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:
[...] 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 [...]. 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
[...]. What people ought to have seen then was that this would
become a rolling stone, and now it is local authorities.
[46]
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:
The principle is independence. I have thought
carefully about this, because I guessed that you might ask me
these questionsand quite rightly, too. In my view, the
question is, is the appointment independent? That is the question.
It is not a principle that it must appointed by a public or an
external body. If you get the right arrangements in place, I believe
it is possible to get independent appointment, because through
the consultation process we could come to a viable set of independent
appointment criteria.[52]
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:
About 80% of authorities already have some type
of audit committeenot necessarily independent ones; possibly
50% could be classed as independent. I read some evidence to the
Committee suggesting that there simply are not good people out
there who would be willing to come forward. That is not my experience
in local government.[54]
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 auditorsboth
Audit Commission staff and private audit firmshave 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 functionswhich
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
53
Qq 555-558 Back
54
Q 549 Back
55
DCLG Consultation doc 4.27 Back
56
Between April 2009 and December 2010, auditors issued public interest
reports to 58 parish councils. Most reports related to the failure
to produce, or provide sufficient evidence to support, the annual
return. (Audit Commission 24 February 2011) Back
57
For example, Lincolnshire County Council (2002), Merseytravel
(2008) and Doncaster (2008). Back
58
Although a PIR was also published, the inquiry was prompted by
public objections to the accounts in July 1987. See Follow
the money, p 341 and Qq 383-393. Back
59
Q 383 Back
60
Mr John McGill, the district auditor who undertook the Westminster
report, was a partner with Touche Ross. Back
61
Qq 416-420 CIPFA Back
62
Q 270 Chris Round Back
63
Q 598 Back
64
Audit Commission, Councils' accounts, Your rights: England,
2006 Back
65
Qq 383-393 Back
66
Q 250 Back
67
Qq 251-252 Back
68
Qq 385 Back
69
DCLG Consultation doc, para 5.24 Back
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