House of Commons - Audit and inspection of local authorities - Communities and Local Government Committee

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

2 Abolition of the Audit Commission

Localism context

7. The decision to abolish the Audit Commission was not widely anticipated, although the wider context had been established. The May 2010 Coalition Agreement of the incoming Government contained a commitment to devolve power from central to local authorities and local communities and to end inspection of local authorities by the Audit Commission:

We will promote the radical devolution of power and greater financial autonomy to local government and community groups.

8. Accordingly, on 25 June 2010, the Secretary of State for Communities and Local Government, Rt Hon Eric Pickles MP, instructed the Audit Commission immediately to cease work on CAA, which it did. The end of CAA was welcomed by the Local Government Association (LGA);[6] it would also save DCLG the £28 million a year grant that it paid to the Audit Commission for CAA. With the contentious issue of CAA removed, it might have been assumed that the Audit Commission would be left to continue its historic core functions of local government auditor and national value-for-money (VfM) studies. This was not to be.

9. DCLG Ministers justified the decision to abolish the Audit Commission on the grounds that an Audit Commission which was regulator, commissioner and provider of local government audit services was highly "centralist" and thereby incompatible with the Government's move to localism.[7][8] In addition, "Ministers believe that the work of the Commission has increasingly become less focused on accountability to citizens and more on reporting upwards to Government, judging services largely against top down Government imposed targets."[9] Local government minister Grant Shapps MP also argued that abolishing the Audit Commission was a simplification of the audit arrangements and removed duplication[10]—a view shared by few of our witnesses.

Abolition and fragmentation

10. The Government and witnesses made clear that, as an auditor, the Audit Commission was respected. Nonetheless, many of our witnesses accepted that it was unusual for a body to fulfil all three functions of regulator, commissioner and provider of (audit) services and that a separation of these functions was a reasonable move. With regard to its inspection and its VfM functions[11], there was less sympathy: "the Audit Commission had lost its way"[12] and "lost its stakeholders"[13] too.

11. We asked Amyas Morse, the Comptroller and Auditor General (C&AG), as the country's senior public auditor, whether abolition was in line with best audit practice and value for money. He told us it was a "policy-driven decision" and that the proposals were "different but practicable":

He stressed that the implementation "need[ed] rigorous attention".[15] Like the Chairman of the Audit Commission,[16] he had not been consulted beforehand on the principles and was "aware of it shortly beforehand".[17]

12. David Heald, Professor of Accountancy at the University of Aberdeen Business School and Steve Martin, Professor of Public Policy and Management at the University of Cardiff, criticised the process as "not evidence-led".[18] David Walker, former Managing Director of Communications and Public Reporting for the Audit Commission also endorsed this view. Other witnesses, notably the late Dame Barbara Mills, Chair of the Professional Oversight Board, Financial Reporting Council (FRC) and some of professional audit bodies,[19] regretted that the option of a residual Audit Commission had been effectively ruled out by the summary announcement of the Commission's abolition. The Audit Commission themselves favoured this option. Whilst it was cooperating in the development of the new audit arrangements, its chairman said "at the moment our instincts are that the whole will be less than the sum of the parts."[20]

13. There were those who argued that retaining the Audit Commission and central control of audit could be seen to support localism where a multiplicity of providers and devolved budgets might make it difficult for devolved audit arrangements to account for public money.[21] A detailed recent study into the Government's proposals by the New Local Government Network (NLGN ), while accepting the new proposals, pointed out the risks:

14. A number of our witnesses, including the Chair of the Professional Oversight Board, FRC,[23] were concerned that the proposals would result in more fragmented audit arrangements, not only within local government but adding to the complexity within public audit generally, with a myriad of audit arrangements across local government, health and other local public bodies. The proposals also contrast strongly with audit arrangements for central government, where the NAO is the external auditor for all departments, undertakes the VfM studies and contracts out less than 20% of its work to private audit firms.[24] These concerns chime with matters recently discussed by our colleagues on the Public Accounts Committee, who have considered and are continuing to consider issues of accountability raised by "[...] reform and localism proposals which envisage a significant devolution of responsibility for service delivery to a wide range of new bodies, in some cases independent of both central and local government".[25]

15. Professor Heald argued strongly that, since the established principles of public audit had been challenged, the time had come for a thorough review of public audit by Parliament, including the role of the NAO:

16. Although Government acknowledges the distinct principles of public sector audit, there also appears to be an underlying belief that the system used for company audits will be appropriate for local government audit. The Chief Executive of the Audit Commission said that there had been "no real debate" as to whether the Companies Act regime was appropriate for public sector audit.[27] The move towards greater commonality between public sector and company audit is supported by the FRC.[28] Yet the system for company audits is receiving intense scrutiny from a number of bodies including the European Commission, the FRC and the House of Lords Economic Affairs Committee. Directly replicating the company audit model may bring additional risks—such as the lack of powers of the FRC as lead regulator[29]—as a result of fragmentation of the system.

17. We accept that sometimes policy-led decisions have to be made quickly and without lengthy prior evaluation and consultation. The decision appears to have been taken without a clear evidence base. There is potentially an opportunity for a valuable reassessment of the arrangements for public audit. The Government has also effectively ruled out consideration of the potentially useful option of retaining a residual function for the Audit Commission, which may have presented an opportunity to prevent the fragmentation of functions.

18. We are now some way down the road of the abolition of the Commission, and, as we report below, further delay in finalising arrangements could jeopardise the chances of a smooth transfer of its audit practice into the private sector.[30] In the short term, therefore, the Government should concentrate on successful implementation of the changes it proposes. Nevertheless we are critical of the manner in which this major policy change has been handled, and the missed opportunities which have resulted. 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. Such a review should be carried out in close consultation with Parliament, in particular through the relevant select committees.

Savings from abolition of the Audit Commission

19. The press notice announcing the abolition of the Audit Commission suggested that it would result in savings to the taxpayer of £50 million a year:

Save the taxpayer over £50 million a year

20. The local government minister was reluctant to divulge further details to us but insisted that the figure was likely to be even higher:

21. The Minister presented no detailed evidence of how the £50 million saving would be achieved. In any event, the £50 million figure has been challenged by the Audit Commission, which says the cost of redundancy payments resulting from abolition is already £27 million and will rise to between £40million and £105million. £56 million has been set aside for the costs of Audit Commission abolition in the DCLG Main Estimate 2011-12, May 2011. In addition, there will be £15m for early termination of leases. Pension liabilities would be additional and depend on whether or not the Audit Commission continues to be classified as a going concern. The CEO pointed out that £30-35 million—70% of the savings sought—had already been achieved through the curtailment of some of its functions, notably CAA, and that the Audit Commission had implemented an efficiency programme.[33]

22. It is not clear to us that significant savings will result from abolition of the Audit Commission, at least in the short to medium term. There is a huge discrepancy between the £50million savings cited by the Secretary of State and the figures provided to us by the Audit Commission. Some costs will be transferred to other bodies, including the NAO[34] and local government audit committees. Costs transferred to private sector firms and professional audit bodies will be recharged to local government in audit fees.

23. The overall impact on local government costs is also unclear. There will be savings from the reduced burden of inspection[35] although these could have been achieved without wholesale abolition of the Audit Commission. The wider impacts on local government of deregulated audit fees are unclear but potentially significant. We address these in chapter 5.

24. DCLG should demonstrate its commitment to transparency by reporting and monitoring annually for the next five years on the full savings and costs in respect of: the abolition of the Audit Commission and the tasks transferred to other bodies, and how these compare with costs under the existing system.

Armchair auditors

25. In his announcement of the abolition of the Audit Commission, the Secretary of State suggested that "armchair auditors" would in future hold local government to account:

26. Although a few witnesses, such as the TaxPayers' Alliance, were enthusiastic about the armchair auditor concept, most of our witnesses were doubtful that members of the public would have the time or capacity to obtain and analyse data to the extent that an official auditor or inspector might. David Walker suggested that armchair auditors might usefully ask about value for money but their role should be distinguished from that of the professional auditor.[37] Professor Martin made a similar point regarding inspection.[38] There were also concerns that the publication of raw financial data—such as all items costing over £500[39]—would not have adequate context for meaningful assessment. Professor Heald suggested that there might be a focus on minutiae instead of on the bigger picture.[40] There was, however, an acceptance by local government witnesses that greater transparency in council spending was the right and proper path, that requests for information were not unduly burdensome, and that publication had a useful 'disciplinary' effect on spending decisions.