Conclusions and recommendations
Abolition and fragmentation
1. 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. (Paragraph
17)
2. 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. 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. (Paragraph 18)
Savings from abolition of the Audit Commission
3. 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. (Paragraph 24)
Local appointment
4. 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. (Paragraph
37)
5. 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. (Paragraph 38)
6. 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.
(Paragraph 39)
Public interest reporting and objections to accounts
7. 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. (Paragraph 44)
Right of objection
8. 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. (Paragraph 46)
Responsibility for the audit code, standards and
consistency
9. We
agree that the NAO is best-placed of the remaining bodies concerned
with public audit to prepare the code of 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 consistency in audit is a related task, and
key matter, responsibility for which has not been specified. The
Government must clarify how consistency in audit is to be achieved
before the new system is introduced. (Paragraph 49)
10. In preparing the
code of audit practice, the NAO will—subject to the approval
of the Public Accounts Commission—incur additional costs,
and may have to build capacity to fulfil these functions. We invite
the Public Accounts Commission to monitor costs and seek to ensure
that they do not exceed those previously incurred by the Audit
Commission. (Paragraph 50)
Scope of audit: key elements
11. Public
sector audit needs to be proportionate and risk based. Its primary
purpose is to protect public money but it should also be adaptable
for legitimate local needs and provide value in its own right.
The code of audit practice needs to reflect these principles.
In the early days of local audit committees, a more prescriptive
code may be appropriate, but the code should not be enforced in
such a way as to stifle local innovation and the benefits of local
decision-making. (Paragraph 56)
12. The nature and
extent of value for money work prescribed in the code of audit
practice is contentious. On balance, we favour the proposal that
a council prepare an annual report of its arrangements for delivering
value for money, showing what it is trying to achieve and the
measures that it is using to improve performance. The auditor
should be required to review and provide reasonable assurance
on the annual report. This would be a more limited but realistic
requirement than requiring auditors to judge whether the council
is delivering VfM. Additional VfM work should be an optional,
not mandatory, part of the code. Financial resilience must remain
a part of the audit code although the scope of the work should
be proportionate to risk and clearly related to financial matters.
Grant certification work should be brought within the general
audit instead of being a disproportionate additional cost. The
results of the audit need to be communicated to councillors and
public in ways that are more meaningful than currently. (Paragraph
57)
Domination by the few
13. Unless
the Government can crack the problem of the very limited competition
in the audit market in the UK, it will be open to the accusation
that the abolition of the Audit Commission is not a measure to
save public money but merely a mechanism to transfer public money
into private hands. For local auditor appointment to work, the
local government audit market must be opened up to wider competition
that provides local authorities with a genuine choice of audit
firms. This will require active management and learning from developments
in the private sector, such as the outcome of the OFT's current
review. DCLG should work with other appropriate bodies, including
DBIS, Competition Commission, FRC, the LGA and professional accountancy
bodies to deliver a more open and competitive local government
audit market. (Paragraph 61)
Audit Commission: audit practice
14. It
is vital that the Audit Commission audit practice's skills and
expertise are not lost and that it remain a significant player
in local government audit market, in order to provide fee competition
and choice. Our favoured outcome is the establishment of a stand-alone
company, preferably a mutual. If this proves to be unviable, merger
with another audit firm outside the Big Four would be our second
preference. Failing both of these, the audit practice should be
broken up so that capability is spread to a number of other smaller
firms. It would be entirely unacceptable for the practice to be
bought by one of the existing Big Four as this would further reduce
the already-limited choice and competition. DCLG must also carefully
consider the transitional arrangements and ensure that the necessary
assistance and stability is provided to assist the audit practice
through this period, particularly if the practice is established
as a mutual. (Paragraph 66)
Audit fees
15. Developing
a fully competitive market will be an important element in achieving
lower overall audit fees—a key design principle of the Government's
proposals. All local authorities should be required to publish
annually their audit fees, showing separately the cost of the
mandatory (code) audit and any additional audit or consultancy
work. The figures should be published in a consistent way that
allows comparison and analysis. (Paragraph 69)
A driver of improvement?
16. The
"command and control" system has an appealing logic:
ministers set objectives and targets, local government devises
the delivery methods, and an inspection service reports and drives
improvement. Yet this has proved to be highly controversial and
its benefits uncertain. There has not been a proper examination
of issues relating to performance management, inspection and how
to drive improvement in local government. A rigorous, dispassionate
review of public sector performance management regimes, including
targets, indicators, inspection methods and their alternatives,
is long overdue. (Paragraph 78)
Sector-led performance management
17. We
welcome the LGA's proposals for sector-led performance management.
However, they suffer from the limitation that they are optional
and there is no formal mechanism to identify poorly performing
local authorities, who may choose not to participate. It remains
to be seen how vigorously and effectively they are implemented.
The Government should clarify its position on sector-led arrangements
and whether it intends to provide any further policy or legislative
framework. (Paragraph 84)
Performance indicators and public reporting
18. It
now seems inevitable that there will be a lack of comprehensive,
consistent data on which authorities can be compared. There are
calls to reinstate some limited form of national indicators to
allow comparison between councils. This may seem attractive but
it is unclear how it would avoid the problems and anomalies of
the previous indicator sets. We consider that the emphasis, at
least for now, should be on comprehensive local reporting against
local objectives with maximum transparency. Nevertheless the need
for a broader perspective will remain. 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. (Paragraph
88)
Variation, failure and intervention
19. It
would be idle to pretend that intervention by central government
in the conduct of local authorities is never going to be necessary.
It should therefore be well-regulated and based on clear and transparently-applied
criteria—preferably statutory. Some local authorities will
inevitably perform better than others. In some cases, council
services will fall below acceptable standards, or a council itself
may fail. We reiterate the recommendation in our report on Localism
that the Government make clear the grounds on which intervention
in local services will be deemed necessary. We further recommend
that, in cases of serious service or corporate failure, the Government
set out not only the grounds on which intervention might take
place, but also the mechanisms that would trigger intervention
and how it would be undertaken . It should do so in close consultation
with the local government sector, including the Local Government
Association, but mindful of the fact that the LGA is a voluntary
membership body which may not itself be capable of identifying
or dealing with all cases of serious service failure. (Paragraph
93)
NAO to take on the role
20. Over
the years the Audit Commission has produced some of useful national
value for money studies, but the programme has become excessive
and not sufficiently linked to the needs of the sector. Not all
the studies have proved helpful or, at £5 million a year,
themselves provided value for money. We believe that a smaller,
more selective programme would be better. It would be wrong for
one part of public expenditure—local government—to
be excluded from VfM assessment and the National Audit Office
should ensure that local government services and expenditure are
given due weight in its studies programme. Provided that the National
Audit Office has, or acquires, the necessary expertise in local
government matters, there may be some advantages to having a more
unified approach to reporting on public expenditure across both
local and central government. Additionally, we welcome reports
by a diverse range of organisations, including those from outside
government, and recommend that the National Audit Office, Local
Government Association and Department for Communities and Local
Government encourage collaborative working and seek to ensure
information is made available to all serious researchers. The
NAO and LGA should lead on devising a coherent programme that
adequately covers priority topics and avoids undue overlap. (Paragraph
103)
21. The proposal for
the National Audit Office to take on this role is workable and,
as we note above, may have some advantages over the existing arrangements.
However, the way in which the announcement was made did not show
a proper respect for the constitutional position whereby the Comptroller
and Auditor General, the head of the NAO, is an officer of Parliament,
and the funding for NAO work is granted directly by Parliament,
through the Public Accounts Commission, rather than by Government.
It is not for the Secretary of State—any Secretary of State—to
transfer work to the National Audit Office without proper consultation
with Parliament first. (Paragraph 104)
22. The transfer of
responsibility for national value for money studies to the NAO
involves a transfer of costs from DCLG to Parliament. We recommend
that the Comptroller and Auditor General make an assessment of
what it will cost to ensure that the NAO is able to carry out
an adequate programme of VfM studies of local government expenditure;
that he discuss his requirement for the necessary resources with
the Public Accounts Commission; and that DCLG make a clear transfer
of the necessary resources to the Public Accounts Commission from
the savings from the abolition of the Audit Commission. (Paragraph
105)
Conclusion
23. In
implementing these changes, the Government must be mindful of
the fact that that devolving power to local government and communities
does not absolve it of the responsibility to construct a system
which continues to provide accountability for public money and
which results in better value for money. That is so more especially
whilst the lion's share of local government spending remains funded
by central government. (Paragraph 109)
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