Written evidence submitted by the Audit
Commission
1. The Audit Commission considers that:
— Public
bodies that have tax-raising powers, or which spend large sums
of public money, should not be able to appoint their external
auditors, a principle first recognised by Parliament in 1864.
— Allowing
local bodies to do so would undermine auditors' ability to work
independently and report without fear or favour, key principles
of public audit. This would weaken accountability to the public
and Parliament for about a third of public spending.
— There
should continue to be integrated oversight of the new audit framework;
this should include coordination of local audits and provide assurance
to departmental accounting officers and the C&AG.
— Detailed
specifications for a new audit framework, when available, should
be objectively evaluated and compared with other options, including
the current regime.
— Moving
to new arrangements will be complicated and protracted, bringing
significant financial and governance risks; it is possible to
achieve most of the government's objectives more quickly, with
reduced risk and without major legislation.
— Some
of the Commission's wider functions, which cease on abolition,
are valuable. It is counter-intuitive to disband expertise on
VFM, data, analysis, governance and assessment when severe financial
pressures are increasing the risk of financial or service failure
in local public bodies.
— Over
the years we have helped local authorities, health bodies, the
police and fire services, and social landlords manage their money
better, improve their performance, and work with other agencies—to
the benefit of local users and local tax-payers. There should
be more consideration of the local impact of the Commission's
abolition.
SECTION 1: INTRODUCTION
2. The Audit Commission has four statutory duties:
audit, inspection and assessment, value for money (VFM) studies
and data matching. Our response covers the three areas specifically
mentioned in the inquiry's terms of reference, but excludes data
matching.
3. The government intends to abolish the Audit
Commission. This means that our responsibilities for supervising
and delivering local audit and inspections will stop, as will
our national VFM studies, and our audit practice will move to
the private sector.
4. As part of the wider localism policy, the
government wants local councils to appoint their auditors. It
wants to streamline national performance management of local authorities
by government departments and scrap many performance indicators.
The government also intends to strengthen local democratic accountability,
through transparency of raw spending data, voluntary analysis
of value for money ("armchair auditing"), and sector-led
improvement.
5. It is not clear whether the government wishes
to gather intelligence about local authorities at risk of financial
or service failure, or how it would trigger ministerial powers
to intervene in the event of failure.
6. We understand there will be no single body
with overall responsibility for supervising and coordinating local
audit. Instead, different organisations will provide elements
of the Commission's integrated regulatory and auditor support
functions.
7. Our inspection and national VFM work includes
studies and analysis, comparative information databases and good
practice guidance, which support local public bodies, local auditors
and inspectors, and central government policymakers.
8. We understand the timetable for the necessary
legislation to abolish the Commission, and put in place a new
local audit framework, means we are likely to keep some powers
until at least December 2013.
SECTION 2: AUDIT
OF LOCAL
AUTHORITY EXPENDITURE
What does this function achieve?
9. Public money is special. It:
— is
raised by compulsory levy;
— can
only be used for purposes allowed by law; and
— funds
services whose users often have little or no choice.
10. External audit is an essential part of accountability
for the stewardship and use of public money. It underpins confidence
in the conduct of public servants. Historically, Parliament has
recognised that the special accountabilities for public money
require a different form of audit from that of private companies.
11. Local public audit is necessary to:
— ensure
proper accountability—to Parliament, government, taxpayers
and other stakeholders—for a third of public spending, over
£200 billion; and
— provide
assurance that public business complies with proper standards.
12. To achieve these aims, the framework for
local audit should comply with the three principles of public
audit. Grounded in many years' experience, the Public Audit Forum
of the UK public audit agencies[23]
formalised these principles in 1998.
Principle 1: Independence of auditors
13. The independence of auditors is central to
the principles of public audit in both central and local government.
In 1864 a select committee recommended auditors in local government
should be appointed independently.[24]
In 1976, the Layfield Committee of Inquiry into Local Government
Finance decided it was wrong, in principle, for any public body
to appoint its own auditor. The public needs confidence in auditors'
independence when they report on local council spending.
14. Local authority auditors have quasi-judicial
functions, for example in deciding on issues referred to them
by local electors objecting to items in the accounts. Members
of the public are unlikely to consider auditors appointed by local
authorities to be sufficiently independent, increasing the prospect
of legal challenge.
15. Independent appointment provides safeguards
so auditors can:
— carry
out their role freely;
— be
free from influence by the audited body; and
— report
objectively and impartially without fear, or favour.
16. The government has proposed that local authorities
should appoint their own auditors. We consider this to be wrong
in principle because it undermines auditors' independence. Those
responsible for raising taxes or spending and accounting for public
money should not decide who scrutinises how they conduct their
business. This is particularly relevant in the political environment
of local government, where there is significant public interest
in auditors' reports.
17. Independent appointment remains an essential
democratic safeguard. It should be retained. Nevertheless, public
bodies could be given more influence over the appointment of auditors.
Principle 2: Wide scope of public audit
18. Public auditors' work covers the audit of
financial statements, as well as corporate governance, including
regularity (legality) and propriety (probity), and use of resources
(VFM).
19. This wider scope reflects the special accountabilities
for public money and the fact that public servants are accountable
not just for what they do, but also how they do it. Auditors assess
whether public bodies have arrangements in place to ensure the
proper conduct of their financial affairs, to manage their performance
and use resources well. This helps the public to hold local bodies
to account.
Principle 3: Public reporting
20. Appointed auditors report locally, in public
through the annual audit letter (which audited bodies must publish),
public interest reports, and (in local government) formal recommendations.
Audited bodies must consider and respond publicly to public interest
reports and formal recommendations. Because they are appointed
independently, auditors can deliver uncomfortable messages or
report unfavourably on aspects of an audited body's performance.
21. The government has announced that: "Auditors
will retain a duty for reporting issues in the public interest".
In practice, their ability to issue reports may be impaired if
local bodies appoint their own auditors. Local authorities often
make great efforts to prevent auditors issuing public interest
reports, and in some cases have sought to have the auditor removed.
Auditors would be less able to resist pressure without the safeguard
of independent appointment.
What has the Commission done?
22. As the statutory regulator of the local public
audit regime, we oversee arrangements for:
— appointing
auditors;
— managing
the market for supply of audit and related services;
— specifying
the technical standards for all auditors, including the firms;
— providing
technical support; and
— overseeing
and regulating auditor performance.
23. These arrangements, which in 2009-10 cost
less than £4 million, have secured independent, high-quality,
and good value public audit for local public bodies.
Independent audit
24. We have secured auditors' independence by:
— Appointing
auditors and suppliers. This ensures that
auditors cannot be improperly influenced by those whose work they
audit. In making appointments, we: consult widely; consider threats
to independence, such as those arising from prior business relationships;
and create appointment portfolios that are viable—professionally,
practically and economically.
— Meeting
auditors' costs. We meet all audit costs
from the fees levied on local government and NHS bodies. By underwriting
costs, we ensure auditors cannot be constrained from meeting their
statutory responsibilities by lack of resources. Equally, they
cannot overcharge.
— Limiting
non-audit services. Lucrative contracts
for consultancy could compromise the independence and objectivity
of auditors. We monitor non-audit services and must approve any
that exceed a threshold.[25]
Consistent audit
25. Auditing local public bodies is a specialised
business reflecting complex legal, governance and financial controls.
In local authorities, this includes considerations of legality,
responding to local electors and reporting in public. We only
appoint auditors with the necessary technical knowledge and expertise.
We also oversee quality, challenge inadequate audits and investigate
complaints about auditors.
26. We have a statutory duty to prepare Codes
of Audit Practice[26]
prescribing how auditors should carry out their work. We also:
— specify
work to certify grant claims and returns for government departments;
— coordinate
regime-wide responses to emerging issues; and
— coordinate
auditors' work for key stakeholders with an interest in financial
management of local public bodies, including the Department of
Health and the NAO.
27. Public auditors apply the same professional
standards to audits of financial statements as private auditors.
But there are no private standards covering the wider aspects
of public audit, for example on VFM arrangements and legality.
We provide extensive support through detailed guidance and advice,
technical forums and directories, and a helpline.
28. As a regulator, we provide assurance that
audits meet the required standard to audited bodies and other
stakeholders. These include accounting officers of departments
who are accountable to Parliament for the money disbursed to local
public bodies. The NAO receives assurance for its audit of departments'
resource accounts and the whole of government accounts. We also
act as a single point of contact for coordinating the work of
local auditors, for example on grant claims and returns.
Value for money of audit
29. We have secured significant economies of
scale. As the largest buyer of audit from the private sector in
the UK, we have used bulk buying power to secure good value for
audited bodies and taxpayers.[27]
The Commission's procurement exercise in 2006-07 realised savings
of £30 million over five years. In 2010, the Commission renegotiated
these contracts to save a further £11 million up to 2016-17.
Audited bodies had no procurement costs, paid lower fees and received
rebates. The firms had lower bidding costs and certainty of work,
which they reflected in prices.
30. Within the specialised market, we ensure
there are enough suppliers of acceptable size to guard against
the risk of market failure or reduction in providers. Suppliers
can sustain delivery and investment.
31. By managing the market for supply, we ensure
that all audited bodies have a competent auditor at a reasonable
price. The same audit fee scale applies to similar councils whether
close to cities or in remote rural locations, even though audit
delivery costs vary significantly. We have also constrained the
cost of auditing to the smallest bodies. Twelve hundred small
parish councils pay no audit fee. Without our approach, some bodies
would face much higher fees, potentially out of proportion to
their budgets.
32. In an open market, private sector auditors
can decline an audit, perhaps because it is too risky, or because
its size or location makes it commercially unattractive. Our current
mixed economy, including our in-house practice, means that every
public body has access to effective audit. The market is not homogeneous—many
audits are commercially unattractive—but under their contracts
with us, firms must accept a portfolio comprising both more and
less attractive appointments.
33. Firms contract with the Commission, rather
than with individual audited bodies. We regulate the regime and
indemnify them for litigation costs arising from the exercise
of their powers. This significantly mitigates the risks for audit
suppliers, avoiding costs that would be factored into fees.
What needs to be considered for the future?
34. We accept the government's proposal to move
the work of the Commission's in-house audit practice into the
private sector.
35. In future, audit regulation will continue,
but not by a single body. As we understand it, the proposal is
that, for local authorities,[28]
these functions should be distributed to different bodies. These
may include the NAO, the profession (the Financial Reporting Council
and the professional institutes) and audited bodies themselves.
The proposals are still being developed, so options have not been
subject to cost/benefit analysis.
36. Significant issues remain to be resolved,
in particular arrangements for the certification of grant claims
and returns and the audit of small bodies.
37. There is a strong case for retaining a single
body (not necessarily the Commission) with responsibility for
appointing auditors, regulating the audit regime, managing the
market for supply, specifying the technical standards, providing
technical guidance, and monitoring and regulating auditors' performance.
To date there has been no evaluation suggesting these tasks would
be better carried out separately by different bodies. At present,
there is a significant risk that the whole will be less than the
sum of its parts.
38. It is possible to give most local public
bodies more influence over the appointment of their auditors and
open the whole market to the private sector with minimal legislative
change. This would meet most of the government's objectives.
39. Maintaining a single oversight body with
responsibility for making auditor appointments would also retain
the strengths and practical advantages of the current arrangements—which
are widely recognised by the accountancy profession, the firms
and finance professionals in local government and the NHS. These
include:
— ensuring
auditors' independence to act without fear or favour;
— enabling
local public bodies to benefit from the firms' current contracts,
by transferring them to a successor body;
— retaining
the benefits of bulk procurement to minimise costs;
— avoiding
the additional safeguards necessary for local bodies to appoint
their auditors;
— maintaining
consistency of audit approach across the sectors; and
— eliminating
the "hidden" costs to the NAO and departments of coordinating
the work of auditors.
40. A single oversight body would also facilitate
the transfer of our audit practice to the private sector, by providing
an opportunity to win contracts through competition, which would
determine its commercial value.
SECTION 3: INSPECTION
AND ASSESSMENT
What does this function achieve?
41. Inspections can review many aspects of public
services, starting from the experience of service users. They
can cover:
— professional
standards;
— responsiveness
to the public;
— performance;
— governance;
and
— VFM
and outcomes (including through collaboration).
42. Inspection is often confused with audit,
but it has a very different purpose and approach. It is based
on the standards and practice of service professionals,[29]
rather than accounting standards and practice.
43. Inspection can serve a number of different
purposes including:
— Safeguarding
the vulnerable—reviewing whether
minimum standards are met and highlighting inadequate services.
— Identifying
and mitigating risk of poor performance—motivating
managers to prevent service failures and reporting on improvement.[30]
— Substituting
for absent market stimuli—compensating
for the lack of competitive pressures and representing customer
interests where they have limited scope to influence service standards
or choose supplier.
44. It is for government to determine what to
inspect, how to inspect and what resources to allocate. Inspections
are sometimes part of the performance framework, or alternatively
triggered by failure. Inspections can be scheduled well ahead,
or inspectors can arrive at short notice. They can be broad-ranging,
or narrowly-focused on priority areas. They can involve peer reviews
or customer inspectors.
45. Unlike audit, there are no international
standards or common methodologies for inspections. This is a strength;
by drawing on professional experience, inspection has been adapted
flexibly to a wide range of issues and applied across multiple
organisations.[31]
But there are also weaknesses; multiple assessments by different
inspectorates can be bureaucratic and burdensome.
46. To be credible, inspection must be done by
independent, skilled people, using a method that is widely accepted.
Inspectors need suitable powers, selection, training and professional
support to deliver evidence-based judgements in which the public
has confidence.
47. Published reports, often highlighted in the
media, inform citizens about local services. Inspection therefore
strengthens public bodies' accountability to local people.
What has the Commission done?
48. We have inspected local services since 1996.[32]
Legislation changed our remit frequently. In response, we developed
approaches based on the experience of users, proportionate to
risk and focused on improvement. We reported all our findings
publicly, with summaries for the general public and more detail
for public servants.
49. When the intention to abolish the Commission
was announced, our inspections included:
— landlord
services provided by councils, arms length management organisations
and housing associations, commissioned by the Tenant Services
Authority;
— local
authority strategic housing;
— police
authorities, jointly with Her Majesty's Inspectorate of Constabulary;
— fire
and rescue authorities;
— housing
and council tax benefit services, commissioned by the Department
for Work and Pensions; and
— corporate
governance inspections, undertaken rarely, the most recent being
in Doncaster last year.
50. These can recommend that the Secretary of
State for CLG should use intervention powers.
51. Legislation also required us to assess the
performance and capacity of local bodies and, latterly, multiple
bodies in areas. These assessments uniquely incorporated auditors'
financial judgements and the judgements of specialist inspectorates.
There were two assessment programmes:
— Comprehensive
Performance Assessment (CPA) ran from 2002 until 2009. It reported
annually on councils using two easily-understood dimensions: current
performance and likelihood of improvement.
— Comprehensive
Area Assessment (CAA) replaced CPA in 2009, commissioned jointly
by four secretaries of state. It ceased in May 2010. CAA provided
a joint assessment by six public service inspectorates[33]
of how well services, working together, were delivering for their
communities on agreed local priorities.
52. Independent research shows that published
assessments stimulated improvement in local services.[34]
The assessments compared performance in individual organisations
or areas with that of others. Support was given to poor performers
to help them improve. High performers were identified and encouraged
to share their successes. Assessment also created peer pressure
for improvement and increased local accountability.
53. Prior to the announcement of our abolition,
we were working to develop an early warning system to identify
potential failure.
54. We increasingly targeted inspections on risk,
ensuring they were proportionate. As a result, local authority
inspections reduced to 67 in 2009-10, from a peak of 650 in 2002-03.
What needs to be considered for the future?
55. The government intends to reduce inspections
across local government further. Education and social care are
likely to be the main priorities. There will be no overall assessments
of broad performance and no risk-based inspections of other council
functions.
56. The government plans to reduce the accountability
of local authorities to central government by ending local area
agreements and reducing performance information, inspection and
assessment. It intends that citizens will hold public bodies to
account through greater transparency of local data and information.
Local democracy, greater choice, community ownership and better
complaints procedures will strengthen accountability. Competitive
pressures and new forms of ownership (including mutualisation)
will encourage improvement. The sector is expected to stimulate
self improvement, supported by peer review.
57. While these mechanisms each have a role,
they also have significant limitations. For example, the transparency
agenda has focused on raw data, especially unaudited spending
data. Publishing this discourages waste, encourages freedom of
information requests and attracts media interest. But it lacks
context and local people (or third parties such as the media)
cannot judge service performance unless they know more about the
reasons for spending, what it achieves, and what comparable bodies
spend and achieve. The requirement for local authorities to provide
comparable performance information has been reduced, and there
will be no formal assessments that integrate the findings of auditors,
inspectors and research.
58. People will struggle to judge VFM in complex
areas, for example those which involve multiple public, private
and voluntary bodies working together. They will not be able to
identify when saving by one body increases costs for another.
Third-party commentators will interpret data, but may have their
own agendas. We are concerned that local accountability will not
be enhanced without improvements to the accuracy and comparability
of published data, and local context.
59. It is counter-intuitive to disband expertise
on information, governance and assessment when financial pressures
mean that the risk of service failure is increasing. The effectiveness
of proposals for sector-led improvement with peer review is unproven.
With the Commission's abolition:
— The
government will lose a lever for addressing failure; corporate
governance inspections are an important power for tackling failing
local authorities.
— Pressure
to achieve standards in some key services, especially housing
and benefits, will be reduced.
— There
will be less incentive to achieve better performance and VFM across
organisational boundaries or geographic areas—and less knowledge
of how to do so well.
SECTION 4: VFM STUDIES
What does this function achieve?
60. The Commission has a statutory responsibility
to carry out studies, under the Audit Commission Act. This duty
requires us to study and comment on the impact of central government
legislation, regulation and direction on the ability of local
authorities to deliver VFM. The government has announced the Commission's
research role is to be abolished.
61. Policy and practice are more effective when
based on evidence. Independent research and analysis is particularly
important in complex or sensitive areas of policy, where the interests
of tax-payers, users and service providers often diverge.
What has the Commission done?
62. Our statutory national studies define VFM
and how it can be improved, providing the foundation for much
of the work of auditors and inspectors. They also provide both
local public bodies and national policy-makers with comparable
data, evidence and guidance on achieving better VFM. Before the
abolition announcement, the studies budget was around £5
million.
63. Our studies cover both national and local
perspectives, to identify how well they interact. We review many
different services to identify changes that will deliver improved
economy, efficiency and effectiveness. This includes how individual
services or bodies are managed, but also how whole systems work.
Our studies are not primarily designed to pass judgements retrospectively,
but rather to see how local services can improve and deliver better
VFM in future. Research methods include primary research and new
analysis of data.
64. Our research and analysis has:
— Addressed
complex and sensitive subjects. We have
covered topics on which independent evidence was needed, such
as local government pensions, the financial implications of the
ageing population, and waste disposal. Many studies have addressed
subjects that cross the boundaries between public bodies, a frequent
cause of waste and poor performance.
— Used
our local presence to build the national picture.
Our studies are based on unique access through local auditors
and inspectors. Many of them draw conclusions based on surveys
of auditors which can have near 100% response rates, significantly
higher than the norm and providing a full picture. Using this
method we collected real-time data to identify how well local
authorities were responding to the recession, and what lessons
could be learned from the best.
— Identified
action for central government. We have
highlighted where government policy could be reviewed to help
local bodies deliver better public services. For example, we demonstrated
difficulties for local bodies caused by different departmental
policies for children's trusts.
— Showed
how to improve VFM. We have identified
many ways to improve VFM. For example, we identified how local
authorities could: save on back office functions; use market competition
more effectively; commission better from the third sector; and
divert young people from anti-social behaviour. Recently we showed
how the police could save around £1 billion, without affecting
services to the public, by changing workforce mix and shift patterns.
65. Studies have a clear focus on improvement.
As well as highlighting good practice and how to achieve it, most
include tools to help local authorities save and improve. These
can include comparative data for benchmarking, self-assessment
questionnaires and tools which support joint working.
66. Our analysis has been incorporated into methodologies
used by auditors and inspectors.
What needs to be considered for the future?
67. The combination of in-depth, independent,
evidence-based research, practical application and consistency
over time makes our studies distinctive. The link between national
research and local audit and inspection work will cease, losing
benefits that other research organisations cannot replicate.
68. It is counter-intuitive to disband expertise
on VFM, data and analysis when local authorities face severe financial
pressures. Ministers and Parliament should consider whether and
how to replace the following:
— In-depth,
accurate, comparable information. Our
VFM reports are based on aggregate local data that enables credible
comparison between councils.
— Recommendations
for central government based on local experience. Independent
from government and drawing on evidence from our auditors and
inspectors, studies provide analysis informed by a unique insight.
Many have addressed the disjointed nature of national policies
when implemented locally.
— Practical
tools for local authorities, including benchmarking data. Our
tools have been widely used by local bodies seeking
to improve VFM.
— Audit
and inspection guidance. When reviewing
local authorities' arrangements, auditors and the remaining inspectorates
will lack analysis and comparative tools for assessing VFM derived
from national research.
SECTION 5: CONCLUSION
69. This paper has discussed three of the Commission's
main functions: audit, inspection and assessment, and VFM studies.
While these have been undertaken using different statutory powers,
we have achieved greater impact from integrating our different
activities. They have each drawn from, and contributed to, the
others.
70. This has particularly enhanced our ability
to identify ways to improve services and VFM, both locally and
nationally. This unique approach will cease when the Commission
is abolished.
71. Since the announcement of our abolition on
13 August 2010, most discussion has focused on future audit arrangements.
Little has been said about the gap that will be created when a
major agency simply ceases to exist. For 27 years we have worked
with local authorities, health bodies, the police and fire services,
and social housing providers to help them manage their money better
and improve their performance. We have encouraged cross-agency
working to the benefit of users and tax-payers, and helped mitigate
the effects of failure.
72. The independent judgement of auditors and
inspectors, based on evidence and research, acts as a catalyst
for effective and efficient public services. Since most of our
reporting is directly to local bodies and local people about local
issues, we are significant contributors to the local accountability
of local public services to local tax-payers and users.
73. A number of commentators have expressed a
view that the Commission should be reformed, as it has been in
the past, so it is fit for the future. It is now for Ministers
and Parliament to decide how the Commission's experience could
contribute to effective, efficient and accountable local public
services in support of the wider localism objectives.
January 2011
23 National Audit Office, Audit Commission, Audit Scotland,
Wales Audit Office and the Northern Ireland Audit Office. Back
24
This paper only addresses the public sector, but there are advocates
of independent appointment for private sector companies too. This
is often proposed following failures. For example, the recent
EU Green Paper on audit in the private sector, Audit Policy:
Lessons from the Crisis, asks whether, for the audit of the
financial statements of large companies and/or systemic financial
institutions: "a third party, perhaps a regulator, should
be responsible for the appointment, remuneration and duration
of the audit engagement, rather than the audited body itself.
... This matter should be explored taking into account, on the
one hand, the risk of increased bureaucracy and, on the other
hand, the possible societal benefits of demonstrably independent
appointments". European Commission, COM(2010) 561 final,
Brussels, 13 October 2010 Back
25
Currently the higher of £30,000 or 20% of the audit fee. Back
26
Both Houses of Parliament must approve the Code at five yearly
intervals, and auditors have a statutory duty to comply with it.
Parliament approved the current Codes on 9 March 2010. Back
27
This is consistent with the principle underpinning Sir Philip
Green's recent recommendation that the government should consider
"Mandating centralised procurement for common categories
to leverage… buying power and achieve best practice".
Efficiency Review by Sir Philip Green: key findings and recommendations,
Cabinet Office, October 2010. Back
28
The Department of Health is considering what audit arrangements
should apply to GP consortia; arrangements for police commissioners
have yet to be announced. Back
29
Inspections, as carried out by a number of bodies, are undertaken
in accordance with an overriding set of principles agreed by the
public sector inspectorates and published by government. Our inspection
regime complies with the Regulators' Compliance Code, which put
into practice the findings of the Hampton Review. Back
30
Audit provides a similar function for financial failure. Back
31
Audit applies to the accounts of a single body. Back
32
The Audit Act 1996 introduced joint inspections of social services
with funding provided by the then Social Services Inspectorate.
Subsequently we were given a role in joint inspections of local
education authorities working alongside Ofsted looking at VFM
in local education authorities. Back
33
Audit Commission, Care Quality Commission, HMI Constabulary, HMI
Prisons, HMI Probation and Ofsted. Back
34
For example: Joined up Policy in Practice? The Coherence and
Impacts of the Local Government Modernisation Agenda, James
Down and Steve Martin, Cardiff University, August 2006. CAA:
An evaluation of year one, Shared Intelligence, 2010 Back
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