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The Government has announced the abolition of the Audit Commission and substantial changes to the way in which audit of local government is to take place. It has already terminated comprehensive area assessment (CAA) as part of its commitment to cutting inspection of local authorities. These changes raise significant questions of principle and implementation in regard to public audit and performance management.
Until now the Audit Commission has been the regulator, commissioner and major provider of local government audit services. Under the Government proposals, local authorities will, via independent audit committees, have responsibility for appointing their own auditors. Some of the Audit Commission's functions—responsibility for drawing up the scope of audit (the Code of Audit Practice) and for national value-for-money studies—will pass to the National Audit Office (NAO). Other functions will transfer to other bodies or cease entirely.
The changes are part of the Government's localism agenda, devolving powers to local government and a move away from the "command and control" approach that, the Government argues, has characterised central-local government relations over the past decade.
It is clear that these proposals involve both opportunities and risks. We heard concerns that some fundamental principles - particularly that public bodies should not appoint their own auditors—were being breached. However, on the advice of the Comptroller and Auditor General, we are prepared to accept that the vital principle of auditor independence can be safeguarded, provided that adequate legal and practical arrangements are put in place. We emphasise the heavy responsibility this places on the Government and the NAO to ensure that the new system delivers the key objectives set out in the Department for Communities and Local Government's consultation document. Devolving powers to local government means that central government must ensure that it first establishes an audit framework that is effective, efficient and robust.
The Government intends to introduce a public audit bill in the autumn. This will provide the proper opportunity for scrutiny of the detailed proposals. In our Report, we set out the principles that we believe should govern public audit arrangements in the future, including:
- Auditor independence must be strictly maintained;
- Local audit committees must have a majority of independent members;
- Additional safeguards are needed to ensure the continued effectiveness of public interest reporting, and
- The scope of local government audit should be proportionate and risk based. It should allow for local innovation and application, particularly with regards to local value for money work.
If local audit committees are to have a choice of audit provider, a competitive audit market will be crucial. Presently the Audit Commission undertakes 70% of the local government audit; the remaining 30% is undertaken by five private audit firms, under contracts with the Audit Commission. The Audit Commission audit practice is to become a stand-alone body, able to compete for local government audit work. We recommend that the Government assist the Audit Commission audit practice over this transitional period so as to ensure that its audit skills are not lost and that it continues as a major player in the public audit sector. There are already too few audit firms in the public audit market. We would be firmly opposed to one of the "Big Four" firms taking over the Audit Commission. Our favoured outcome is the establishment of a stand-alone company, preferably a mutual.
The end of CAA and inspection was widely welcomed by local government and others. An over-burdensome inspection regime seems to have been the principal reason why the Audit Commission lost the support of its local government stakeholders. (Its work as auditor is still held in high regard.) Local government will no longer be required to submit performance indicators to government. The responsibility for driving improvements in service standards and efficiency will lie with local government and "armchair auditors". Consequently there will be a lack of comprehensive, consistent data on which authorities can be compared. We recommend that the need for and adequacy of comparative performance data be reviewed two years from now, once the new arrangements have bedded in.
We accept that the time for centrally-prescribed inspection of local government services and governance has passed. We welcome the LGA's proposals for sector-led performance management. We reiterate the call in our Localism report for the Government to examine the role which robust local government scrutiny arrangements could make to improving local government performance. The Government needs to clarify arrangements for intervention in the exceptional cases of serious corporate or service failure.
The manner in which the Audit Commission's abolition was announced and progressed may have resulted in a missed opportunity for what could have been a valuable reassessment of the arrangements for public audit. In the short term, the Government should concentrate on successful implementation of the changes it proposes. Once new arrangements are in place, we recommend that the Government instigate a wide-ranging review of public sector audit and how it fits into the wider context of accountability for the expenditure of public money.
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