cooperatives UK? As a trade union,
loads of members there are relying on you. I do not get the impression
you are doing a lot in terms of making it happen.
Dai Hudd: I disagree.
With the greatest will in the world, before you can come up with
a concept, you have to understand about where those liabilities
are going to go. In essence, if the Government were to say, "Look,
there are liabilities of this organisation going forward, and
we will underwrite them with certain safeguards," that opens
up the opportunity to have an engagement discussion with members
about what the future of the organisation might be. If you do
not deal with that liability, you cannot have that constructive
discussion, because the mind goes back—I understand this
is a perfectly natural human reaction—"What is going
to happen to my pensions? What happens if the organisation gets
into a highly expensive litigation case with one of the local
authorities 12 months down the line? It does not have an
asset base to build up." Remember the assets of this organisation
are predominantly people. There is not a lot other than people.
I disagree that we are not being proactive. We are.
We are looking at a number of models ourselves now to see what
might be out there, if you like, generally used. The difficulty
is that a lot of the organisations where mutuals work tend to
involve an awful lot of voluntary labour, lowcost, lowturnover,
and they do not have the sorts of overheaded costs than an organisation
like this needs to have for probity, public accountability and
so on. We are looking at it. I am sorry; as it is Francis Maude
and the Cabinet Office that have come up with the idea of a mutual,
I think it is only right that we test them to ask what this means
in practice. We are trying to have a positive engagement.
Chris Round: The
biggest problem we have is the uncertainty. It is alright being
very supportive of a mutual, but we do not know what the audit
regime will be, what the costs might be and how much work a mutual
might earn, etc. We do not know whether the Government is going
to be supportive of it in the first instance. Until we know some
of those things, we cannot take forward the concept of a mutual.
If it is going to happen, some decisions need to be made urgently,
while, at the moment, staff are left in limbo not knowing where
they stand.
Q289 Mark Pawsey:
Can I come back on that? Why does the Government need to be supportive?
If the private-sector audit job needs to be done and there will
be private companies bidding for it, why can your people not form
their own organisation and bid for that work? Why do you need
to wait for the Government, to follow Simon's point?
Dai Hudd: Back
to the point I was making earlier, the key point about this is
liabilities. The first one is clearly going to be pensions for
staff. How is staff liability going to be taken on? There are
significant risks in entering the market, bearing in mind this
organisation does not operate as a private company at the moment.
It will be taking on some of the biggest and most sophisticated
operators in the financial world. These people operate on a global
basis with Governments, multinational companies and so on.
Q290 Mark Pawsey:
Do you think they won't be able to compete?
Dai Hudd: What
we are saying is that, at the moment, I do not believe the Audit Commission
would be in a fit state to compete. I could see it happening
if we could get to a position where we could agree on the liabilities
that would be held and who would be accountable for them, and
what model we could have for the staff having a proper stakeholder
involvement in the organisation. At some point it might. The
idea of pulling an organisation like the Audit Commission
into that competitive world within the lifetime of this Parliament,
let alone in the next 12 to 18 months, is fanciful. I do not
believe it has the skills, nor could it attract them. The people
they would need to attract to be able to compete openly with some
of big players are costly; they would make your eyes water, and
that is part of the problem. How on earth it gets to a position
where it can compete is a big question.
Q291 Mark Pawsey:
If it cannot compete, is it not better that it withdraws and leaves
the work to the Big Four?
Dai Hudd: That
very much depends on whether you think the model of competition
is the ideal way to drive efficiency and performance in this area.
My view is an Audit Commission, refocused in the way that
we have described, recognising that there is a greater role for
the involvement of the private sector, which is already in that
field and dealing with it, is a far better way of progressing
than trying to push the Audit Commission simply into the commercial
world over the time-spans that I have seen articulated by the
Minister. I do not believe that is a credible proposition. Over
time, it could happen.
Chris Round: We
are currently the biggest providers of audit to local authorities.
We have an immense wealth of expertise in the organisation.
Mark Pawsey: That is why
I am so surprised you are so fearful of competition.
Chris Round: We
cannot have competition; there is no regime to compete in at the
moment. You cannot have competition where there is no competition.
At the moment, the Audit Commission still exists and appoints
its auditors. There is no competition at the moment.
Q292 Mark Pawsey:
The level of expertise that you have should give you a head start.
Chris Round: Indeed,
one would hope so.
Dai Hudd: Can I
be clear: expertise in auditing and inspection is one thing.
What you are talking about is the ability to devise very competitive
commercial contracts across a number of players. The idea that
the Audit Commission can skill up in that key area, with some
of the big players that it will be dealing with, is nonsensical.
I do not believe that those contracts would necessarily be won
on quality. They might be won on price, but not necessarily on
quality. I think there will be a move and a rush to the lower
end of the market, which many of the big players can underwrite.
If the Audit Commission can develop those skills to be able
to compete with some of the big players, I think it has the potential
quality to compete. I just do not think, over the time-span of
this adjustment, it can be done.
Q293 Bob Blackman:
The concern I have, in what you are telling me, is that you appear
to be suggesting the auditors are skilled, but it is the management
that does not have the skills required to do the job that would
be required if they were bidding for business and managing a company
in the same way that some of the other auditing firms are at the
moment. Is that your concern?
Dai Hudd: It goes
back to Chris's point. If the market is defined now, and it is
not—we have a long way to go before we get to that point—then
the Audit Commission probably does have the skills to compete
on the defined areas of the market where they currently are.
The big problem will be if you open up the whole of the potential
market to the private sector simultaneously with the Audit Commission
bidding for that work as well. I strongly suspect the market
nous of people who have been able to compete in a much more rigorous
environment than this will mean that quality will not necessarily
be the thing that comes up as a successful bid. I strongly suspect
that some of the bigger players will be able to underwrite and
underpin costs in such a way that the Audit Commission cannot
nor ought to. It is that concern that I have: putting the Audit Commission
in a position where it can compete will take work and reform.
Q294 Bob Blackman:
At the moment, local authorities are required to produce accounts
every year. They are then audited by either the Audit Commission
or firms under the auspices of the Audit Commission, so I
do not see how those standards will change. There will still
be a requirement to produce the accounts; there will still be
the requirement to audit them to the accepted standards. Regardless
of whether it is the Audit Commission, a mutual, a private firm—and
by the way it does not have to be one of the Big Four in these
aspects, as it could be a whole range of other competitors—you
seem to be pleading, and forgive me if I am wrong, for a special
case for some sort of floated company to be given an unfair competitive
advantage compared with the private sector. I do not think that
is ever going to be able to happen.
Dai Hudd: Let me
go back to the question, and I think it was you who put it to
me first: is there an argument for a greater involvement of the
private sector in relation to the work currently done by the Audit Commission?
I think the balance is currently 70/30. We think the answer
for that is yes. That is the Audit Commission as it is, but reformed
to particularly be able to respond to those challenges. The next
question we get to is whether or not it should be a mutual. That
is a different question—an entirely different point. That
is the point about whether or not it competes with and tries to
exclude other private-sector providers. My argument is I think
the Audit Commission is well placed to be able to respond and
reform as it currently is for a greater involvement of the private
sector in the future.
Coming back to the mutual idea, which is a different
strategy entirely—i.e. should the Audit Commission
be more aggressive in relation to competing with the private sector
and excluding as much of it as possible, which is a very different
model from the one you and I were discussing earlier? To do that,
it needs clearly to have a management regime that is probably
differently configured from the one that it currently has. That
is the point I am trying to make. I do not think you can conflate
the two points. There is either one model of the Audit Commission,
which is a facilitator of private-sector involvement and potentially
trying to create more competition in the market by directly doing
that, as opposed to one where it is a bigger player in the private
sector, potentially excluding competition because of its potential
size. I do not think those two arguments can necessarily be conflated
in the way that they are one and the same. They are not.
Q295 Mike Freer:
Just to drill down on one point, I would go for the more aggressive
approach into the market, rather than seeking to be half in and
half out of the public sector. Having sat on a number of Committees
that have awarded audit contracts, if I can give you some reassurance,
I do not think the private sector is as competitive as you think
it is, because quite often I found that the gap of the private
sector is that the skills mix on the audit team could not match
the Audit Commission. You have a senior partner at several thousand
pounds a day, and there may be an audit manager and normally two
or three grunts at the bottom end, which is how the Big Four normally
structure their audit teams. The Audit Commission is able
to have a much greater blend of skills and experience. I am almost
trying to say I do not think you should be afraid of competing
because, on the merits of the quality of the team, you could outshine
the Big Four. Is that not your experience: that your blend of
skills is better than the Big Four?
Chris Round: I
certainly believe so, yes. I think we generally have a higher
skill mix for our audits, and I also believe we provide a very
close and good service to our clients.
Mike Freer: So be brave.
Q296 Chair:
Currently, you actually compete genuinely in the market for audits
for Foundation Trusts, don't you?
Chris Round: We
do, yes.
Q297 Chair:
You actually have the beginnings of that experience.
Chris Round: We
have, yes.
Q298 Chair:
One further point: if there was a mutual floated, would you want
to see some restriction on the ability of the stakeholders of
that mutual to be able to sell it on at a future date, namely
for a significant profit for themselves?
Chris Round: The
majority of staff would want to see it as an employeeowned
organisation. Therefore, there would be some safeguard to ensure
that it could not be sold off to another private-sector firm.
I think staff would be looking for that sort of safeguard.
Q299 Chair:
Thank you very much indeed for your evidence.
Dai Hudd: Can I
just compliment the Committee as well, if I may? I am not making
a cheap point in relation to CLG or the Minister.
Chair: Compliments are
always well received. Carry on.
Dai Hudd: Over
the weekend, I read many of the evidence papers, and found much
more about the Government plans from the inquiry that you are
doing than we have done through the conventional consultation
process. That is sad, but nevertheless I thank you for the ability
to do that. Thank you.
1 Mr Nichols (see Q 389) pointed out John Magill worked
for Touche Ross, which merg3ed with Deloitte. Back
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