Written evidence submitted by MacIntyre
Hudson (MHA)
SUMMARY
1.1 MacIntyre Hudson is a top 20 firm of Chartered
Accountants and in 2010 formed MHA, a group of associated major
regional firms to provide nationwide coverage. We are making this
submission on behalf of MHA. Our member firms carry out work for
the Welsh Assembly and the Scottish Parliament. We are one of
the leading firms of auditors in respect of FE Colleges in the
UK and we are committed to extend our business to include Councils,
Police, Fire and Rescue authorities and NHS Trusts. In addition
to external audit, we provide internal audit services, which invariably
involve value for money reviews.
1.2 We recognise that the Audit Commission provides
a quality service and this is reflected in the latest report of
the National Audit Office:
"We considered the Commissions' financial reporting
is effective, transparent and of high quality."
The transfer of the work of the Audit Commission
should, in our opinion, be based on obtaining value for money
with firms competing for the work whilst retaining high quality,
with a system of monitoring the work of auditors.
1.3 There are currently five private firms of
auditors contracted with the Audit Commission in respect of approximately
30% of the work. Press reports have suggested that 100's of firms
should carry out the work of the Audit Commission. The Audit Commission
is appointed to 900 principal authorities and NHS Trusts. It is
our opinion that these 900 bodies should not have 100's of firms
of auditors. It is important that appointed firms:
— Have
sufficient number of appointments to enable them to invest in
training and development, and recruit a significant team of specialist
staff.
— Are
able to demonstrate relevant expertise.
Principal bodies should not have auditors that deal
with a small number of relevant audits. Those auditors will not
be able to invest in relevant training, and will struggle to provide
the level of technical back-up. Nevertheless it is important that
there are sufficient numbers of audit firms dealing with Principal
Bodies to ensure there is competition in the market.
1.4 The Audit Commission carries out many functions:
— Regulator
and Standard Setting; setting work specification and monitoring
the performance of auditors.
— Manager
of the system; allocating work to auditors including the Audit
Commission's own team; Setting fee levels, deciding standard fee
levels across the board irrespective of the underlying cost.
— Auditor.
— Technical
Support.
— Numerous
other assignments including comparison of performance of Principal
Bodies; Annual Fraud Survey together with a substantial number
of other reports.
It is probably unique in having one body acting as
Regulator; Manager of the system and Auditor.
We will consider the options available in respect
of the Audit and Regulatory functions of the Audit Commission
and we believe these are as follows:
1.4.1 Retain the Audit Commission in its present
form—The Government appears to have decided this is not
an option.
1.4.2 Require the Audit Commission to regulate
the work of firms it contracts with.
1.4.3 Transfer work to private firms and rely
on their Institutes and regulators.
1.4.4 Transfer part of the Audit Commission work
to an MBO of the Audit Commission staff.
It appears from Press Reports that the main reason
The Government has decided not to retain the Audit Commission
in its present form is cost. In its current form Principal Bodies
are effectively required to meet the cost of the services whatever
that cost may be. Local Councils can only go to the Audit Commission
and the Audit Commission decide who does the work.
The Audit Commission set a scale of fees and a schedule
of hourly rates. London Partner rates for 09/10 were £380
and Manager rates £210. Rates set for 09/10 for a unitary
council or county council were £135,000, although our experience
from a review of accounts is that fees are normally higher than
the rates quoted. These rates appear high to us but this may be
because of a policy of pooling costs to cover work that the Audit
Commission undertakes where there is either no fee or an uneconomic
fee. It appears that fees payable to auditors are often higher
than the figures quoted because of additional work. Due to the
fact that there is no competition in the market, Councils have
to accept the cost and have no room to negotiate fees. In our
opinion costs to Principal Bodies will only reduce if there is
a free market with sufficient number of participants.
In the year ended 31 March 2010 the staff pension
scheme deficit of the Audit Commission increased by £103
million. This is an issue that would have to be addressed if
the work was transferred to the private sector. Private sector
firms are unlikely to take on the open-ended liability of a final
salary pension scheme. They would only take on staff with a defined
contributions scheme and the government would have to retain liability
for employees' rights to the final salary scheme.
We believe the Audit Commission could have a role
as a regulator. However, private audit practices are currently
subject to their own form of regulation and if the Audit Commission
was a regulator for PBIs this would add another layer of bureaucracy
that would require funding. In our opinion one system of regulation
for private and public sector audits would be more efficient and
reduce costs. The obvious choice of regulator in our opinion is
ICAEW and CIPFA and we believe the two should work together.
Throughout the UK private Companies, Charities, Colleges
etc are all subject to audit by private firms of auditors. It
is a natural extension to carry out the audits of public bodies.
This would however require the private firms to recruit Audit
Commission staff to provide continuity and relevant expertise.
An alternative is to transfer part of the Audit Commission
work to an MBO team. They would have the relevant expertise. The
disadvantage the MBO team would have is that they would rely solely
on public sector work. Their competitors would have a broad range
of clients. The year ends of all the MBO team clients would be
31 March, making all their work seasonal. Their clients would
be open to attack by the independent firms. An MBO is likely to
be more practical on a regional basis; it would be difficult to
cover the whole of the UK. The London area is an obvious target
for an MBO. We suspect that an MBO would be taken over by a larger
practice within a relatively short timescale, and this would result
in one firm dealing with a significant percentage of the market.
There is a danger that the big four firms end up
with most of the work, and when they have cornered the market,
it is likely that prices will rise. Historically there were 13
private firms with 15% of the market and today there are five
firms including three big four firms with 30% of the market. Our
reading of the Audit Commission papers is that they want to ensure
that the firms that carry out the audit work have the right quality
and expertise and they have therefore selected larger firms. It
is important that the balance is right, and that there are sufficient
firms with relevant experience and sufficient appointments to
have a viable part of their business in the audit and assessment
of local authorities. We believe that organisations of our size
are well placed to provide a cost-effective and personal service.
We would draw a parallel with the launch of the Further Education
sector in 1991. In the beginning, the audit of the newly formed
FE corporations was very much the domain of the big 4, and whilst
there was not a specific steer in that direction from the regulator,
it was very much a managed market.
Our references above are in respect of the audit
of Principal Bodies. There are in the region of 9,800 small bodies
with income/expenditure below £1 million and of these 7,600
have income/expenditure below £50,000. In our opinion these
bodies should be exempt from external audit and subject to independent
examination along the lines of charities with the bodies between
£50,000 and £1 million also being subject to internal
audit.
THE WORK
CARRIED OUT
BY THE
AUDIT COMMISSION
2.1 The Audit Commission work includes:
— Audit
— Assessment
— Research
— Data-matching
The audit of the accounts of local authorities and
other public bodies has differences with audits typically undertaken
in the private sector.
The audit includes an independent opinion on the
financial statements, and that is in line with the typical work
in the private sector. Audit assurance represents a significant
part of our core business.
In the public sector the scope of the auditors work
is extended to cover arrangements for securing economy, efficiency
and effectiveness in its use of resources. We have significant
experience of this type of work through our internal audit service.
The public sector also includes the scope of legality
and probity/propriety. The certification of claims and returns
is also an important area of work. It will be necessary to transfer
Audit Commission staff with relevant experience to private firms;
however there are parallels in respect of this work in the private
sector and the merger of staff with different skill sets working
together as a team will in our opinion produce the best results.
We have extensive experience of conducting regularity (probity
and propriety audits under the Nolan principles) audits in FE.
Due to the very nature of our structure and training,
our staff have exposure to both external audit, internal audit
and a VFM focus.
There are areas in respect of the scope of Auditors
work that the legislators should consider, for example the right
of the public to ask questions of Auditors. It appears to us that
questions put forward by members of the public should be directed
to elected representatives and not Auditors.
We believe that medium sized firms with nationwide
coverage offer the blend of skills required to deliver work currently
carried out by the Audit Commission and this can be achieved with
the costs savings that are being sought by the government.
It is important that the scope of the public sector
audit is not lost in any transfer of audit responsibilities to
the private sector.
We believe that the transfer of Audit Commission
staff is key to the transfer of relevant knowledge and experience,
and we would seek to recruit Audit Commission staff.
2.2 There are a number of initiatives that the
Audit Commission has been responsible for in recent years. Some
that can easily be identified as part of their responsibility
and others where the link appears tenuous.
A good example of an initiative that can easily be
recognised as relevant is the National Fraud Initiative. The question
arises how this will be dealt with in future? Will it be organised
by the National Audit Office? Will it be scrapped? We believe
it is a valuable exercise and should be retained.
The Audit Commission has statutory duties to report
on value for money in the application of government legislation
on local authorities. The Audit Commission has spread its net
widely and we question if some studies are about value for money.
With the transfer of the Audit Commission responsibilities
to the private sector, these initiatives are likely to be lost
and that will undoubtedly be part of the cost saving. The Government
will have to decide if it requires such studies to be undertaken,
and if so how they will be carried out. In our opinion it should
be managed by the NAO with the work contracted out as they decide.
2.3 Research and data-matching will undoubtedly
be carried out by some private firms and this will be used as
part of their marketing and practice promotion, but the level
of this work is likely to reduce. A decision needs to be taken
how this service will be provided and in our opinion it should
be managed by the NAO and contracted out as they decide.
TIMING
We consider that the timing of any transfer of responsibility
to the private sector is an important consideration. A delay in
the decision to implement any transfer will have a negative impact
on the morale of the staff, and it is likely that key staff will
move as the opportunity arises, resulting in a reduced level of
service and a fundamental shift in the dynamics of where resources
will be available.
We appreciate that any transfer should be made at
the time the audit for the year is complete, and before any significant
work is carried out for the following year.
At the same time relevant legislation has to be in
place to deal with a new system, and that will take time to implement.
Current contracts with the five private sector firms
are in place until 2016-17 and we assume that they will not be
changed although they will need to reflect changes in legislation.
FUTURE CONTRACTS
We believe that future contracts should be between
the Auditors and the Principal Body with the decision in respect
of the appointment being made by the full Council. The recommendation
being made by the relevant officer and the Audit Committee.
We believe however that the NAO should have a power
of veto and there should be an appointment process with all proposed
appointments being notified to the NAO in advance. The power of
veto should be limited to specific points including the restriction
of any one firm being allowed to obtain more than 10% of the market.
There should be written into the contracts that in
the event of change in control of the auditor, the appointment
would have to be ratified with the approval of the NAO.
CODE OF
PRACTICE AND
TECHNICAL SUPPORT
The Audit Commission is responsible for issuing the
Audit Code of Practice for Local Government Bodies and for NHS
Bodies and this is approved by Parliament. We believe this responsibility
should be passed to the new Regulatory Body and approved by the
NAO every five years. We consider that the regulatory body should
be the profession—that is the ICAEW and CIPFA, working together.
We consider that audit firms will provide their own
internal technical support and this should be backed by support
from the profession that is the ICAEW and CIPFA. We have been
part of the working party producing the Audit Code of Practice
in FE.
STRUCTURE OF
THE FUTURE
PROFESSION
Fees charged for audit and assessment to AIBs in
2009-10 totalled £182.7 million with 30% being dealt with
by five private firms. This would suggest that the Audit Commission
had fees for audit assessment by their own staff of £128
million. The objective of passing the work to the private sector
must be to reduce those fees, and it is reasonable to assume that
the target would be to reduce to something in the region of £100
million.
It would not make sense to transfer this work to
200 firms at an average of £500,000 per firm. There would
be insufficient scale of activity in each firm to deal with the
work effectively.
On the other hand, if the fees were split into four
blocks of £25 million, there would not be competition.
It is our opinion that the fees should be split into
blocks of £5 million to ensure there is sufficient competition
in the market. No single firm should be allowed to control more
than 10% of the market. This would need to be overseen by a body
such as the NAO.
Rakesh Shaunak
Head of Public Practice
MacIntyre Hudson LLP
Mike Brown
Chairman
MHA
14 March 2011
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