Written evidence submitted by Mazars LLP
INTRODUCTION
Mazars LLP (formerly Neville Russell) have been providing
audit services to the public sector since its inception in 1990.
The firm has been an Audit Commission "appointed auditor"
since 2010, auditing principal authorities, local councils (2,500)
and providing staffing resources to the Commission's Audit Practice
under a framework contract.
Our submission does not cover all the issues but
merely sets out what we consider to be the key issues, taking
account of evidence already submitted, which the committee needs
to consider in relation to the audit and inspection regime of
local authorities.
APPOINTMENT OF
THE AUDITOR
AND INDEPENDENCE
It has to be remembered that the auditor is a watchdog
and not a bloodhound; his core function is to ensure that expenditure
incurred is within the law and all monies are accounted for, thus
protecting the public purse. The auditor must be independent.
There should be no perceived or actual conflicts of interest.
If audited bodies were allowed to appoint their own
auditor we have concerns that audit independence could be impaired.
Potential conflicts/disagreements between the auditor and the
audited body could result contracts being terminated or not renewed.
There would need to be a mechanism to protect the "auditor".
It is also important to take into consideration whether
the members, of the audited body, have the skills and experience
necessary to make such a crucial appointment.
If the auditor had to exercise his "auditor's
powers", who would fund the cost of litigation and/or who
would indemnify the auditor? If the cost were to fall on the auditor,
the auditor might seriously consider whether such an action is
worth pursuing. If auditors were required to take out insurance
to cover such costs then this would have to be reflected in the
audit fee.
ELECTOR'S
RIGHTS
Objections to the accounts are currently investigated
by auditors, who are licensed by the Audit Commission. Following
the demise of the Audit Commission, who will assume this role?
Safeguards need to be put in place to ensure that
auditors are capable and have the resources available to investigate
a complaint, which may lead to the auditor issuing a Public Interest
Report. Furthermore, mechanisms need to be in place to deal with
Public Interest Disclosures and their subsequent investigation.
COMPETITION
The auditor/firms must have the technical knowledge,
experience, resources and skill sets to undertake the audit. These
audits are complex. There are currently only seven firms plus
the Commission's Audit Practice that have that capability to undertake
large/principal authority audits. This increases to ten when small
bodies are included. Based on our own experience, the set up costs
for new entrants to market are significant, and can be prohibitive;
certainty of appointments for a minimum time period would be necessary
if a firm were to consider entering the market.
In our opinion, competition is unlikely to result
in an overall reduction in fees. Firms would "cherry pick"
and 'low ball' to win large audits to obtain critical mass in
the market place eg London Boroughs, Counties and Unitary authorities.
Some authorities, particularly small districts councils and those
in geographically remote places, may have difficulty in appointing
an auditor.
Who would be the auditor of last resort?
Small Bodies (Town Councils, Parish Councils, Drainage
Boards etc).
The present Limited Assurance Audit regime works,
in our opinion, well and ensures audit scrutiny. The public purse
is accounted for and there is a mechanism for the exercising of
elector's rights. In our view it would not be appropriate or sensible
for these bodies to appoint their own auditor. We have frequently
noted independence issues concerning the appointment of internal
auditors by small bodies.
It is questionable whether firms would be interested
in tendering for individual audit appointments with fees of between
£50 and £2,500. If audit limits were increased the public
purse would be at-risk, transparency would disappear and elector's
rights would be curtailed.
AUDIT COMMITTEES/AUDIT
REPORTING
We are of the opinion that audit committees in principal
authorities should be mandatory and the Section 151 officer and
the auditors, both internal and external, should report to that
committee.
The role, responsibilities, membership and the appropriate
skill sets of the committee members should be enshrined in statute.
The Audit Committee should be non-political. Members should be
appointed for a four year term, serving for a maximum of two terms.
The membership should include independent members and we would
suggest the Chair should be a non-councillor member.
REGULATION
Codes of Practice and Guidance for auditors will
need to be provided to ensure consistency of approach and standards.
The Code should be reviewed every five years and approved by Parliament
as is currently the case.
Arrangements will need to be put in place for the
monitoring of auditors performance and quality. We consider that
the Audit and Inspection Unit of the Institute of Chartered Accountants
England and Wales are best placed to do this. There will be a
learning curve and a cost which would require funding.
AUDIT REPORTING
We understand it is envisaged that the auditor will
be required to give four opinions:
— Financial
statements.
— Regularity
and Probity.
— Value
for Money.
— Financial
resilience.
The auditor will need to be provided with guidance
in order to come to a judgement and be able to give those opinions.
This also vital if there is consistency between opinions and authorities.
GENERAL COMMENTS
We consider that the Audit Commission overall,
has fulfilled its role and responsibilities since its inception
but in recent times may have "lost its way"; failing
to stand back and ask fundamental questions of itself—why
are we doing this, is it cost effective, does it add value?
The majority of services the Commission provides
to both auditors and the public in its regulatory, advisory role
eg code of audit practice, audit guidance, technical support,
electors rights/PIDA, public interest reports, appointment auditors,
audit quality and monitoring etc, will need to be provided by
another/other bodies. This could result in fragmentation, not
be cost effective or represent value for money for the tax payer.
In addition, there are likely to be substantial set up costs.
Consideration should be given to either creating one new body
or retaining a slimmed down version of the Audit Commission. This
body having clearly defined roles and responsibilities.
The Audit Commission's audit practice should become
independent of the Commission. To limit the cost to the Exchequer
and an employee-owned managed business would appear the best way
to achieve this.
As stated above, we have concerns with audited bodies
appointing their own auditors. Of particular concern, in the absence
of a managed market is that the market will contract with audits
being vested in the Big 4 as in the case of foundation trusts.
14 February 2011
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