Written evidence submitted by New Local
Government Network (NLGN)|
regime for the audit of local authority expenditure must be based
around the following principles: transparency, affordability,
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.
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.
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.
must also be paid to the internal council mechanisms in appointing
auditors, publishing reports, and taking follow-up actions.
Assessment and inspection:
believes the Local Government family should own, design and conduct
risk-based assessment process, with the process being managed
by the LGA.
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.
of random weighted sample inspections should allow for a risk-based
approach to the inspection of services for vulnerable individuals.
ABOUT NLGN AND
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.
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.
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
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?
NLGN believes that a new inspection and assessment
system should be based around the following principles:
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.
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.
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.
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.
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