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

3 Auditor independence

Principles of public audit

27. Independent audit of local government and other local bodies responsible for public funds has existed in England for over 150 years. The District Auditors' Society emerged in 1846 followed by the District Auditors Act 1879. Over this period, principles of public audit and the ways in which it differs from private sector audit have been established. These principles were codified by the Public Audit Forum[41] in 1998 and endorsed by Lord Sharman's report of 2001:[42]

· auditors are independent of the audited body;

· the scope of auditors' work covers not only the audit of financial statements, but also 'regularity' (legality), propriety (probity) and use of resources (value for money), and

· auditors may report widely to the public, councillors and other key stakeholders.

28. Our witnesses, from both public and private sector, agreed that the principles should be retained in any future audit regime because there are unique features which need to be taken into account for the sector including:

· the political nature of local government;

· the need for local and national accountability;

· that taxpayers are obliged to pay council tax and cannot switch their investments and custom as in the private sector; and

· the absence of a profit motive to drive efficiency and improvement.[43]

29. The Government says that, in framing its proposals, it has "had regard" to the principles of public audit.[44] Our witnesses were divided between those who felt that the Government proposals breached the fundamental principles and those who believed that the principles would be retained provided that adequate safeguards were put in place.

Local appointment

30. The most contentious aspect of the Government proposals is that local authorities should become responsible for appointing their own auditors.[45] Professor Heald was strongly opposed:

31. The Government is proposing that each council should establish an audit committee, with an independent chair and substantial representation of independent members, to ensure that auditor independence is protected. There would be requirements for transparency regarding the recommendations of the Audit Committee and the auditor. The Secretary of State would have reserve powers to act if, for example, a council failed to appoint an auditor. The Government also points to the existing legal and institutional framework protecting auditor independence in both public and private sectors.[47]

32. The Audit Commission witnesses accepted that there was a debate to be had about whether the Government's proposals constitute a breach of the principle of auditor independence if adequate safeguards are put in place.[48] It favours retention of independent appointment but is engaging with the Government and others in development of safeguards for local appointment.

33. The LGA supports the proposals and believes that independence can be maintained. It questions why local government should not be trusted with this responsibility when foundation trusts, universities and further education colleges currently appoint their own auditors;[49] and it is proposed that Academy schools should also.[50] In the LGA's view, local appointment would also enable local government to obtain better value from its audit through more locally-specific arrangements. The NLGN concludes: "In principle there is a strong argument for giving local authorities greater control over their own audit processes. [....] In practice there are also strong grounds for localising audit processes."[51]

34. We have set considerable store by the opinion of the C&AG, who has responsibility for auditing the Whole of Government Accounts and who would be concerned by weaknesses in local government accounting. The view of the C&AG was that, given adequate safeguards, auditor independence can be maintained with local appointment. He told us it was a matter of implementation, not principle:

35. We also emphasised to the Minister the need to safeguard auditors from unreasonable dismissal.[53]

36. The legal framework for and practicalities of local audit committees are of crucial importance to the success of the proposals. The Government is consulting on the eligibility criteria for independent members of audit committees and whether they should be in the majority. Details would be included in the proposed public audit Bill. Concerns were raised about the capacity of some local authorities to find sufficient suitably-qualified independent members to chair and serve on local audit committees. These concerns were played down by the minister:

37. The Government is proposing a departure from the established practice that public bodies should not appoint their own auditors. The proposals place a great responsibility on the Government to create adequate legal safeguards and assist local government in establishing local audit committees that are, and are seen to be, capable and independent. Advice, training and resources will be required. The National Audit Office, on whose evidence we have placed considerable weight, must also ensure that the system succeeds.

38. The legislation will have to provide clear and uncontestable protections for assuring the independence of audit committees and auditors. We recommend that final responsibility for appointment of the auditor should lie with the full council, following a recommendation of the audit committee. Dismissal of the auditor should also be a decision for full council, following the recommendation of the audit committee. The regulations should provide a 'double lock' so that neither body is allowed to dismiss the auditor without the agreement of the other. Full transparency and public reporting of the workings of the audit committee will be essential.

39. Audit committees must be chaired by independent persons of proven competence, and should have a majority of independent members. These requirements (including the avoidance of conflicts of interests for independent members) should be defined in law. Chairing of audit committees will be a significant responsibility and should be remunerated, and allowances should be payable to other independent members. The law should require full transparency for audit committee proceedings.

Public interest reporting and objections to accounts

PUBLIC INTEREST REPORTING

40. Public interest reports (PIR) are produced by the auditor where there are grounds for believing, for example, that a local authority has wasted significant amounts of money through poor governance or acted outside its legal powers. These reports can bring the auditor into conflict with the local authority. Public interest reporting is an essential element of public sector audit which does not feature in private sector audit. The DCLG consultation accepts this and proposes that public interest reporting continue to be a responsibility of the local auditor.

41. The Audit Commission has issued 131 PIRs since 2002.[55] A number are for relatively minor issues, such as non-publication of accounts by moribund parish councils.[56] However, some PIRs have dealt with important and highly controversial cases,[57] which have sometimes been strongly resisted by the council or public body concerned. The most protracted, costly and high-profile case was the report of the district auditor into Westminster City Council, which concluded that senior councillors, including the leader, Dame Shirley Porter, had misused public money by selling council homes in order to influence voting patterns. This took 14 years (from 1987 to 2001) and was finally settled in the House of Lords on appeal by the Audit Commission.[58] Although PIRs are relatively rare, they are seen as a vital component in the public auditor's arsenal to ensure that public bodies address their responsibilities and ultimately to "keep them honest".[59]

42. Under the Audit Commission, district auditors—both Audit Commission staff and private audit firms—have demonstrated their capacity to undertake PIRs and to pursue objections by the public.[60] The concern is that, under local appointment and without the backing of the Audit Commission, auditors may be less inclined to instigate a PIR. CIPFA questioned whether "difficult conversations" between auditor and council would take place.[61] The Audit Commission has also provided the firms with some indemnity cover in respect of their statutory audit functions—which is discussed in chapter 5.[62]

43. Some audit firms were not convinced that PIR would be feasible under local appointment. Professional bodies CIPFA and ACCA also expressed serious doubts. Deloitte and ICAEW suggested that a review was needed to narrow and clarify the auditor's responsibility. The Minister, however, believed that the current duties and safeguards were adequate.[63]

44. The Government has proposed that arrangements for public interest reporting continue without additional safeguards. However, the abolition of the Audit Commission as overseer and guarantor of public interest reporting represents a fundamental change to this aspect of local auditor appointment. Therefore changes are required to the Government's proposals to safeguard public interest reporting, as indicated by several witnesses. These should include an explicit requirement in the duties specified for the audit committee in the primary legislation to support the auditor in any reasonable recommendation for a public interest report; and the professional oversight body (or bodies) responsible for accrediting auditors for local government audit work, should be specifically required to consider the competency of firms to undertake this role and to monitor the standard of public interest reporting undertaken. In addition, the oversight body should be given powers to appoint a separate organisation to undertake the investigation and report, where necessary.

RIGHT OF OBJECTION

45. The public has a statutory right to inspect and formally to object to local government accounts. The district auditor must decide whether to take any action; they will normally give reasons for their decision.[64]. The view of most of our witnesses was that too many objections were unjustified and vexatious, often incurring excessive costs which were then charged to the local authority. Mr Johnson of Deloitte explained that, in his experience, objections caused the auditor more problem than public interest reporting as the former were often of a quasi-judicial nature.[65] The Audit Commission cited a case relating to Barnet Council which cost over £1m to investigate.[66] The Audit Commission and other witnesses recommended limiting the statutory right to object and to allow the district auditor discretion over how to deal with objections.[67] An alternative suggestion was to channel complaints to the local audit committee or to the local authority s151 officer who could then decide whether to refer them to the auditor.[68] The Government is proposing changes to the rights to object to accounts of smaller bodies (those with expenditure or income under £6.5 million a year). The right to object would be amended so that the objection is made to an independent examiner who would decide whether to refer the issue to the 'proper officer' of the district or county council.[69]

46. The statutory right of the public to object to accounts should be replaced by more proportionate arrangements. We recommend that, for larger bodies, objections be investigated by the s151 officer, who would inform the local audit committee and auditor of the objection and the investigation. The auditor would be free to decide whether it merited further attention and, if so, by whom. The public's rights to inspect accounts and to ask questions of the council would remain.

41 The Public Audit Forum is comprised of the five public audit agencies in the UK: the National Audit Office; the Audit Commission; Audit Scotland; the Northern Ireland Audit Office; and the Wales Audit Office. Back

42 Holding to Account, The Review of Audit and Accountability for Central Government, Report by Lord Sharman of Redlynch, HM Treasury, 13 February 2001 Back

43 For example, Ev w45 Back

44 DCLG Consultation paper para 1.19 Back

45 After our evidence sessions concluded, DCLG announced that those local authorities for whom the Audit Commission was the audit provider would be able to appoint their own auditors starting in 2012/13. DCLG: Developing options for the most effective transfer of the Audit Commission, press notice, 2 June 2011. Back

46 Q 8 Back

47 Q 208 Back

48 Q 211 Back

49 Ev 135 Back

50 Q 23 Walker Back

51 NLGN, Show me the money-accounting for localism, April 2011, p 29 Back

52 Q 477 Back