4 Audit scope
Responsibility for the auditcode, standards and consistency 47. The scope of local government audit is set outin a code of audit practice which is drawn up by the Audit Commissionand approved by both Houses of Parliament at five-yearly intervals.Auditors have a statutory duty to comply with it.[70]The Government has proposed that the NAO take on the role of producingthe Audit Code. The C&AG told us that the NAO was willingand able to do so;[71]this would cost "a few millions".[72]The cost would accordingly be met by Parliament whereas currentlyit is borne by DCLG and local government, although it makes littledifference to taxpayers. In the absence of the Audit Commission,our witnesses accepted that the NAO was the organisation bestplaced to fulfil this task, but it was noted that the NAO wouldlack the close engagement with local government that made theAudit Commission so well-placed for the task. 48. The Government's consultation document assertsthat "higher standards of auditing" is a key designprinciple of its proposals.[73]It proposes that the FRC take on responsibility for overall monitoringof quality in local government audit, with roles for the recognisedsupervisory bodies.[74]The FRC already fulfils this function for the private audit sectorand has had some recent involvement with public audit. It is seenas an effective and even 'ferocious' regulator.[75]Nigel Johnson of Deloitte told us that consistency was likelyto be a bigger issue than quality. Without the Audit Commissionand with a greater diversity of audit providers, a new mechanismwould be needed to enable and promote discussion, coordinationand advice. This would imply a proactive role which is not addressedin the Government consultation. It seems logical that, if theNAO is made responsible for producing the audit code, it shouldlead on ensuring consistency of application. However, withoutdirect regular involvement in local government audit, the NAOis likely to need to involve others, such as the FRC, professionalbodies and the LGA, in the process. 49. We agree that the NAO is best-placed of theremaining bodies concerned with public audit to prepare the codeof audit practice. It should do so in conjunction with the LGA,professional accountancy bodies and other appropriate stakeholders,who should be made statutory consultees. Ensuring consistencyin audit is a related task, and key matter, responsibility forwhich has not been specified. The Government must clarify howconsistency in audit is to be achieved before the new system isintroduced. 50. In preparing the code of audit practice, theNAO will—subject to the approval of the Public AccountsCommission—incur additional costs, and may have to buildcapacity to fulfil these functions. We invite the Public AccountsCommission to monitor costs and seek to ensure that they do notexceed those previously incurred by the Audit Commission. Scope of audit: key elements 51. As noted earlier, it is an established principlethat audit for public bodies requires a broader scope than auditfor private companies. It includes not only the audit of financialstatements, but also 'regularity' (legality), propriety (probity)and use of resources (value for money)[76].Our inquiry showed no dispute about the need for the audit offinancial statements—the auditor's "true and fair view"opinion. However, in the view of some of our witnesses, the auditscope is too broad and some elements, particularly value for moneyin audit (local VfM work), should be reduced or even dispensedwith: [...] the professionalism of auditors lies infinancial probity, regularity, and fair and true assessments.Let's try to keep them on that track and strip away what has accruedover the past 25 years—certainly during the lifetime ofthe Audit Commission—with the wider effort to subject themto a performance management regime on the one hand and value formoney on the other. [77] The LGA wanted to see the not only the VfM elementremoved, but also the financial resilience element, and a moreproportionate approach to grant claims certification. A furtherview of some in local government was that the audit code was tooprescriptive and not what some councils needed—a one sizefits all.[78] The NAOappeared to support the view that the code could be better focusedand more responsive to local circumstances.[79]At the same time, the audit firms wanted the code clearly specifiedso that bidding would be on a fair basis and local authoritieswould not be able to omit elements of the code and auditors wouldbe clear what was required of them.[80] VALUE FOR MONEY IN AUDIT 52. The value for money element of the audit codeis by far the most contentious. The NLGN study found "somesupport for a more in-depth audit scope including VfM" but"a much more significant level of scepticism as to the benefitsit provided against its costs."[81]NLGN's recommendation is to "reduce the compulsory levelof audit, with councils voluntarily able to upgrade to VfM surveys."[82]Grant Thornton proposed that VfM should remain a part of the auditcode but local authorities should have a greater say in determiningthe scope of VfM audit.[83] 53. "Value for money" seems a simple, almostunimpeachable concept—a balance of quality and cost—butit can be interpreted in a number of ways and can be very difficultto define in practice. Nigel Johnson of Deloitte noted that itcan be highly technical matter, requiring specialist staff, andone that auditors were not necessarily equipped to undertake.David Walker[84]and GervaseMacgregor of accountancy firm BDO[85]argued that VfM involves value judgements which were matters forcouncillors and electors, not auditors. Professor Seddon, ManagingDirector of Vanguard consultancy, suggested that too much VfMwork had involved the promotion of pre-determined solutions (sharedservices, contracting out "back office" functions, callcentres etc) which were not necessarily appropriate and had oftenled to increased costs and poorer service.[86] FINANCIAL RESILIENCE AND GRANT CLAIMCERTIFICATION 54. The assurance that an organisation is a 'goingconcern' is a fundamental part of financial audit in both publicand private sectors. The LGA, however, wanted to see the financialresilience element removed from the audit code. It objected tothe broad definition of financial resilience that has been appliedof late, "ie. having proper processes in place to continueto operate for the foreseeable future and manage potential financialrisks and opportunities."[87]Other witnesses argued against this: in this period of cuts, financialsurvival should have higher priority in the audit code than value-for-moneywork. Ben Page, Chief Executive of Ipsos MORI told us: We did a piece of work for Zurich Municipal wherewe were interviewing senior people from across the sector, bothinside local government and in the auditing community. It is widelythought that one of the risks of the scale and the speed of thecuts that we have is that some authorities will simply fall overand there will be service failure.[88] 55. There was more of a consensus that the requirementsfor grant claims certification were excessive and disproportionatelycostly relative to the size of the grants and the scale of errorsdetected. The LGA criticised it as "expensive and unnecessary"and said that in 2008-09 the cost of certification was £18.7million in relation to grant claims of £45.6 billion.[89]The Audit Commission said this was a significant issue to be resolved;and other witnesses argued that a smaller effort was more appropriate.[90]The ICAEW and others recommended that the government departmentsproviding the grants take on a greater degree of responsibilityand that certification be included in the overall audit.[91] PROPORTIONATE AND RISK BASED 56. Public sector audit needs to be proportionateand risk based. Its primary purpose is to protect public moneybut it should also be adaptable for legitimate local needs andprovide value in its own right. The code of audit practice needsto reflect these principles. In the early days of local auditcommittees, a more prescriptive code may be appropriate, but thecode should not be enforced in such a way as to stifle local innovationand the benefits of local decision-making. 57. The nature and extent of value for money workprescribed in the code of audit practice is contentious. On balance,we favour the proposal that a council prepare an annual reportof its arrangements for delivering value for money, showing whatit is trying to achieve and the measures that it is using to improveperformance. The auditor should be required to review and providereasonable assurance on the annual report. This would be a morelimited but realistic requirement than requiring auditors to judgewhether the council is delivering VfM. Additional VfM work shouldbe an optional, not mandatory, part of the code. Financial resiliencemust remain a part of the audit code although the scope of thework should be proportionate to risk and clearly related to financialmatters. Grant certification work should be brought within thegeneral audit instead of being a disproportionate additional cost.The results of the audit need to be communicated to councillorsand public in ways that are more meaningful than currently.
70 Ev 163 Back
71 Q 491 Back
72 Q 495 Back
73 DCLG Consultation doc para 1.17 Back
74 DCLG Consultation doc par. 2.23-2.25 Back
75 Q 518 Back
76 The Audit Code of Practice specifies that some value for moneywork be undertaken as part of the audit. This "local VfMwork" is distinct from the national value for money studiesundertaken by the Audit Commission, which are addressed in Chapter7. Back
77 Q 15 David Walker Back
78 NLGN, Show me the money-accounting for localism, April2011, p 53 Back
79 Q 498 Back
80 Q 398 Back
81 NLGN, Ibid, p 53 Back
82 NLGN Ibid, p 60 Back
83 Ev w45 Back
84 Q 14 Back
85 Q 379 Back
86 Ev 192 Back
87 Ev 138 Back
88 Q 201 Ben Page Back
89 Ev 138 Back
90 Ev 164 Back
91 Ev 222 and Qq 408-409 Back
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