Audit and inspection of local authorities - Communities and Local Government Committee Contents


Written evidence submitted by New Local Government Network (NLGN)

SUMMARY

Audit:

—  A new regime for the audit of local authority expenditure must be based around the following principles: transparency, affordability, and effectiveness.

—  Safeguards will have to be put in place to ensure that the market for local government audit does not lead to conflicts of interests, increased overall audit fees, or collusion.

—  Consideration will have to be given to the "spectrum" of audit, and whether it should include "value-for-money", to the body most able to undertake such a task.

—  With the advent of the Big Society, an increase in shared services and other management reforms, and community budgets, it is imperative for any audit regime to include these dynamics into its remit.

—  Attention must also be paid to the internal council mechanisms in appointing auditors, publishing reports, and taking follow-up actions.

Assessment and inspection:

—  NLGN believes the Local Government family should own, design and conduct risk-based assessment process, with the process being managed by the LGA.

—  NLGN recommends increasing the input of citizens as drivers of both priorities and improvement in the assessment process. Furthermore, they should be allowed to petition the Local Government Association for external inspection, flagging up poorly performing services.

—  A system of random weighted sample inspections should allow for a risk-based approach to the inspection of services for vulnerable individuals.

ABOUT NLGN AND ITS INTEREST IN THIS POLICY AREA

The New Local Government Network (NLGN) is an independent, not-for-profit think tank that seeks to transform public services, revitalise local leadership and empower local communities. NLGN's unique networks of innovative local authorities and private companies, voluntary, community and public bodies work alongside the research arm of the organisation to provide thought-leadership and original research into the future of localism and ways to improve public service delivery and re-energise democracy in England.

NLGN welcomes the Communities and Local Government Committee inquiry into assessment, inspection and audit of local government. We are grateful for the opportunity to present our thinking and recommendations. NLGN has been actively engaged in the debate on inspection, audit and assessment, as demonstrated by our publication Through the Looking Glass: Placing citizens at the heart of the assessment process, published in July 2010. NLGN is also currently engaged in a research project on the Future of Local Government Audit. This project will attempt to identify the most appropriate regime for the audit of local authorities, ensuring affordability, quality-control, probity, sustainability and effectiveness.

AUDIT OF LOCAL AUTHORITY EXPENDITURE AND "VALUE FOR MONEY"

Following the abolition of the Audit Commission as the principal body of local government audit, NLGN believes that special attention should be given to the mechanisms put in its place in order to ensure that the proposed solution will be, on the whole, cheaper, more accountable, and would retain the same level of quality as the previous arrangements. NLGN believes that, unless the process is rigorously examined, problems relating to conflicts of interest and market distortions could arise.

NLGN is committed to the establishment of a transparent process. Transparency should be applied to both the process of audit, in order to ensure rigour and best practice, and the publication of the result of audit, in order to ensure scrutiny and accountability. Transparency can also be a useful tool in increasing citizen engagement and participation in the political process.

NLGN believes that in order for the new regime to achieve the aims outlined above, special attention should be paid to the establishing and running of the local government audit market. Lessons from the private sector, such as the collapse of Enron and the demise of Arthur Andersen, should be heeded. NLGN believes that in order for such a market to function effectively, both the external market mechanisms and the internal local authority mechanisms should be reviewed and analysed.

External market mechanisms

Considering the budgetary pressures facing local authorities, affordability should be a primary concern in the establishing of an external audit market. The question is whether market competition will automatically result in lower audit fees for the public sector as a whole. Studies from the LSE have shown that audit fees increased by 2.4% following the reduction from five large auditing firms to four, with the near-demise of Arthur Andersen in 2002.[19] Careful consideration is needed, therefore, to gauge the potential impact of the proposed changes and levels of audit fees across the public sector. Costs could be further inflated because of the risks with regards to auditor's liability, and the need for them to take additional insurance to cover this. Another potential issue is likely to be the location and size of a local authority, and how this will impact on audit fees. Smaller councils or geographically-remote authorities might be forced to pay disproportionally large audit fees due to their budgetary limits, and/or the travel costs incurred by auditing firms.

Mechanisms should be put in place to ensure that any conflicts of interest between auditor and auditee are minimised. As many of the auditing firms also provide consultancy services to local government, it is imperative that the process and results of audit are not affected by the relationship between the auditing firm and the local government body. Furthermore, there is currently no provision preventing auditing firms from conducting both external audit and internal audit services to the same authority. Such a relationship could potentially lead to conflicts of interests. This is exacerbated by the fact that, while public services are exposed to wider audit coverage (financial, governance, and Value-for-Money) which currently restricts their need for consultancy, this might not be the case in a future regime. Questions should be raised as to whether this is likely to increase the demand for consultancy by local authorities in the future, and, if so, whether this may aggravate the potential conflicts of interests.

Attention should be paid to the "spectrum" of audit: should the audit be purely financial, to combat fraud and misuse of funds, or should it cover the Value-for-Money angle as well? If it were to have the wider remit, consideration will have to be given as to which entity is the most appropriate to conduct this assessment. While suggestions have arisen that the National Audit Office might be given the "Value-for-Money" aspect of audit, such a shift would raise a series of questions: Does NAO currently posses the resources and expertise needed to carry out such a task? Could such an arrangement lead one day to a Local Authority Chief Executive appearing before the House of Commons Public Accounts Committee, and if so, would this not entail a conflict of accountability? Finally, will the NAO's Auditor General have the power to criticise either government policy, or Local Authorities' application of policy?

Local Authorities currently perform their duties in partnership with a range of public, private, not-for-profit and community bodies and groups: with other local public bodies, sharing services with other local authorities, and in arrangements with private and voluntary organisations. The complexity of these approaches may become problematic. If different authorities share certain services, but are audited by different firms, who would audit the shared services arrangements? Aspirations for the "Big Society" and new community responses mean that this level of complexity in service delivery and resource utilisation is likely only to increase. If public money is involved and if services are handed over to specific groups of volunteers, will accounts be audited and reported, and, if so, how? Finally, this problem could arise on an even more significant scale in the case of community-based budgets, which could involve a myriad of funding streams from local and national government and other sources, thus complicating systems of accountability and financial audit trails.

NLGN strongly believes in the principle of transparency, as it should provide a platform for "arm-chair" auditors to inspect the accounts of authorities. This should provide an additional layer of scrutiny, complementing, but not replacing, the audit work carried out by auditing firms.

Examples from abroad have shown that audit of public bodies can be conducted by private auditing firms, but that this market should be regulated. In Sweden, for example, indirectly elected Public Auditors within each municipality are responsible for contracting private auditors to carry out the actual audits, with reports made public to the municipal assembly. The private audit firms work directly for the Public Auditor, as opposed to the municipality itself, and "aid" him or her in their auditing work.

Internal local authority mechanisms

The other angle NLGN believes should be considered relates to internal council mechanisms in both appointing auditors and in dealing with the outcome of audit reports.

NLGN believes that thought should be given as to the person and / or body responsible for appointing auditors: the executive, the full council, or the political leadership. While the full council would possess the required democratic mandate to conduct such a process, this could lead to potential conflicts of interest, as those responsible for overall decision-making would also choose auditors and their terms of appointment. Local taxpayers, as "shareholders" could be given a say in appointing auditors, or in choosing who appoints auditors. Questions must also be posed as to whom the auditors will report to, how this might impact their work, and whether this could lead to conflicts of interests. Additionally, should all reports be made public? Who would have the power to intervene in cases of emergency, or where gross failures are detected?

ASSESSMENT AND INSPECTION OF LOCAL AUTHORITY PERFORMANCE

NLGN believes that a new inspection and assessment system should be based around the following principles:

—  Transparency: Transparency is the most efficient, democratic, and organic way to make elected officials accountable. NLGN advocates for the publishing online of salaries and expenses of elected officials, but also of the financial revenue and expenditure local authorities are operating in, in order to provide citizens with the tools needed to make democratic decisions.

—  Centred on the Citizen: Assessment should become a bottom-up process, with citizens defining priorities for areas, and measuring the progress made by local authorities against those priorities. They should act as de facto assessors, and should have a wide variety of options for expressing their views, journeys, and experiences of local services. Citizens should also be provided with the mechanism to petition the Local Government Family if they feel that a specific service is deficient or inadequate.

—  Owned by local government: Local Government possesses the democratic mandate and legitimacy, the desire, and the knowledge to organise and oversee self-assessment processes, peer-reviews, mentoring schemes, and best-practice sharing.

—  Designed to protect vulnerable individuals: attention must be paid to the most vulnerable sections of society: children in care and vulnerable adults dependent on critical services. This must be achieved through a risk-based, proportional, and efficient system of weighted random inspections for specific services, designed to reassure citizens that vulnerable individuals are being properly cared for and to ensure standards are maintained.

NLGN believes these measures would free councils from the target-driven and regimes installed by previous governments, whilst enabling standards to be maintained and improved. They would place citizens at the heart of the process. They would provide adequate safeguards for vulnerable individuals. They would dramatically reduce the costs associated with previous inspection regimes. Finally, they would foster community empowerment and local democratic engagement by transferring previously centralised power back down to the citizens.

January 2011


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Prepared 7 July 2011