Written evidence submitted by Deloitte
LLP
EXECUTIVE SUMMARY
We have pleasure in submitting comments and views
on the above topic following the Committee's decision to review
the proposed abolition of the Audit Commission. Our key points
are:
— We
are supportive of the separation of the regulatory functions of
the Commission from all audit providers. Our firm's external audit
work for companies, charities and NHS Foundation Trusts is already
subject to regulatory oversight by the Financial Reporting Council
(FRC) and the professional Institutes.
— We
consider that protections will need to be built into any new regulatory
regime for exceptional circumstances that may arise which could
prevent local audit being carried out without fear or favour.
Some protection would be brought if audit committees were made
mandatory for local authorities and they were required to comprise
full membership, or a majority, of independent members.
— We
believe that the power of the auditor to produce a public interest
report should be reconsidered. If all reports submitted by auditors
to Audit Committees were made publicly available, then matters
of an urgent nature could readily be brought to public attention
without additional reporting responsibilities being imposed. New
legislation could require the audited body to have to respond
to any non-standard audit report or a report requiring a formal
response to a significant matter within a designated timeframe.
— As
audit standards already require the lead audit personnel to have
to rotate, we see no reason to impose a fixed or recommended term
for audit appointments. This should be left to local choice, in
our view.
— We
believe that the current changes to the legal provisions governing
local public audit should include new provisions requiring all
local audited bodies to produce a "corporate style"
Annual Report alongside their accounts.
— Reporting
explicitly on the regularity of expenditure at a local authority
would add to audit costs, since the amount of work involved would
be disproportionately expensive. We consider that the regularity
requirements of parliament are best served under any new local
public audit regime by retaining the facility for specific grant
certification. The NAO is likely to be the appropriate agency
to ensure that any such requirements are proportionate.
— The
Companies Act provisions relating to proportional auditor liability
and to liability limitation agreements (including a negotiated
cap) would be equally appropriate here.
— We
consider that the abolition of the Audit Commission takes away
a layer of regulatory oversight that can readily be integrated
within the other existing audit quality and regulatory arrangements.
— We
believe that existing and new firm entrants into this market will
have sufficient resources to be deployed in this market to handle
the planned introduction of local audit competition.
— There
is some advantage to spreading the phasing of local audit tendering
over a transition period, but not over such a long period that
the potential benefits of the new local audit appointment regime
are delayed unduly.
— With
necessarily robust governance and accountability structures in
place, we believe it would be appropriate, and consistent with
the other elements of this change agenda, for GP Commissioning
Consortia to be able to appoint their own auditors.
— We
encourage the development nationally of a limited suite of suitable
core indicators of local authority financial and service performance
which would be able to serve as early warning and reassurance
for local people.
— We
believe that a move to simplify local authority accounts and bring
them more into line with corporate reporting standards and disclosures
is likely to bring significant savings.
We have provided more detailed comments below. As
a firm who has had a longstanding involvement in providing external
audit services to a wide range of local public bodies, including
local authorities and NHS organisations, we are grateful for the
opportunity to comment on the implications of the government's
announcement to abolish the Audit Commission in 2012. We are encouraged
that the Committee is giving this decision appropriate scrutiny,
particularly in determining the structure of any new external
audit arrangements for local public bodies.
1. AUDIT REGULATION
1.1 We are supportive of the separation of the regulatory
functions of the Commission from all audit providers. Our firm's
external audit work for companies, charities and NHS Foundation
Trusts is already subject to regulatory oversight by the Financial
Reporting Council (FRC) and the professional Institutes. These
regulators spend considerable time and effort challenging our
audit processes and systems and reviewing our detailed audit work.
The FRC publish reports each year on the outcome of their reviews.
The Institute of Chartered Accountants in England & Wales
(ICAEW) determines those members who qualify to be Responsible
Individuals and hence can lead audit engagements and sign external
audit reports in their own name. We believe that there is no overarching
reason why the oversight of local public audits could not be similarly
overseen by these regulatory bodies. This will reduce the regulatory
burden on firms, as many of our audit systems and processes are
common between the corporate and public sectors. We think that
the public should be able to take assurance from these regulatory
arrangements provided there is continuation of reporting in public
of the outcome of regulatory reviews and of the list of persons
accredited to be Responsible Individuals and hence lead the audits
of local public audits.
1.2 There has been discussion on whether there should
be additional accreditation requirements to be a firm and a Responsible
Individual able to undertake local public audit engagements. We
believe strongly that adding additional accreditation criteria
just for this market is not necessary. The current criteria applied
to accredit audit firms and Responsible Individuals (who can lead
audits and sign audit reports) are sufficient to ensure only suitably
qualified audit professionals are given Responsible Individual
status. The criteria that may be important to individual audited
bodies as to what other additional skills and experience they
want to see from their auditor should be left as a matter for
local choice, just as it is in other sectors of the economy.
2. AUDIT INDEPENDENCE
2.1 One of the elements in the current public sector
audit regime is independent audit appointment. This applies in
central government with the National Audit Office and the Comptroller
& Auditor General being responsible for all audits. At a local
level, parts of the public sector already have the ability to
appoint their own auditors. For example, the higher and further
education sectors and NHS Foundation Trusts. In both these cases,
there remains a separate regulator to whom the auditor can report
in extremis and who helps define the scope of audit work and reporting
required from the local auditor.
2.2 We consider that protections will need to be
built into any new regulatory regime for exceptional circumstances
that may arise which could prevent local audit without fear or
favour. In part, this may depend on the revised scope of the audit,
on which we comment below. Where the auditor is in need of most
protection potentially is when the auditor is undertaking elector
challenge work (so called "objections") or pursuing
a matter considered to be of public interest (which currently
lead to Public Interest reports). It is not difficult to imagine
circumstances where an auditor identifies some alleged wrongdoing
at an audited body that could have implications for elected members
as well as officers. Some protection would be brought if audit
committees were made mandatory for local authorities and they
were required to have either a complete membership, or a majority,
of independent members. This would go some way to mirroring the
position at NHS bodies where, despite having a unitary board,
the Audit Committee has to be made up exclusively of Non- Executive
Directors. However, the question remains as to whether the potential
involvement of independent members on local authority audit committees
will be sufficient to protect the auditor both in terms of reporting
wrongdoing and getting paid for such work.
2.3 We also have concerns as to whether there are
enough suitably qualified candidates across the country who would
be willing to become independent members of local authority audit
committees. Perhaps ClPFA, the ICAEW or other professional body
could be required to establish and maintain a central register
of independent people appropriate to serve in this capacity.
2.4 A further aspect of audit independence is length
of appointment. In the private sector, auditing standards require
rotation of the lead auditor. Rotation of the senior audit leadership
is designed to prevent close associations building up to prejudice
auditor independence, whilst recognising that too regular rotation
either of individuals or firms creates inefficiencies and risks
ineffective audits. In fact, many audit clients request greater
rather than reduced team continuity, since change in audit personnel
can create additional burdens on the audited body. As audit standards
already require the lead audit personnel to have to rotate, we
see no reason to impose a fixed or recommended term for audit
appointments. This should be left to local choice, in our view.
We recognise the merits of occasional audit tendering, but we
do not consider a mandatory audit appointment period should be
imposed.
3. RESPONSIBILITIES
OF AUDITED
BODIES
3.1 Critical to the changes to the local public audit
regime are the responsibilities of the audited bodies. The statutory
requirements on local authorities for producing annual accounts
and related reports are somewhat different to those for NHS bodies.
NHS trusts (and NHS Foundation trusts) are required to produce
an Annual Report and accounts, much in line with the corporate
sector. Local authorities are not currently required to produce
an Annual Report with their accounts. Neither a local authority
nor an NHS body has to include a clear statement in the report
accompanying the accounts or in the Annual Governance Statement
(or Statement on Internal Control for NHS bodies) on how they
have delivered value for money for their local people. Hence,
despite the current statutory requirement on auditors to satisfy
themselves on the value for money arrangements at an audited body,
they cannot reference their work to an audited body's formal statement
about how it has organised and delivered value for money.
3.2 We believe that the current changes to the legal
provisions governing local public audit should therefore include
new provisions requiring all local audited bodies to produce a
"corporate style" Annual Report, which should include
a summary of the audited body's performance and prospects, the
risks it faces and how these are being managed, and, either in
the Annual Report or in the Statement on Internal Control, there
should be a requirement for a section describing how the audited
body achieves and has achieved, value for money for its various
stakeholders, including how the audited body has assessed this
achievement. Audit work is facilitated where the audited body
has clear responsibilities to produce and represent information
and judgements for the auditor to opine on.
4. AUDIT SCOPE
4.1 The scope of local public audit is wider than
that for company audits. This recognises the important role the
auditor plays in reporting on the accountability of local audited
bodies for their use of public funds. It also recognises the role
the external auditor can play in being a vehicle for independent
challenge and investigation should local electors have concerns
about stewardship or legality aspects of their local authority.
4.2 Although these audit powers have been in place
over a long period, recent legislative changes provide the opportunity
to modernise them. For example, the Freedom of Information Act
and the new transparency requirements on local bodies to publish
all their expenditure data make access to information so much
easier for local people. There are also formal complaints processes
as well as scrutiny (or equivalent) groups and committees. Hence,
we consider that the extended audit powers to hear and pursue
elector objections should be dispensed with, as they have increasingly
tended to involve considerable audit expense on matters of concern
for individuals, sometimes of a legal nature, where such matters
are best addressed either through direct dealings with the audited
body or through other dispute resolution channels. Reviewing the
powers of the Local Government Ombudsman may be required to provide
the failsafe mechanism for anyone who cannot otherwise obtain
satisfaction or resolution of a local issue of concern.
4.3 We believe that the power or the auditor to produce
a public interest report should be reconsidered. Whilst it can
give comfort that significant local matters can be given serious
consideration by the audited body and auditor, there is a risk
that local electors see the auditor's public interest powers as
being there to pursue minor or individual concerns.
4.4 Options for change would therefore include dispensing
with public interest reporting and leaving the auditor with two
responsibilities: to report on the annual accounts and on the
value for money arrangements. This is still a broader scope than
for a corporate audit. Many issues that have public interest could
be covered within a properly defined set of detailed responsibilities
for the value for money part of the audit. Further, if all audit
reports were made publicly available, then matters of an urgent
nature could readily be brought to public attention without additional
reporting. Simplifying the audit responsibilities in this way
would help limit cost and bring the role more into line with the
corporate sector. New legislation could require the audited body
to have to respond to any non-standard audit report or a report
requiring a formal response to a significant matter within a designated
timeframe. This would be a marked improvement to the present arrangements
under which a late or qualified audit report does not require
any formal publicly available response from the audited body.
4.5 The more detailed requirements on auditors for
reporting matters by way of exception, and for addressing specific
aspects of value for money, should be left for inclusion in a
Code of Audit Practice and related auditor guidance. The responsibility
for producing this Code should that of the National Audit Office
(NAO), given their understanding of auditing standards and value
for money work.
4.6 A further element of the audit scope for Primary
Care Trusts and central government bodies is the requirement to
test and report whether the monies granted to the audit body have
been used for the purposes intended - the so-called "regularity
opinion". In our view this is an appropriate audit responsibility
where !be majority of the funds at the body's disposal derive
from parliamentary funding. We consider that extending this regulatory
responsibility to local authority auditors would be costly and
potentially impractical. Local authorities receive considerable
funds from central government, but also collect taxes and charges
locally. Much of the funding received is for general use by the
authority, and wide local discretion can be applied in how such
funding is allocated. There is a mix of local and centrally raised
funding in circulation at local authorities. In addition, where
government departments need assurance about how any monies they
have granted are applied, they establish separate grant audit
arrangements, which provide for specific audit on the expenditure
involved. This is a cost effective way of getting assurance on
specific sources of funding. Reporting explicitly on the regularity
of expenditure at a local authority would add to audit costs,
since the amount of work involved would be disproportionately
expensive. We consider that the regulatory requirements of parliament
are best served under any new local public audit regime by retaining
the facility for specific grant certification. The NAO is likely
to be the appropriate agency to ensure that any such requirements
are proportionate and do not impose undue audit burden for smaller
amounts of funding.
5. AUDIT GUIDANCE
5.1 As noted above, there is likely to remain a need
for a Code of Audit Practice, which has statutory status, and
for related auditor guidance. How such guidance is produced and
disseminated remains open to options. Under the NHS Foundation
regime, there is an Audit Code but other guidance to achieve audit
consistency and shared understanding is achieved through a Technical
Issues Forum - essentially a group of senior audit firm representatives
which meets three or four times a year to consider accounting
and audit developments. The minutes of such meetings are published
on Monitor's website. A similar structure for local authority
auditors could be established, under the auspices of the NAO,
since, through such discussions and publication of meeting minutes,
there is a reduced need for production and distribution of detailed
audit guidance.
6. AUDITOR PROTECTION
6.1 The Audit Commission provides an element of protection
to the local auditor through their indemnity in the event that
the auditor incurs costs in exercising special powers for objections.
If the auditors' responsibilities and powers are reduced as recommended
above through the removal of the formal objection powers there
would be a reduced need for indemnity protection for the local
auditor. The Companies Act provisions relating to proportional
auditor liability and to liability limitation agreements (including
a negotiated cap) would be equally appropriate here.
6.2 In relation to areas of dispute or disagreement
with the local audited body, there needs to be provision for an
auditor to obtain settlement of reasonable audit costs in the
event that the local audited body does not agree to paying them.
Introducing enhanced, mandatory, Audit Committees with a majority
of independent members would help in this regard. There also needs
to be provision for an independent mechanism to resolve disputed
audit fee matters.
7. AUDITOR OF
LAST RESORT
7.1 There has been recent comment that a small number
of audited bodies may find it difficult to find an auditor willing
to accept the audit appointment under the proposed new local public
audit regime. We understand that it is proposed that the new legislation
will include a new duty on local audited bodies to appoint an
external auditor. If this duty is not exercised, perhaps within
a set time period, there would appear to be a need for some remedial
action. In relation to whether CLG or another agency should have
powers vested in them to make an appointment in such circumstances,
our view is that there is normally likely to be at least one audit
firm prepared to take on an audit. However, it needs to be recognised
that audit costs may increase for any audited body where, either
through its location or perceived risk, a number of audit firms
are reluctant to take on the audit appointment. We believe that
perceived or actual audit risk may be a greater barrier to local
appointment choice than the location of the audited body. Audit
Ethical Standards require any auditor to assess before accepting
appointment the risks associated with the appointment. In the
exceptional circumstances of potentially difficult elected member
or member/officer relationships, it is conceivable that many audit
firms may view the reputational and financial risks of the audit
at a handful of audited bodies as being unacceptable.
8. AUDIT MARKET
8.1 We are of the view that there is, and will be,
sufficient capacity to maintain comprehensive and quality audit
coverage once local audit choice is made available. We believe
that existing and new firm entrants into this market will have
sufficient resources to be deployed in this market to handle the
planned introduction of local audit competition.
9. AUDIT QUALITY
9.1 Audit firms are already subject to considerable
scrutiny and oversight by regulatory bodies such as the Audit
Inspection Unit (AIU) of the Financial Reporting Council and the
Quality Assurance Department (QAD) of the ICAEW. Audit firms are
also required to publish an Annual Transparency Report setting
out how they ensure their audits meet the required quality standards.
We consider that the abolition of the Audit Commission takes away
a layer of regulatory oversight that can readily be integrated
within the other existing audit quality and regulatory arrangements.
We see no reason for establishing any new additional quality oversight
arrangements for local public audit, other than, perhaps, to ensure
that the wider aspects of the local public auditor responsibilities
are specifically addressed both by firms, in their Transparency
Reports, and by the AIU and QAD in their review programmes on
firms.
10. TRANSITION
10.1 The transition from the current to any new audit
regime needs to be considered carefully, particularly as this
may be happening at a time when local audited bodies may be experiencing
serious financial challenges. Launching sector-wide audit tendering
creates a challenge for both audited bodies and audit firms. There
is some advantage to spreading the phasing of local audit tendering
over a transition period, but not over such a long period that
the potential benefits of the new local audit appointment regime
are delayed unduly. Under the existing Audit Commission regime,
it is possible to extend existing audit appointments. This could
be done in such a way as to stagger the end of those existing
appointments over say two to three years.
11. NHS
11.1 The proposed new local public audit regime affects
both local government and NHS sectors. The NHS is being subject
to considerable structural change under this government's health
reforms. Primary Care Trusts (PCTs) and Strategic Health Authorities
(SHAs) are to be disbanded by March 2013. OP Commissioning Consortia
are to be established as local statutory bodies responsible for
commissioning healthcare services from NHS provider organisations.
Hence, there is a case for retaining existing audit arrangements
for PCTs and SHAs until their demise - this would most sensibly
be done by simply extending the Audit Commission's life for a
further year beyond the announced abolition ion 2012 to oversee
the last audits of NHS demising bodies.
11.2 NHS Trusts yet to become NHS Foundation Trusts
are being encouraged to prepare for Foundation Trust authorisation
as soon as possible and no later than 2014. Hence all NHS Trusts
should have local auditor choice as they move into Monitor's regulatory
regime. Again, there may need to be some auditor appointment extensions
where NHS Trusts follow a slower trajectory toward Foundation
Trust status.
11.3 For the new GP Commissioning Consortia, there
is little information to date as to their status, legal form or
governance structures. One of the main policy objectives behind
the proposed changes to the local public audit regime is to shift
power away from Westminster. Local choice and accountability seem
to be guiding principles. We consider that GP Commissioning Consortia
should be established with robust constitutional and governance
arrangements so that the local taxpayers and service users can
be assured as to how well the money at their disposal is being
applied. Such structures should include boards, audit committees,
locally elected members and a governor group sitting above the
board and holding it to account. This could be similar to the
Foundation Trust model. The local authority should also have reserved
positions either at board or governor level to ensure appropriate
democratic legitimacy. With such robust governance and accountability
structures in place, we believe it would be appropriate, and consistent
with the other elements of this change agenda, for GP Commissioning
Consortia to be able to appoint their own auditors.
12. LG PERFORMANCE/RISK
INDICATORS
12.1 One of the features of the proposed new local
audit regime will be the potential absence of an organisation
other than either the CLG or Department of Health to stay abreast
of emerging and sensitive issues at a local level and watch over
the action taken to prevent such issues escalating into more serious
problems. We do not consider large-scale inspection, or nationally
onerous and specified, performance monitoring to be appropriate.
We do however see a place for a small suite of nationally consistent
indicators of performance, covering both financial and service
performance. The model of NHS Quality Accounts is worth considering
in this regard. These require an NHS body to present both historic
and forecast performance information, describe their performance
monitoring arrangements and set out local targets for improvement.
They also require review and comment before publication from other
local stakeholders. Some core sector-wide performance indicators
as well as local ones enable both the ability to benchmark between
bodies as well as local differentiation and prioritisation to
be reflected. We therefore encourage the development nationally
of a limited suite of suitable core indicators of financial and
service performance which would be able to serve as early warning
and reassurance for local people about the comparative performance
of their local authority or GP Consortia.
13. FINANCIAL
REPORTING REGIME
FOR LG
13.1 Whilst the NHS has for some time adopted a largely
"corporate-style" format for annual accounts, and this
has been particularly true for NHS Trusts, the accounts of local
authorities remain complex as they seek to balance generally accepted
financial reporting requirements against the needs of local tax
based allocation accounting. We believe that a move to simplify
local authority accounts and bring them more into line with corporate
reporting standards and disclosures is likely to bring significant
savings. There could remain separate reporting, say through Council
Tax leaflets and other media, for the tax-based accounting still
to be evident. However, a thorough review of local authority accounts
is strongly encouraged, going back to defining the core purpose
of the Annual Report and Accounts of local public bodies and resulting
in financial statements that are broadly comparable to the commercial
sector and therefore more meaningful to members of the public.
January 2011
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