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Oral Evidence

Taken before the DLABC

on Tuesday 20 November 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Mr Clive Betts

Meg Hillier

Ian Swales

Heather Wheeler

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Examination of Witnesses

Witnesses: Gillian Fawcett, Head of Public Sector, ACCA, Steve Freer, Chief Executive, CIPFA, Paul George, Executive Director, FRC, and Vernon Soare, Executive Director, ICAEW gave evidence.

Q359 Chair: Welcome, and thank you very much for agreeing to help us in considering the draft legislation. I thank Gillian Fawcett particularly, who is also an adviser to us; I think we have worked out that you are a gamekeeper turned poacher today. Steve, you are from CIPFA. Vernon is from ICAEW, and Paul is from the FRC.

Our task is not to say, "Was it a right or wrong decision"; it is to look at the legislation and really identify where we think there are flaws or gaps. That is the kernel of our purpose. I will start with a general question. I think some of us know some of Gillian’s views, so I will start with you, Paul, with your FRC hat on. What, for you, look to be potential benefits in the legislation, and the dangers and gaps?

Paul George: I would like first to focus on the benefits because clearly, that is always a positive way to start. A lot of effort has been put into trying to replicate, where appropriate, the regulatory environment for private sector auditing, which has been in place for a number of years and has been working, by and large, reasonably well, so that is a good starting point. Like the legislation for private sector auditing, the Bill is quite complicated and there are lots of details that need to be filled in through subsequent regulations. Clearly, the art to making the Bill itself effective is to get the regulations as clear as possible, so those-

Q360 Chair: And where are the key regulations, for you? I like to see as much as possible on the face of the Bill.

Paul George: From the FRC’s perspective, there are some things around the definition of major audit, for example, because that will define respective responsibilities between the FRC and some of the other professional bodies that may put themselves forward to supervise public sector auditing. There are some details around the qualifications from bodies that-

Q361 Chair: I am not an auditor, so explain that first point to me.

Paul George: The intention underlying the Bill, as I understand it, is that there will be monitoring of the quality of audit work being performed. Some of that work will be performed by a professional body-for example, Vernon’s organisation, the ICAEW-and some directly by somebody more independent of the profession, such as the Financial Reporting Council. The split between what work is done by the professional body and what is done by the FRC, as the independent regulator, is struck on the definition of what is a major local public audit. Therefore, there is some work to be done to make sure we get that definition right, so the Bill can work in a proportionate manner. So that is one area.

Q362 Chair: So would you like to see that on the face of the Bill?

Paul George: I’m not sure I would necessarily say that it needs to be on the face of the Bill. What there needs to be is absolute clarity, so that those who have to implement the legislation can do it as effectively as possible-as long as it is clear. It is not on the face of the Bill for private sector auditing. The FRC has designated what are major audits in the past, and that has worked reasonably well.

A number of other things in the detail need to come out. I have mentioned qualifications, and another area might be the resignation process. There are some provisions around what actions need to be taken and whether the Secretary of State can set further regulations, which is quite an important set of provisions that need to be developed.

The other area that I would highlight-again, there is a lot of overlap with what is happening in private sector auditing-is that there are a lot of different bodies that will be involved in making sure that this is all effective. I have no reason whatsoever to believe that each of those bodies will not operate effectively together, making sure that there are no gaps or overlaps. It takes a lot of working through, and we need to make sure that that happens-again, a number of the people in front of you are responsible for making sure that that happens-but it makes it complicated, to be effective.

Q363 Chair: For the local authority. Have you got the resources in the FRC to take on the new duties?

Paul George: Yes, we do. We may need to top those resources up slightly, but we have already been doing a lot of the work that is envisaged within the Bill. We have already been monitoring some of the work from the Audit Commission under contract, so we have a perspective on the work that it has been doing in-house for audit, and we also have a perspective on the firms-appointed by the Audit Commission-that have been undertaking audits. So we have some experience of doing that.

Q364 Chair: What about all the health bodies and all that sort of stuff? Have you had any experience there of monitoring those audits, because it is a much more dispersed landscape?

Paul George: We do not inspect audits of foundation trusts to date.

Q365 Chair: We are concerned that there has never been a report in the public interest on any foundation hospital trust to date.

Paul George: There are obviously some specific grievances around public interest reporting. In the terms of monitoring the quality of the audit of the health trust, so long as the requirements that the auditor is to follow are clear, then whether we are inspecting the quality of the audit of a health trust, a local authority, a major oil company or perhaps a retailer, the actual auditing standards are relatively consistent.

Clearly, there are some additional things that are particularly relevant to local audit-for example, value for money work-and we do have experience of looking at the Audit Commission’s work in that area as well. I am relatively comfortable that we have the in-house expertise. We will probably need to top that up slightly in order to undertake that work.

Q366 Chair: Let me come back on two things. First, the NAO is going to do the VFM stuff, so I do not know quite what you see your role in that as being, except to make sure that the framework is appropriate to enable that to happen. Secondly, you are the organisation-correct me if I, in my ignorance, have got this wrong-that is responsible for the quality of audit across the piece. If I were in your shoes and there had not been a report in the public interest on any health bodies, even though we know, because Monitor tells us so, that-I cannot remember the figure-20 or something like that are in financial difficulties, that would ring bells. It is a bit worrying that that part of your current responsibility has not triggered any activity from you.

Paul George: I will answer the first question first and then come back to the second question. On the first question-the respective responsibilities between the NAO and the FRC or one of the supervisory bodies-it is my understanding that the National Audit Office will be responsible for setting the standards, but it will be the audit regulators that will be responsible for establishing compliance with those standards.

In terms of your second question, I am well aware of your concerns, particularly from reading the transcripts of previous evidence about public interest reports. That has not been the scope of our work that we have been performing under contract for the Audit Commission to date. Certainly, I can see that being something that we would wish to focus in on, in terms of making sure that there were clear standards that the auditor was aware of and complied with in terms of when a public interest report should be produced and how such reports are produced.

Q367 Chair: Why has it not rung bells with you on foundation trusts to date?

Paul George: As I think I said earlier, we do not do any work with foundation trusts.

Q368 Chair: I do not know the answer to that. Does anybody know? Foundation trusts appoint their own auditors-can somebody help me on this?

Vernon Soare: I can say, Chair, that ICAEW carry out the review currently of the quality of audit work done on foundation trusts for Monitor.

Chair: For Monitor?

Vernon Soare: Yes, for Monitor under contract.

Q369 Chair: That is really interesting. So have you found anything? Here are all of us thinking that all these foundation trusts are likely to be in some financial difficulties, to put it mildly. Why has there not been a single report in the public interest?

Vernon Soare: In reviewing the work that the auditors have carried out, we have not seen any issues around the application of auditing standards, which is the remit of the work that we do in terms of monitoring the work that they carry out.

Q370 Ian Swales: What about issues such as going concern? Are you not asked to comment on such issues?

Vernon Soare: We look at the work that auditors have done around going concern, yes. Obviously, the definition of a going concern is that the organisation is financially viable 12 months from the date on which the audit opinion is signed.

Q371 Ian Swales: So you have never been in a position where you have looked at a health trust and said, "We think there is a problem within 12 months." Is that what you are saying?

Vernon Soare: What I am saying is that when we have looked at the work the auditors have done, the view we have come to is that they did sufficient work at the time of the audit to satisfy themselves that the entity was a going concern.

Q372 Ian Swales: For 12 months. And it could fall off a cliff in the 13th month, and that would not trigger any-

Vernon Soare: Well, you can only look at what information the auditor had when they signed the balance sheet. So if there is a factor that comes in and no one was aware of it-

Q373 Ian Swales: I am not talking about new factors or post-balance sheet events; I am talking about what the auditors can, presumably, see on the day. Given what we are now hearing about some of these trusts, surely if these had been private sector organisations the auditors would have been blowing the whistle, wouldn’t they, in many cases?

Vernon Soare: The fact that an organisation is running a deficit does not necessarily mean that it is not a going concern.

Q374 Ian Swales: So is the Bill strong enough in that area? In terms of what we expect the auditors to comment on, do you think it is strong enough?

Vernon Soare: I can talk specifically, Chair, if you have finished with-

Q375 Chair: Gillian wanted to come in on that point, and then I will come to you specifically.

Gillian Fawcett: It is fair to say that deficits do not happen overnight, in most cases. There are early warning signals there, drawing on my experience. What you would expect to see is for a health trust to have financial plans in place, looking five years ahead, to get themselves out of that financial deficit. As far as I am aware, in most cases where there is a lead-up to a financial deficit, you would expect the auditor to be well aware of it and to work with the health trust to review the financial plan to see whether it stacks up and will help them move forward.

Q376 Ian Swales: This is really important. You are saying that, to the best of your belief, the auditors would have worked with each of the trusts in each case and said, "Okay, we have looked at your five-year plan and we think you are okay." We have not had any reports to the contrary; that is the point. The reason why I am pressing this is because it is quite scary.

Chair: It ain’t like that-they haven’t got a plan to get out of their financial difficulties.

Ian Swales: Exactly. It is quite scary. If we are visiting this new system on to a new set of organisations, we need to know how bad it would have to be before the auditors would say something.

Gillian Fawcett: Yes. Drawing on my previous experience, there would be a three-way conversation with the Department of Health, with the health trust and with the auditor to make sure there were plans in place to move forward out of that deficit. I am quite surprised that an auditor would only look 12 months ahead.

Q377 Ian Swales: It is just that we are hearing so much about certain trusts that it is hard to believe that they have been passed by the auditors right up until recently. If you look at the state of them and what has had to be done-some of the London ones and so on; Margaret knows the names better than I do-it is hard to believe that the auditors have not said anything.

Chair: The other interesting thing is this. I know Steve wants to come in; maybe you can take this question, Steve, in your reply. In the new world, it looks rather iffy on the circumstances in which an auditor would do a report in the public interest, given what we know about what has happened so far with foundation trusts. Even more importantly, what would the mechanisms be for auditors to share information across local authorities, foundation trusts and academy schools so that one could begin to spot somewhere whether there are any systemic problems that would cause wider concern? How on earth will that happen in the new world, and does it need strengthening in the legislation? Steve, do you want to comment on the issues so far?

Steve Freer: Yes, I do. I think the starting point is actually the point about the scope of public audit. One of the worrying features of the legislation is that the wider scope of public audit, which was certainly understood by the earlier Select Committee inquiry, is not strongly reflected in the legislation, or certainly does not seem to be reflected as strongly as it should be.

The importance of that point in the context of this discussion is that if you look back at public interest reports that have been produced from different parts of the public sector over the recent period, or perhaps the past couple of decades, relatively few would be about the financial statements audit, which is where you get to going concerns, deficits and so on. A more significant number would come from the wider scope of public audit: the aspects that look at regularity, propriety, probity and value for money. One of the dangers in the legislation and in the policy is that that wider scope is being lost.

To refer back to your questioning and Paul’s earlier response, I don’t think the FRC simply needs to recruit a small number of additional staff to take on this new responsibility; I think it needs to understand this as a major new line of work and area of responsibility. It needs to think through how that needs to be reflected at every level in the FRC, including in the composition of the FRC’s board. If there are no people at that level who have a really strong understanding of the public sector, Government and public audit, it will not trickle down in the way that it needs to in the organisation.

To come to your specific point, I don’t think there is a mechanism for sharing that information where public interest reports are either produced or being considered. That is one of the major potential losses in the new regime. That is an important role that the Audit Commission has discharged previously. Of course, a lot of this is not in public view, but when auditors have had suspicions about really serious matters in public bodies that they are responsible for auditing, they have known that the commission was a very wise and well-informed sounding board with which those issues could be discussed. Sometimes, that has given the auditor the steel that he or she has needed to go on to the next stage and ultimately get through to the report in the public interest.

Q378 Ian Swales: You are making two really powerful points there; if we can just unpick them for a moment and go to back to the first one. You said you felt that on the scope issue-you used four expressions: regularity, propriety, probity and value for money-less work would be done in all those areas, or that there would be less ability to find things as a result of the Bill. The other point concerns the reporting mechanism. You were suggesting that it is less likely that things will be found in the new regime. Can you say a bit more about that?

Steve Freer: Over the past 20 or 30 years-the period in which the commission has been in operation-we have seen that the entry of firms into this market is quite difficult. That reflects the fact that the transition from private sector auditing, which firms are clearly extremely good at, to public audit is not straightforward; it is very challenging and difficult. The firms that have been relatively more successful in that market have found that, in order to do public audit, you need to develop specialist groups of staff who by and large do that as their full-time occupation. They become specialists in those wider aspects of the audit regime that applies to the sector.

The commission has been a very expert overseer of those arrangements and has been quick to criticise firms that have not been sufficiently well equipped to do those more specialised public sector tasks. Again, if that expert supervision disappears or is replaced by more general supervision-or by supervision that thinks that public and private audit is all much of a muchness-gradually, we will see, in a sense, a dumbing down of public auditing and, to an extent, a narrowing of its traditionally wide scope.

Q379 Chair: Before you go on to the second one, I want to give Mr George a chance to come back and comment on that, because that has huge implications.

Paul George: Thank you. I certainly don’t think it’s going to lead to a dumbing down of-

Q380 Chair: Why not? What are you doing to make sure that that isn’t going to happen?

Paul George: First, while Steve is absolutely correct-most of the firms undertaking this work do establish specific divisions, and specific people within those divisions who have the required skills to undertake that work-the Audit Commission has found, and we have found by reviewing the work, that, just as there are some benefits to private sector auditing in learning from the experience of auditing public bodies, the latter can learn from the skills and expertise of private sector auditing as well.

Q381 Chair: I don’t understand what that means-just explain that to me. I know it’s something that people have spat out quite often, but I am interested in what it actually means in practice. What are the skills that you can bring from the private sector that will improve and enhance public sector auditing? What further things are you going to do to ensure that those hugely important points that Steve Freer has brought into the debate are going to be protected-apart from saying, "I can do it"? Because otherwise, we will look to recommending a strengthening on the face of the Bill, rather than leaving this to regulation.

Paul George: For example, historically, the focus of public sector auditing has been very much on the income statement-income and expenditure. While that is very important and links with some of Steve’s comments about probity and value for money, what it has meant is that on occasions the balance sheet has not had such a significant focus. Going concern is a major issue as far as private sector auditing is concerned, and therefore the skills and expertise that private sector auditors have at auditing the balance sheet, looking at the liabilities and-

Q382 Chair: That is why we are so astounded that no one has drawn to our attention the fact that up to 20 foundation trusts are in the red, with very little prospect of getting out of it.

Paul George: Perhaps I can go back to my earlier comment, in that we do not monitor the audits of foundation trusts.

The other point that Steve mentioned concerned the expertise on the FRC board. We have a particular committee that supervises our work on audit monitoring, and it comprises one of Steve’s former presidents who has experience of working in the health sector. I am sure you are familiar with Sarah Hogg who chairs the FRC; she will have a responsibility to make sure-as in other organisations-that the board, in accordance with the combined code, has the requisite skills and resources to challenge the work that we are doing. That happens on an annual basis. The work of the FRC has evolved over a number of years. If we didn’t think we had sufficient expertise on the board, then clearly we can supplement that.

Q383 Mr Betts: How far does this draft legislation require you to change the way we do things, to take on board these public sector responsibilities; or is it something you are going to think about doing, and there is a permissive element to the legislation to allow you to do it if you think it relevant?

Paul George: We have obviously been doing some thinking there. The Department came to us to ask if we would be prepared to take on some of these responsibilities; we didn’t seek to take them on-

Chair: Can you answer the question?

Paul George: I am just coming to the question. We have already been doing a lot of work with the Audit Commission, looking at a significant proportion of the work we would be asked to do if the Bill is enacted as proposed, which is around monitoring. We also have experience in overseeing the work of the ICAEW, CIPFA and other professional bodies, which is another key factor that the draft Bill requires. The Bill requires the FRC to make sure that the professional bodies have adequate systems in place to ensure that only the right people are able to conduct audits. That is what we have been doing in the private sector. To extend that to make sure that those systems and procedures now adequately cover public sector auditing is not a significant change of tack. It does not bring completely different issues; it is an extension of the responsibility-

Q384 Mr Betts: That seems to be where we have a fundamental disagreement, do we not?

Paul George: Yes, perhaps. I am not sure how much of a disagreement-

Q385 Chair: Are you going to build a bridge between the two of them?

Vernon Soare: I will try to reconcile these two, Chair. I think it is important that you ask at the beginning what still needs to be tightened up in the Bill, or made clearer. The scope of the audit is very important, so I think there are elements of that scope-exactly what is meant by value-for-money work in the new regime as opposed to in the regime it is replacing.

On whether it will be-to use Steve’s phrase-dumbed down, I don’t think so. One of the reasons is of course that the vast majority of people doing the audit work in the new regime will be the same people, by and large, who are doing it now. With the abolition of the in-house practice of the commission, as you know, its staff are going to the firms, and the firms that have been working on Audit Commission work for many years now-probably 25 to 30 years-do have experts in-house, value-for-money people, etc. It is probably not an interest to declare, but 15 years ago I worked for the Audit Commission, and did quality assurance work with the firms as well as with the in-house practices, and they do have the right staff.

The key point in this, as Paul referred to, is for the new regulatory regime, which currently sits with Audit Commission, to be robust enough to ensure that auditors are delivering on that scope. That is the important point.

Q386 Chair: So strengthen the scope. On the regulation, is there anything you need to change there?

Vernon Soare: The other issue that needs to be strengthened is that the Bill, as it stands, by and large with some further work, can work in what one might call "the normal circumstances". This is where we come back to public interest reports. We are not quite so sure that, at the moment, it actually caters for extreme or difficult situations. Relatively frequently compared with the foundation trusts, public interest reports are issued in the local government sector.

The Bill currently does not have a mechanism for sorting out the point where an auditor believes that he or she needs to issue a public interest report and do a fair amount of work, and the local authority is going to have to foot the bill. Currently, the Audit Commission indemnifies. In the new system it is not clear, and although it could be said that the auditor could go to law, it is not a good use of public money going to law to get the fees back. That is an issue that we are a bit concerned about, and that it does not cater for those more extreme situations.

Q387 Mr Bacon: Do you have any concerns about the new responsibilities of the National Audit Office in relation to value for money? Do you think it has sufficient resources to carry out the value-for-money work?

Vernon Soare: In a sense, that is a question for the National Audit Office, but it is going to set the framework. It is going to be, as I understand it, asked to deliver studies in the sector. Interestingly, it has been delivering studies in the health sector for many years so, from a personal point of view, I believe that it would have the resources. I know that it has staffed up, bringing somebody in as a former finance director in the local authority. I assume that it would, but I am only speaking from observation.

Q388 Mr Bacon: Do you have any sense of the profile of value-for-money work from the Audit Commission, as it has developed over the years? One of the things we have heard quite recently is that, as it expanded and did more value-for-money work, the quality of the Audit Commission’s value-for-money work was not always of the highest order; in fact, it declined. Is that your own sense?

Vernon Soare: I have to say that I don’t really have the sense of that, not being in that sector.

Chair: Do you want to come back, Gillian?

Gillian Fawcett: Yes, on three points. In relation to resourcing and staffing for the National Audit Office, a real opportunity has been missed to transfer some of the skills and expertise from the Audit Commission across to the National Audit Office. That is quite a loss to the sector in terms of expertise.

Q389 Mr Bacon: Can you clarify that? Are you saying that there are lots of value-for-money people who have worked in the Audit Commission, whom you would have liked to have seen transferred to the National Audit Office?

Gillian Fawcett: Yes. I think that, if the transition had been much smoother, you would expect some of that expertise.

Q390 Chair: What has happened to them? Have they just gone?

Gillian Fawcett: Well, they have gone off in various ways. Lots are pursuing consultancy work and the like. There is a missed opportunity there.

Q391 Mr Bacon: To speak to my previous point, if the quality of the value-for-money work that was being done had palpably declined, and there is some evidence from commentators and people in local government that it had and that they were not impressed with what was coming out of the Audit Commission, why would the National Audit Office want those people?

Gillian Fawcett: A long history and knowledge of the sector in terms of bringing them into the fold and looking at new ways of developing the value-for-money programme. [Interruption.]

Mr Bacon: Sorry, my mobile phone speaks at me. I have asked my office to find out how to stop it. I never consciously started it. It is one of those things that I didn’t start but I can’t stop. I interrupted you. You had finished your first point, but you had one or two more points to make.

Gillian Fawcett: I am not so sure whether the value-for-money studies declined or whether they were just superseded by what was a comprehensive performance assessment, and that the two became very muddled. In many ways, some people thought that it was either one or the other and not both. Things have moved on, and certainly in terms of looking back to the halcyon days of the Audit Commission and those big national studies that had a lot of value in terms of efficiency and effectiveness across local authorities and addressing some of the wicked issues, they were successful for a time. I just wonder whether the comprehensive performance assessment programmes were really superseded.

Q392 Mr Bacon: In so far as the National Audit Office enters into this area-its remit is to do a relatively small number of studies at least to start with, possibly a maximum of six-would you like those studies to be bigger and meatier, and what you call big national studies, big thematic studies looking at these issues across a range of different local authorities in the ways of the old halcyon days?

Gillian Fawcett: Absolutely. In terms of addressing some of the wicked issues, which are perhaps not prioritised or are priorities at a local level, where there is scalability in creating national efficiencies, I think that there is a place for that. The National Audit Office should consult beyond the reference group that it currently has in terms of what those areas are and what the key issues are that need to be addressed.

Paul George: I was just going to add a little bit to what Gillian has said. Gillian has been focusing on the thematic studies, the cross-sector work, that has previously been done by the Audit Commission. There is another part of the value-for-money work, which is the specific opinion that an auditor will provide in respect of the particular local body that they have been auditing. One of the things that the National Audit Office will want to do is to look at whether those standards and the reports that are the product of those standards are adequate. At the moment, the opinion is very much couched in the terms of process, so it looks at, "Does the organisation that has been subject to the audit have the right processes in place in order to ensure that it is getting the right value for money in its products and services that it brings in?" One may wish to look at that to see whether it needs to be enhanced in any way.

Q393 Heather Wheeler: I am interested in this-the Bill is there and the Audit Commission has gone. There is a bit of a tail of work. There are still some existing contracts. Who will be responsible for overseeing those contracts, post 2015? Has that been sorted out?

Paul George: I do not believe that it has.

Q394 Heather Wheeler: Perhaps that needs to be stated somewhere.

Vernon Soare: The five-year plus contract that has been let under the current regime. The issue of timing is that there will have to be an agreement-a cut-off point between when the Commission ceases doing the quality assurance work and when it passes to bodies such as ICAEW or others who may wish to enter into this sphere and the FRC. We are in discussion with the DCLG about where the cut-off will be. There should be no hiatus between the two.

Q395 Heather Wheeler: So does that need to be a statutory instrument, an advisory note or something in the Bill?

Vernon Soare: I could not advise on the exact mechanism, but yes, it needs to be done.

Q396 Ian Swales: May I move on to the question of independence and the proposals in the Bill for independent auditor panels? Can we hear what you feel about that? Clearly, it is important that the auditors are independent, but does the Bill adequately cover that?

Steve Freer: This is another area of significant difficulty. We go back to the principles of public audit with which you are familiar. Again, I know that they were mentioned in the Select Committee. The first one is about independence of public sector auditors from the organisations being audited. The legislation, as it currently stands, feels like a very awkward attempt to achieve that level of independence around the appointment within the new framework. I have yet to meet anyone who is enthusiastic about it. I apologise; I did read the evidence and I think that Birmingham city council seemed to be reasonably comfortable with it. The majority of public bodies do not feel that audit appointment panels are the appropriate way-

Q397 Ian Swales: So awkward in what way, and what better proposals are people coming up with?

Steve Freer: Awkward in the sense that there does not seem to be an enthusiasm for these panels from the audited bodies. I think there are significant concerns among those bodies about whether they will be able to attract people to serve on these groups. There are also potentially questions about whether, if we put all this in place, it will really be independent in an effective way.

Regarding alternative proposals, it depends on whether we are working within the constraint that the Audit Commission must be abolished.

Q398 Ian Swales: Let us start with that as an assumption. We are working on the basis that we have a Bill that will go through, and we are trying to make it better through this process.

Steve Freer: If that is the constraint, and there is no room for a residual national body to pick up some of these functions, the better bet would probably be for the role of audit committees within the public bodies concerned to be re-engineered to address this responsibility.

Q399 Ian Swales: Audit committees within the bodies might involve elected representatives, for example. Are you talking about the type of audit committees that exist in local authorities now? You would, say, have them appoint the auditors?

Steve Freer: Essentially I think it is about reviewing those committees. There probably is space for elected representatives. There is almost certainly a requirement for independent members to be in a majority and for independent chairs to be appointed.

Q400 Ian Swales: But you also feel that one proposal would be to retain some kind of body? We have had the joke in the Committee before that we might retain something, but we could not call it the Audit Commission. That is one live proposal.

Vernon Soare: This is only an issue in the local government sector. The health sector has been working with audit committees and independent audit committees for many years, particularly as their accounting and auditing arrangements are similar to those in the private sector.

The awkwardness in the local government sector-I say this from my days as a local government auditor and having worked in local authorities in the now dim and distant past-is that it cuts across the political environment. Let’s face it: elected members have a mandate, and an independent audit committee does not sit easily in that structure. That is the point.

The independent auditor panel could work. On the issue about finding the necessary people, I remember when audit committees were brought into the health sector, a lot of people said, "You would not find the people." Actually, the people came forward. I am not saying that it is easy, but I think that could be overcome.

The potential problem of having an independent auditor panel and an audit committee, as well as a full council-I come back to this issue-is that it may work when everything is going fine, but when you get to the point where things are not going so well, you have the auditor, the independent auditor panel, the audit committee and the full council. I think it is too many, and I would agree with Steve that you should perhaps try to focus it on one committee or one panel, if that means putting the audit committee on a statutory basis, which it is not currently in local government, to reduce the kind of noise that could happen in those situations. You want only one focal point for the audit appointment and dealing with audit matters in the authority.

Q401 Ian Swales: I have two quick follow-up comments. You made one important point that I think we need to bear in mind as a Committee, which is whatever mechanisms we come up with, they need to be fire-proofed and tested against worst-case scenarios, and I think you have made that point in an interesting way.

The other point that strikes me is smaller bodies. We are not talking about just local authorities here. I am not sure that the proposals will work well for academies.

Q402 Heather Wheeler: I am just interested that you say that there is an independent audit committee for trust hospitals or whatever they are. Bearing in mind that we are talking about a locality, surely to goodness, why do we not give them twice the job? Why do we not get them, immediately then, to become the independent audit for the local council? Then it is job done, and you do not have to go through all this angst that everyone is going on about. Why do people not perhaps take that as a view, that they could go across that as well?

Paul George: I was just trying to check, but it was my recollection that there was provision that, if appropriate, the audit committee could take on the functions of the independent auditor appointment.

Vernon Soare: My point is about sharing across public bodies. In some senses, there is no reason why it could not be similar, or the same, people. Obviously there would be a legal, confidentiality issue around it, but I would suggest that the people with the skills, as you intimate, are likely to present themselves as audit committee members in any local government audit committee situation.

Q403 Heather Wheeler: In effect, the evidence that you have given us today, to my knowledge, is the first time we have heard about these other committees. In all the evidence we have received so far, everybody has thrown their hands up in the air, saying, "This won’t work. It’s bureaucratic. We won’t be able to find the people." Actually, apparently, they are already there.

Paul George: I think there would be a challenge, in fact. The bodies mentioned are much smaller bodies. The larger bodies will not have any difficulty in finding appropriate people. When you move down the scale quite so considerably-

Q404 Heather Wheeler: You’ve got one hospital in one area; you’ve got one council in one area; you have an audit committee for the hospital: why can’t that audit committee do it for the council?

Chair: And for the schools?

Ian Swales: We have to test all of this at the boundary, don’t we? We have to test if this works for the smallest organisation we can think of.

Q405 Chair: Before I bring Clive in, may I just ask, do we need this national list of appointable auditors?

Gillian Fawcett: I am going to attempt to clarify this national list. It is all about governance and accountability at the departmental level-at the accounting officer level. The DCLG issues substantial amounts of money to local government. The accounting officer at the end of the year has to sign a governance statement that basically says that he is assured that there is sound financial management for that money spent, that there is value for money, that there are good internal controls and procedures in place. He or she has to have that assurance before they sign that statement. What the Audit Commission have produced, in the past, was a statement that would give that accounting officer the assurance that public money has been well spent. Within that statement, you would have information such as all local authorities that appointed their auditors; all local authorities that produced their financial accounts; most local authorities had a clean opinion, with no qualifications. Where authorities had significant qualifications, that information would go back to the centre.

Also, one of the big national initiatives for change in financial accounting across public services has been a change relating to financial reporting to IFRS. Now, that has to be driven and co-ordinated across all public bodies. So the information coming back to that accounting officer is telling him or her that that has been implemented, and has been implemented well, so that accounting officer can then sign the governance statement, or assurance statement, which will then lead to accountability to Parliament. It is not just about a list of who audits whom, or whatever; it is actually an important part of the governance arrangements for public money.

Chair: That is very helpful. Thank you.

Q406 Mr Betts: When Ministers first announced their intention to abolish the Audit Commission, and hadn’t quite got as far as thinking about what was going to replace it, it was going to save lots of public money. Is it your view that that is still the case?

Vernon Soare: There have been some savings realised, through, for example, the demise of the in-house audit practice and the final salary pension scheme. People have now gone to firms where they won’t be in that situation. The issue that has been uppermost in people’s minds is ongoing: will there be savings from audit fees? This is potentially what you are driving at here. From our point of view, though firms will obviously have their own point of view, the answer at the moment is that, actually, nobody knows, because this is going to be a new market. Up to this point, the Audit Commission have acted as somewhat of an economic regulator, and firms, in bidding for work, have had to take fairly attractive audits and not so attractive audits, and have had them as a package. Under the new system, depending on how authorities and trusts decide to procure, firms will be able to decide whether they want to take a particular audit or not. Probably-and this is purely surmising-what you may find is significant competition for the very large, major audits that Paul referred to. They may get a benefit, as the fee may come down, as happens in the private sector. The issue is for the smaller bodies. On that analysis some of them might find their normal audit fee going up because the firms will have to take on audits that in the past they would have taken on as part of a package but are now taking on individually.

Paul George: I agree.

Q407 Chair: There is obviously a relationship between audit fee and outcomes. If the pressure is to push the audit fee down, what do you think that will mean in terms of quality? Is there a quality impact? Paul George, go on, this is for you.

Paul George: This has been something we have been concerned about in the private sector. There is quite a lot of risk to audit quality at the moment as a result of considerable fee pressure. The role we play is a counter-balance to that. We are not an economic regulator but what we do is ensure that the auditor does not short-change in undertaking the work required. We look at things after the event and that provides some safeguard. Clearly there is a risk: if you drive prices down too low, you will not get the same quality of work.

Q408 Mr Betts: How will you stop that from happening?

Paul George: The only way we can stop that from happening is to hold the firms to account, either through reporting on the quality of their work or through the disciplinary arrangements, if the auditors do not do what they are required to do.

Q409 Mr Betts: Isn’t there a danger, going back to what Vernon just said, of smaller organisations probably having their fees pushed up? They are having their budgets squeezed. They are going to be saying, "I wonder where we can cut this pressure on the audit fees and push them the other way. What can we cut out? What can we reduce? What are we asking the auditor to do?" Isn’t that a particular danger for smaller firms, as they may see their fees starting to rise? How will you stop it?

Paul George: As I said, the only way we can stop it is through the quality of our review work. As it happens, the review at the bottom end of the smaller authorities will not fall to the FRC, but the principle is the same. If there is a reasonable chance that you will be selected for inspection, so that somebody will assess whether you have done adequate audit work in comparison to the standards, that is a good incentive to ensure that you do not short-change in the work you do. It is a matter of judgment and it is very difficult, particularly when you are doing it on a sample basis and after the event.

Gillian Fawcett: On the small audits there is actually what they called a limited assurance audit that is carried out. The problem I can see with that is that they have applied the small companies’ threshold of £6.5 million, so any small organisation below that gets a limited assurance audit. That should help to limit the fees. The problem is that the European Parliament is apparently considering uplifting that threshold to €10 million, which would mean a substantial number of small councils falling below that threshold and receiving a limited assurance audit.

Just to throw something into the mix. If you look at the number of public interest reports that come out, they tend to come from the small audits for small councils. If you looked at 2010-11, there are 68 public interest reports. You are basically squeezing it so much that you are not carrying out a wholly effective audit.

Q410 Mr Betts: So will we see the public interest reports go down because nobody is doing them?

Gillian Fawcett: Potentially.

Vernon Soare: Can I just say that the audit firms will be thinking very much about their professional and ethical obligations as well as their reputations? It is not inconceivable that if, for example, they put in a particular proposal for an audit fee, the small body says, "Well, we are going to pay you less." They could say, "Well, we won’t do the audit work, then." That is a scenario.

Q411 Chair: Who should be paying for this? How would you resolve this? You haven’t got the Audit Commission, you have got the new Bill, and you are going to have the new arrangements. Taking your point, Vernon, that we have to think about these exceptional situations, how do you resolve this? What is your answer to it all?

Vernon Soare: I think there is a provision in the draft Bill that, if an authority fails to appoint an auditor, the Secretary of State could order or appoint one. I do not think from the way I read it-I may have misread it-that it quite gets to the situation where no audit firm wishes to do the audit. At that point, I do not think the Bill has anything to say.

Paul George: I was just going to add one point. On the overall fee position, I think that what nobody can yet predict is whether the reduction in fees that is likely in the larger entities will more than compensate for the increase in fees. The problem with the cross-subsidisation of the market as a whole is that it will be a great challenge on the small authorities.

Q412 Ian Swales: On the theme of testing this against real cases, let us take the case of an academy school-I am not making this case up, by the way-that has a friendly auditor. Fairly significant fraud takes place inside the academy that is not picked up by the auditor; in the end, it is a whistleblower who raises the case. I am particularly struck by what Gillian said about the fact that the majority of public interest reports are actually in smaller bodies, not bigger ones; this would be an example. Under the new circumstances, how do you see the arrangements working in a case like that in terms of the appointment, the work required to deal with the situation and who would pay for it? Just walking through that will highlight some of the issues that we have been talking about. I do not know who would like to have a go at that. Steve?

Steve Freer: I can certainly start to walk through it. I think the auditor must have the freedom to pursue the line of investigation. There should not be any obstacles that can be put in the way of that. It seems to me that the auditor must have the right to be paid for the work that he or she needs to carry out, and it seems to me that there ought to be a straightforwardness about that leading to a public interest report. Again, there should not be fences that have to be jumped over to seek approval to publish.

Q413 Ian Swales: I think we touched on this briefly earlier, but let us just try to wrestle it to the ground. What about the issue of fees in a case like that? The auditor hits this issue. He or she has already agreed the audit fee and sees there is more work to do. As the Bill operates, am I right in saying that we would be expecting the audited body to pay these extra fees? Would there have to be a negotiation? That does not seem right, does it?

Vernon Soare: It is the auditor body, on the recommendation of the independent auditor panel, that would look at the circumstances. That is the way I understand it works.

Q414 Ian Swales: This is more a question for the Chair. Do we need to start thinking about some contingency fund or arrangements that apply in cases where the investigation, in the end, may be completely disproportionate to the organisation’s ability to pay?

Chair: We have talked in previous sessions about the Westminster case, which cost millions. Hopefully it is an exception, but nevertheless, without the backing of the Audit Commission to pick up the bill, would it ever have happened?

Vernon Soare: Pragmatically, some sort of provision held centrally for that issue may be the way forward. On the other hand, the dictates of localism may point in a different direction. You can see some electors in other areas saying, "Why have I been paying for what’s been going on over there?" But I think pragmatically, I am making a different point.

Q415 Heather Wheeler: We have really picked up on this issue of the whistleblower. It is very interesting to hear the example of the academy. Do you think that the Bill is strong enough in assisting whistleblowers? Particularly if it is now so obviously a private company doing the audit, would a whistleblower feel comfortable going to the auditors rather than straight to the Audit Commission or something like that? I put it out there as a question, not because I believe it.

Steve Freer: I think it is important that the whistleblowing arrangements are rewired into the new arrangements. Although whistleblowing to the auditor is not the only route, it is a very important route that needs to be kept open. I suspect that there may be some people who would be more comfortable phoning the Audit Commission than phoning a firm; there might be some the other way. It is important to reiterate that there are other routes available, but I repeat that I think it is very important to make sure that that one is securely woven into the overall arrangements.

Chair: Good. That was a very interesting session. I am grateful for your brains and for your thoughts on the issue. Hopefully, we can come up with a Report that improves on the proposals.

Examination of Witnesses

Witnesses: Gareth Davies, Partner Mazars LLP, Sarah Howard, Head of Public Sector Assurance, Grant Thornton LLP and Paul Woolston, Assurance Partner, PwC gave evidence.

Q416 Chair: Welcome. Were you all present at the previous session? You were, so you know what we are about and what we are trying to establish. Clive has gone. Clive and I are old enough to remember pre-Audit Commission days in local government. I was a leader and I remember having regular meetings with my auditor during difficult times. It feels to me a little like a circle and that we are going back now to having auditors appointed by local authorities one way or another, however independent the audit body is in the end. I am interested to hear from you how, in that context, you are going to be able to retain true independence in the public interest and what powers you think you should have, or if you think you need any strengthening of what is in the legislation to ensure that.

A lot of us on this Committee come from the Public Accounts Committee. We assiduously follow the taxpayer’s pound, and we want to be able to do so in the new arrangements. We have some concerns that you may be sucked into the authorities that pay your bill; that you will not be able to do public interest reports, or you will be less likely to; and that the experience so far-I accept it is early days-of foundation trusts suggests a reticence to act in the taxpayer’s interest in the way that has happened under the Audit Commission. Who wants to start on that?

Paul Woolston: There are two questions: one about the independence and one about public interest reports.

All our work is enshrined in being independent. If you lose that, you kind of lose everything, so our internal systems and our training mean that our people are trained to be sceptical about what they hear. They have to be independent. I do not really see it as being that much different in the new regime from how it is now, so we have to be independent.

Q417 Chair: Except that they employ you, in one way or another. Thinking of my own authority, which is 100% Labour, you can have whatever sort of audit committee you like, but I have seen it-

Mr Bacon: Strong leader there.

Chair: It is not me, thank God. This is Barking and Dagenham. It is 100% Labour, and when I look at their scrutiny arrangements, even I am extremely sceptical about how independent they currently are. I can see the leadership controlling the audit appointment. I do not think that that will sound so unusual to those of us sitting around the table.

Paul Woolston: I think we would have to be even more independent then. We would have to take that stand. On public interest reports, my view is that they are relatively blunt instruments, which quite often take a long time to produce. Earlier on you were asking about foundation trusts. As an auditor, you actually have a means there to deal with the issue promptly, through the audit committee, the board or the board of governors. Fortunately, I have not had any that are in that kind of difficulty, but the public interest reports that I have been involved with take an awful long time to produce and have been a bit too late. So I am not a big fan of public interest reporting for drawing attention to something and/or being able to deal with difficult situations. I would rather be able to deal in real time.

Sarah Howard: Independence is absolutely fundamental from a number of perspectives. It is crucial in terms of supporting local democracy and protecting councillors and officers, and it is critical in terms of giving assurance to local electors. Particularly in a period of decentralisation and localism, the independence of the auditor is paramount.

Q418 Chair: We all agree with that; I do not think that anyone would disagree that that is where we want to be. Our concern is that, in the new regime, rather than you being appointed and allocated work through the Audit Commission, which enshrines your independence and is a good way of doing so, you will be appointed in some way or another by the local authority. Under those new arrangements, how can you enshrine that absolutely essential independence that we all think is hugely important?

Sarah Howard: Absolutely. That is important from our perspective to being able to act totally independently, and also from the council’s perspective and the councillor’s perspective.

Q419 Chair: Okay, but how? How, how, how?

Sarah Howard: Our view is that that is best served by some form of procurement and appointments body, whether that is national or regional, with local authority-

Q420 Chair: So you would rather have a national body. I think one of our witnesses said last week that it could almost be a little residual body doing the appointments.

Sarah Howard: You referred to that earlier, and I think it is similar to the proposal for the local councils-the small bodies-that takes the concept of the auditor panel to its logical conclusion, which is for that to be efficient and effective, and potentially to deliver savings through national procurement. In effect, you would take that to a regional or national level. But it is critical to view this from the elector’s point of view and the councillor’s point of view, because it is fundamentally important for councillors to have that protection so that they are able to say, "My auditor is completely independent." Certainly in our experience that is what local electors want assurance over too.

Q421 Ian Swales: Can we just explore this once again at the boundaries? So, if something goes wrong, the electors kick out all the councillors. What happens to the auditors? What sanctions should we have? I am talking about something going seriously wrong, as we have seen in some private sector situations. What should happen, and what do you think the Bill says about sanctions? I am not suggesting that we need something to keep you honest, but I presume you understand why I am asking the question.

Sarah Howard: In relation to public interest-

Q422 Ian Swales: In the case where something goes seriously wrong, we have got people who are democratically accountable; we have got officers who, I suppose, have their careers on the line. What about the auditors-what should the sanctions be, and what should happen?

Gareth Davies: It could be that the auditor has detected the problem and brought it to light, and that is the trigger for the electorate taking control. Otherwise, it is a case of audit failure as well.

Q423 Ian Swales: That is my question. The first bit is the good story and the second bit is what the question was really about. Either because the auditors were too close or just because they had not done their work properly, they missed a lot.

Gareth Davies: The Bill provides the mechanism, using the FRC and the supervisory bodies that you have been hearing from. So in that situation, where there was a prima facie case of audit failure, I am sure that there would be an investigation-just as there would be in the private sector and just as the Audit Commission currently does in public sector audit-to get to the bottom of whether the auditor should have behaved differently.

Q424 Ian Swales: But are the new arrangements strong enough? I think it is in the interests of the profession that the new arrangements are strong enough to protect it.

Gareth Davies: That was the point that I was going to add to Paul’s and Sarah’s. Your earlier discussion with the previous witnesses about the difficult cases would be my answer to your question about whether this is an adequate protection of the independence of auditors. In 95% of all of our audits, the kind of up-to-date conversations that Paul was describing are the way in which you resolve issues, and it works well. But it is in those hard cases where this is going to be tested. In that case, I do not think that the Bill adequately protects the position of the auditor.

Q425 Chair: So what would you put in?

Gareth Davies: You have already heard one point, which was the-

Chair: Independent appointment.

Gareth Davies: Well, essentially, I think there needs to be a choice now. Either we go for local appointment, in which case the audit committee of the body, suitably beefed-up, carries out that role, or we stay with a remote, central appointment.

Q426 Chair: What do you prefer?

Gareth Davies: There is a balance here. For independence, it is stronger to have central appointment, but in competitive market and local choice, it is clearly better to have local appointment. That is the policy choice that is being made here. I do not think that we should pretend that it does not put greater pressure on auditor independence; it puts the auditor in a more exposed position-particularly as currently drafted-when things get very difficult, but I think that it is likely to lead to a more competitive market and possibly lower overall fees.

Q427 Chair: Can you just expand on "as currently drafted". So-

Gareth Davies: In the Bill?

Chair: Yes, go on.

Gareth Davies: As you have already heard, from Steve Freer, the Bill-

Chair: The nature of the audit.

Gareth Davies: Yes, but the Bill also needs to be much clearer about how the auditor’s costs will be reimbursed if we get into one of these special cases. They are rare, but they do happen. At the moment, you can see that it says, essentially, that the auditor may charge the audited body for the cost of the work. Well-

Q428 Chair: Just out of interest, I do not want to name and shame, but do you any of you audit a foundation trust that is in financial difficulties at present?

Sarah Howard: We both audit foundation trusts.

Q429 Chair: Are they in financial difficulties?

Paul Woolston: I personally do not have any but, back to Ian’s point, actually, if you look at any foundation trust at the moment, with the demise of PCTs and the advent of CCGs, you would be concerned about their income, going forward. You are alive to that all the time.

Q430 Chair: I will help you on this, because we are looking at it all the time. There are 20 that are in real financial difficulties. There is the £20 billion of cuts that they have got to find, so they are all going to be-okay, transition creates a bit of a hiccup and I accept that, but I do not take that overly seriously because the reality is that it will be the same people turning up in a new organisation. But, undoubtedly the financial pressure on trusts is growing and in the past, when it was all one big family, you robbed Peter to pay Paul. That is no longer going to happen.

Heather Wheeler: That is how they got in the mess in the first place.

Chair: That may be right, but that was there, so there was always an underpinning that way.

Sarah Howard: On that point, Chair, I think it is worth emphasising that we spoke a lot about public interest reports, which are sort of the extreme form of formal reporting. Auditors report in many other ways, routinely, in public, to their audited bodies. Annual reports go to councils, hospitals and other bodies which are made public and can often be very critical, so the public interest report is an extreme of that. The other point to make in relation specifically to foundation trusts is that Monitor, as I think you will have seen in your earlier evidence session, is a highly effective regulator. It is actually very good, in its own monitoring, at identifying and reporting publicly those matters.

Q431 Chair: I hear that, but it is you-you are pretty keen on this landscape.

Sarah Howard: Pardon?

Chair: You are pretty keen. I accept that about Monitor, but we do not want Monitor simply to replicate what you do. This is all testing your independence and testing, in the new landscape, whether there will be a genuine, real intervention, where needed.

Paul Woolston: In some respects, I think it is easier with those extreme cases of financial difficulties, because we would be wanting to draw that to the attention of management as early as possible, and to gauge their reaction to the situation. We would be on top of that all the time-reporting it to the audit committee and to the board-and we would probably increase our level of reporting in those circumstances.

Q432 Ian Swales: To ask that question a slightly different way, should we be concerned about, if you like, the fragmentation of this? I am thinking about my local council, which the Audit Commission has recently said is running up the biggest debts in the country in proportion to its size. That sounds like a simple statement, but if they were not talking to each other, it could not make that statement. If it was not the Audit Commission but a local firm down the road, it would have had absolutely no way of knowing. Are you satisfied that, in this public interest area and so on, your organisations will have the mechanisms to do the kind of commentary and assessment that the Audit Commission is doing now?

Sarah Howard: That is a really important point. Fragmentation and co-ordination are themes that have come through the various evidence sessions. How can we ensure that in the draft Bill? There does appear to be a gap there; that is a risk. One of the benefits of some form of national or regional procurement body is that it could fulfil some of those other functions and help address some of the other risks.

Q433 Ian Swales: My last point is the obvious one about the going concern of a foundation trust, for example. If we have different firms in different localities doing different work, it is highly likely that we will not get exactly the same opinion about a similar situation, because they will take a different view, whereas now we would be more likely to get a similar opinion, I think.

Gareth Davies: An issue such as a going concern is very well covered by auditing standards. It is probably less likely that you would get inconsistency of approach there; it is more of a problem when it comes to issues such as benchmarking and value for money. That is not something that you can do as the auditor of an individual body on its own; you need a scale to make sensible comparisons.

Q434 Ian Swales: Will your firms be putting something in place between yourselves? Is that something that you talk about, or are you all just expecting to have separate local practices?

Gareth Davies: Well, of course, we are competing with each other. That is a stronger dynamic in the new framework than it has been in the Audit Commission framework, where there was a more collegiate set-up. The truth of it is that we will do that if we think that there is an advantage to us in doing so as individual firms. Part of the offer of individual firms will be, "We can offer you a good benchmarking service as part of our audit, because of our coverage."

Q435 Mr Bacon: Paul Woolston, you said that the new regime could actually lead to an increase in reporting and hasten the bringing to management’s attention of relevant matters by the auditor, whereas you, Gareth Davies, said, "We shouldn’t pretend that it doesn’t put greater pressure on the independence of the auditors." They both sound very plausible, but they cannot both be true. Can they and, if so, how?

Paul Woolston: I think they can. Our starting point would have to be that we are independent; that is why we are drawing these matters to the attention of management.

Q436 Mr Bacon: Gareth Davies, do you agree with that?

Gareth Davies: I agree that you do not survive very long, as a firm of this kind, if you do not demonstrate your independence in everything you do. The real difficulty is the broad scope of public audit. If this was just about the opinion on the accounts, all the mechanisms you have heard about to ensure quality and independence are solid, well established across all sectors and will work. It is the value for money, governance and probity areas that auditing standards do not cover. There are no generally accepted international standards around those areas of the audit. They are not dealt with in the private sector in anything like the same way.

Q437 Mr Bacon: So you mean that if you err, you would err not on the side of caution, but on the side of flagging things up.

Gareth Davies: We would all say, coming from reputable firms, that we would always do the right thing in any situation. However, having been in those situations, I am aware that when issuing difficult reports to extremely reluctant councils, councillors and managers in the rare cases that it is necessary, to know that the Audit Commission is standing behind you is extremely powerful.

Q438 Mr Bacon: If I can tease that out, you are saying that in this new world you might be even more willing. I think you said that it could actually lead to an increase in reporting. Why do you think that is the case?

Paul Woolston: I was comparing it to public interest reports. I think it is much better to report early to management than to wait for a public interest report to be published. In that sense, it might encourage people to raise matters a bit earlier.

Q439 Mr Bacon: But do you feel, like Mr Davies, that the auditor is in a somewhat weakened position knowing that they have not got the Audit Commission standing behind them-or would not have in the future-in the way that he describes?

Paul Woolston: I do not feel that it makes that much difference to me, to be honest.

Q440 Mr Bacon: If you are in the middle of an audit, and you are thinking of flagging something up, is there, in the back of your mind, the thought that if this all goes horribly wrong and there is an inquiry and all the documentation and the emails come out, you want to be able to show that you professionally did the right thing? Is that always ticking around in the back of the auditor’s mind?

Paul Woolston: Absolutely. Our internal systems would look to flag that up as well. Even if there is not a financial problem, you would have had to have been doing the right thing because it is monitored to such a degree.

Q441 Mr Bacon: I have just one more question for Sarah Howard. You have described the other tasks for a national body, if there were one. Do you think that it is going to be possible to do the right amount of benchmarking, measuring and comparison that is required in the new audit regime? Given what is currently proposed, what might you see as a way forward if you do not think that there is sufficient scope at the moment.

Sarah Howard: That is a really important area. It is twofold. One is benchmarking and comparative data that could be provided from a number of sources, including from the sector itself. I know that in your discussion with the LGA, they talked about some tools they have available, for example. Partly, it is about comparative data that could come from a number of sources. Some of that has been provided in the past by the Commission, like the value for money profile tools and so on, but that would not necessarily need to come through the audit base. That is one thing. In addition to that, there is the useful information that can be collated from the output of the audits. Again, I think you had some useful discussions with the Audit Commission on that.

Q442 Mr Bacon: But if they are not there, who is going to do it?

Sarah Howard: Exactly.

Q443 Mr Bacon: Is it necessary to have some unit of this kind doing that at the centre, or-I am agnostic about this-are these tasks which could or should be taken on collaboratively by a body like the LGA?

Sarah Howard: Potentially. It comes back to questions such as, "Do we need a list of auditors?" Well, probably yes, if the National Audit Office or anybody else wants to try to collate some of the information that through your discussion you agreed would be useful. Certainly, locally, working with local authorities, they do find it useful. Those who are performing well and are competitive want to know that they are at the top.

Q444 Chair: I am a little worried about all this. You have said as well, Gareth, that we can offer data that allow you value for money. The National Audit Office is going to have the duty to do VFM reports, even though it is a small number. How on earth is it going to be able to collate the very different data? How are you going to relate to it? What you might think is important in Yorkshire will be different from what you think is important elsewhere. London will be very, very different from-

Mr Betts: The Audit Commission has struggled with these allegations that you get inconsistency of data.

Gareth Davies: It will only happen if somebody is prepared to take the lead and specify that it would be useful for something to be known nationally, for whatever reason, so it should be collected on a consistent basis.

Q445 Chair: But they will not know that it is useful to know nationally until they know it, if you see what I mean.

It is only when you have got the good data that you are able to say, "Ah, there is something there that we ought to"-

Gareth Davies: If you are dipping into a sample, as presumably the NAO will to carry out its studies, it is possible to say, "We are seeing two or three different things here. It would be useful to know what the national picture is on this." So it could be triggered by some of the work that is envisaged.

Paul Woolston: Audit bodies themselves instigate benchmarking exercises. They can even compare one with another, or with a group. The other thing I would say is that increasingly the public sector is interested in benchmarking itself with the private sector. So I think that benchmarking is a very wide area, and typically it is done best where the local authorities get themselves together and seek to benchmark.

Q446 Chair: But PWC will decide that benchmarking on one issue is important in one way, Grant Thornton will do another in another way and Mazars will do it in a third way. At the moment you have at least got the Audit Commission telling you, "You have got to do it like this, guys," and you set about it. We know from the NAO that they will not have a big capacity, so they will be very dependent on the data they get from you.

Paul Woolston: It is some time since we have done some real benchmarking exercises with the Audit Commission.

Q447 Chair: What does that mean? That sounds like a real loaded statement.

Paul Woolston: The sort of benchmarking exercises that were carried out early on in the life of the Audit Commission-we have tended not to do that recently.

Q448 Chair: What does that mean? Sorry, I am literally ignorant as to what that means.

Paul Woolston: It would be wrong to assume that we are doing a lot of benchmarking at the moment because of the Audit Commission being here over the past few years.

Heather Wheeler: In effect, you use the AGA tool or you use APSE, or that sort of thing. You would not do it through this.

Q449 Mr Betts: Back to this overarching body of some kind, there are two issues. One is about procurement, where particularly for smaller authorities there probably will be some benefit in having that. That is what the evidence has been, I think. It may well be that joint procurement will happen anyway; even under the terms of the Bill you can see the LGA or somebody else starting to pull this together. But it is not purely about benchmarking as an overview or somebody looking down from the top; it is about using the information gained in audit to help form a national picture where things are happening across the board. Presumably, there is a real problem about drawing together things under the Bill, because each auditor will have a confidential arrangement with their council, won’t they? It will not be quite as simple as wanting to share information that you may gain with anybody. Isn’t that going to be a real problem?

Gareth Davies: As Sarah said earlier, quite a lot of the product of the audit-the annual letter to the governing body of the organisation-will be in the public domain. That needs to contain anything significant coming out of the audit, because clearly it is the main vehicle for reporting the findings. What it will not have is detailed cost information and that kind of data. It would be possible to trawl the annual letters from every auditor and identify the extent of financial stress for a particular sector, judging by auditors’ reports.

Q450 Mr Betts: Could that possibly work as well as the current arrangements do in that regard?

Sarah Howard: It would be difficult without some form of national co-ordination to pull together the results of audits across the country, whether that is in terms of timeliness of preparation of accounts, whether the accounts have been audited, the outcome of the audit or how well, for example, local authorities are dealing with a particular issue-those sorts of things. That is useful information to local authorities, but it would need to be co-ordinated and you would need a national list. That is where some of those administrative functions could usefully be performed if there was some sort of national procurement body.

Q451 Mr Betts: Can I raise two other issues? One is the fragmentation of responsibility. It is not merely the auditor panel or the audit committee, but at national level. I think I could probably explain fairly easily to someone what happens now and who is responsible, but I have had to go back and read the report several times-I have had a look at it a few times now with the Select Committee Report before-and trying to work out which body or which set of initials does this, that or the other confuses me. Is it likely to be a confusion that carries on for people working in this field generally? Have you got concerns about that?

Gareth Davies: There is a risk of that. What it is lacking at the moment is a clear co-ordination of the whole system.

Q452 Chair: Who should do that? The same old body?

Gareth Davies: Not necessarily, because obviously it is not going to be there. There is possibly a role for the National Audit Office in convening something. As audit firms in this market, we are going to have to interact with: the NAO; the FRC, which we obviously already do, but in a new area of work and on a wider scope of audit; and our supervisory bodies, whichever institute it is, rather than just the one organisation now. Not only for our personal convenience, but, probably more importantly-who is detecting the messages emerging from this regime as it develops? Which issues are auditors dealing with more or less successfully? Does that mean the guidance or the code of practice need to be tweaked? How is that going to happen if there are a lot of bilateral relationships in the new set up?

Q453 Chair: We had that interesting exchange between the FRC and CIPFA. Where do you guys stand on that argument?

Paul Woolston: Which in particular?

Q454 Chair: The FRC said, "We do this work at the moment. It’s just a little more of the same. It’s not that hard. We can do it."-I hope that I am not doing them an injustice. CIPFA said, "Actually, public sector audit is very different."

Mr Betts: It is the point that Gareth Davies made.

Q455 Chair: Where do you stand on that?

Paul Woolston: I think that it is still unclear actually. In terms of the Bill, it would be much better if it is clearer.

Q456 Chair: What is clearer? The scope?

Paul Woolston: The scope and relationship-who does what-should be much clearer about which role the FRC is taking. The notion of reflecting the different nature of public services audit.

Q457 Mr Betts: Should that be a requirement in the Bill to direct the FRC in that direction?

Paul Woolston: Yes, I think that would be helpful. What you are alluding to is that Marcine Waterman at the Audit Commission can at the moment bring us all together and we can discuss these things about emerging trends. It may be that because we have different bodies together, having a small unit like that-currently called the Audit Commission-may be useful, because it is able to bring the various bodies together as a co-ordinating organisation.

Q458 Mr Bacon: We obviously cannot call it the Audit Commission-we had this discussion already with other witnesses-because it would be insufficient saving of face, we have to find a new name. Have you any suggestions for what we could call it?

Paul Woolston: A name? No, I have not.

Chair: We will leave that to Michael Heseltine. Do you want to comment on that in any way, Sarah?

Sarah Howard: In relation to the quality monitoring, that is not an area of great concern in the Bill. There are other areas of risk that we have touched on. The FRC currently does quality monitoring of public sector audit work. As Steve said, currently public sector audit work is unique. There is the wider scope. It would need some gearing up to become familiar with that wider scope. That would not be an area of real concern.

Gareth Davies: I share Steve’s broad point that this wider scope is quite an important issue for quality monitoring. Monitoring is very hard on the basis of a file review; the FRC model is of a very detailed file review to check that you have given the right opinion on the accounts. That works well for the opinion on the accounts, because it is international standards of auditing and so on. It is much harder to do a file review and say, "Should the auditor have said more about the governance arrangements of this local authority or have said something about value for money?" That is not going to leap out at you from standardised audit tests in the same way. I just think it needs more work and more thought on how we are going to ensure a basic level of consistency on that wider part of the audit.

Q459 Ian Swales: Whistleblowing is obviously a key part of the control system in an organisation. Can you say something about how you in future would see working with any whistleblowers and what protections might be needed in the Bill? At the moment, clearly a whistleblower has the Audit Commission, which they would see as independent, public and as people that they can talk to. They might be more reluctant to approach what they might see as a commercial firm that is very closely connected to the organisation they work for. Can you say something about that? I think that it is vital that we make that side of things work, possibly better than it does now.

Gareth Davies: Actually, I think it works quite well now. The auditor at the moment is identified as a person to whom whistleblowing disclosures can be made, and that includes auditors from the firms, as well as, until last month, the commission’s in-house auditors. I think that works quite well. I have not encountered examples of people resisting the fact that it is a private firm that they need to make that disclosure to. I think that is one bit where the current arrangements can essentially roll forward reasonably straightforwardly.

Sarah Howard: Yes, I agree.

Paul Woolston: If it helps, I spoke to a whistleblower last week, or they spoke to me, and they did not have a problem speaking to someone from the firm. Often, the relationship in terms of how you deal with a whistleblower is embodied in the terms of reference for an audit committee, and is often referred through internal audit first, but there is a resort to come to the external auditor as well.

Q460 Ian Swales: I have two supplementaries. First, should we make sure that the routes to do that are absolutely clear to everyone? Secondly, the Bill is largely silent on whistleblowing, even though it is a key part of the control structure, so do we need anything in the Bill about, for example, protection or anonymity of whistleblowers? Do we need to say anything that is not being said?

Paul Woolston: My personal view is that it is not necessary to put it in the Bill, but to ensure that it is picked up in the Court of Audit practice, or in best practice in ordinary standards.

Q461 Ian Swales: Do you mean the organisational codes of practice?

Paul Woolston: Perhaps the code of audit practice that the NAO produces might have some reference to it.

Gareth Davies: Whistleblowers’ interests are protected by separate legislation. Public interest disclosure legislation governs that, and already applies when disclosure is made to the external auditor.

Ian Swales: Thank you.

Q462 Chair: One final thing. We are told the fees are going down in big authorities. I do not know what is happening in smaller authorities. Do you want to talk a little about how the pressure on fees will happen, and whether over time some authorities will gain and some will lose? Will you also comment on what you do when you do not want to do the work for a particular authority, for one reason or another, perhaps because Clive Betts or Margaret Hodge is the leader? You never know.

Sarah Howard: As a general opening comment, I think the strong national procurement has undoubtedly been effective.

Q463 Chair: That is really what you all want. Do you want that, Paul?

Sarah Howard: It is effective in-

Chair: Paul is pulling a face.

Sarah Howard: Cost and quality. That would be my opening statement. In the absence of the national procurement, I think you will see variation in fees among the plums and lemons as they have been called.

Q464 Mr Bacon: Can you tell us who the lemons are?

Sarah Howard: Well, perhaps the remote, smaller authorities. One of the benefits of the national procurement is that we are able to mix them up-the postage stamp effect. Overall, some may go up, and some may go down because there may be highly competitive situations in the large urban authorities. It is difficult to predict, but I think there will be pressure on fees in the absence of the large volume contracts and the huge discounts we are able to offer, the efficiency we benefit from in procurement costs, and some of the indemnities that we have talked about-the public interest issue. I think there will be pressure going forward.

<?oasys [pc10p0] ?>Paul Woolston: When there is an open market, I think the fees will come down across the board, including smaller organisations. That is my view. My team audits academies as well as a unitary authority. It is important for us to have a portfolio of clients, and I think there will be plenty of competition.

Q465 Mr Bacon: When you say it is important for you to have a portfolio, do you mean it is important when you are bidding for, say, an academy to show that you already audit some academies?

Paul Woolston: Yes, and for our people. We want a range of work.

Q466 Ian Swales: This happens to be a hobby-horse of mine, and I know that the Public Accounts Committee has this specific subject coming up this side of Christmas. How are you appointed to academies? Who appoints you, and who do you report to? How does it work at the moment?

Paul Woolston: I am not sure, it is not one of my accounts, but I understand that it is the governing body.

Q467 Ian Swales: In that case, the governing body is effectively the audit committee.

Paul Woolston: If it does not have an audit committee.

Q468 Ian Swales: We quickly run to the idea of big local authorities talking about this, but the Bill must apply to many different types of organisation. It is interesting. Do either of you know about academies?

Gareth Davies: The Bill will not apply to academies, as I understand it, because the Bill reflects the Audit Commission regime and academies are outside that regime.

Ian Swales: I can see the extension.

Chair: I am just having drawn to my attention-I had forgotten it-that in the accounts for academies as a whole in 2010-11, the NAO could not provide an opinion because a whole lot of key data were missing. There were inadequate arrangements and processes to provide assurance over any of the data supplied, missing data from a significant number of academies and low data quality issues with the returns. The NAO estimated that the academies submission omits assets totalling £4 billion. That is a bit scary. We will undoubtedly be critical in the PAC, but I would rather not be critical; I would rather get it right.

Q469 Heather Wheeler: I am interested, on the back of this, that having gone through this all this angst, we will have independent audit committees. I know that we are slightly getting ourselves mixed up with academies and otherwise, but, particularly on NHS things, have you guys been accused of not being independent enough or even being selected unfairly? How do you cope with accusations like that, or do you not recall ever having been accused of that?

Sarah Howard: The key difference in the NHS is that it is not political in the way that local government is. <?oasys [pc10p0] ?>The issue of independence is more complex in local government, because you are dealing with councillors and local electors. The audit committees in the NHS do have non-executive directors-independent people-on them. It is hard to compare, because currently local government is political and audit committees do not have that independent representation. For me, the key risks therefore are around local electors and their perception that the auditor is not independent and the difficult positions that councillors may put themselves in, because they will be open to that accusation. We deal a lot with local government electors who complain to the auditor about various things. I can assure you that independence is critical.

Q470 Mr Betts: It is perception as much as anything else.

Sarah Howard: Absolutely.

Q471 Heather Wheeler: At this point, I should declare that Grant Thornton does my council, and PWC does my hospital, so well done.

Mr Bacon: Questions will be asked in the House.

Q472 Chair: Gareth is looking for some business there. Looking through, we have covered most of the areas. Is there anything that you wanted to say about the legislation as it now stands that we have not given you the opportunity to put in evidence about?

Sarah Howard: Just to reiterate, Chair, if I may, the whole concept of the auditor panel, which we have not dwelt on, is a compromise between having an independent appointment or a fully effective audit committee. It feels like it is a compromise that does not meet either of those.

Q473 Mr Bacon: It is a bodge, is it?

Sarah Howard: For those reasons, there are complications with it.

Mr Bacon: Bodge reasons.

Sarah Howard: Finally, Chair, I am conscious that we have not spoken about small bodies. I do not want to go over the detail of that, but we have made some comments on that, and the NALC submission was very thoughtful and we would agree with its comments.

Chair: I think that it is a pretty straightforward issue.

Q474 Mr Betts: So you all agree on the idea that the panel has not been a good solution.

Gareth Davies: If we go for local appointment, let’s have proper audit committees that take their responsibilities seriously.

Chair: Why is the DCLG not listening? Perhaps they will.

Mr Betts: Who thought of the idea of the panels, if nobody seems to be recommending it? It is a mystery to be solved.

Chair: Thank you very much. We have Lord Heseltine in 10 minutes, so if people want to have a tiny break we can then go to him. Thank you so much for coming, we are very grateful.

Examination of Witness

Witness: Lord Heseltine gave evidence.

Chair: Welcome, Lord Heseltine. Thank you so much for coming.

Lord Heseltine: It’s a pleasure.

Chair: We are hoping that you can help us. We were reminiscing that, when you established the Audit Commission, you had in your sights Clive Betts and M. Hodge here, who, among others, you were trying to bring to stronger public account, as I recall-

Lord Heseltine: Perish the thought.

Q475 Chair: Some of us around the table feel that the circle is going around, and I wanted you to give us some of your wisdom, experience and thoughts, as the Government have now decided that they are going to abolish the commission that you created. What are the key aspects that you will be looking at to ensure that the rationale for its creation, which probably has not changed, is maintained in the new arrangements?

Lord Heseltine: Independence of appointment to a central body, probity and value for money.

Q476 Chair: It is interesting because all our witnesses have talked about independence of appointment through a central body, which means that you have got to establish some sort of central capacity-we thought you might come up with a name, actually-not called the Audit Commission to do that. At the moment, the idea is that the local authorities through an audit committee of some sort or another would appoint their own auditors, which is back to where we were before the introduction of the Audit Commission.

Lord Heseltine: I would not do that.

Q477 Chair: Okay. That is clear. If we look at value for money, at present the Audit Commission sets the framework for audit and does the value-for-money reports. Some of the criticism has been that it spread itself too widely, tried to do too much, but under the new arrangements the data will be collected by private, independent auditors and some of us find it rather difficult to see how you will ensure the proper comparison across authorities and therefore be able to start getting a handle on value for money. So what there would be your view?

Lord Heseltine: I think your question answers itself. You have got to have a system that systemises the process of comparing value for money and like-for-like services. This is not the private sector, there is a vast range of different and complex services.

There is no common means of evaluation and if you want to make comparisons authority by authority, you have to prescribe the information that you want to collect, and that can only be done centrally.

Q478 Chair: So in your view, the Audit Commission has not necessarily outlived its effectiveness?

Lord Heseltine: I have not seen any argument to suggest it has.

Q479 Mr Bacon: There is an argument we have just heard that central appointment is plainly better for independence, and local appointment is better for competition and local choice, although, as one of our witnesses just said, one should not pretend that local appointment does not put greater pressure on the auditors. But we have also heard auditors saying that their own professional independence ought to be an adequate safeguard. Are you saying, essentially, that independence is necessarily compromised in cases where councils appoint their own auditors?

Lord Heseltine: There is a pressure to get reappointed, and the language cannot avoid the word "compliance". You do not want to get a reputation for being difficult. I have to tell you that I think there should be such a process in central Government. I tried to get that when I set up the Audit Commission. I also happen to think that there should be a similar process in the private sector. The arguments are the same, but they are even more intense in the public sector because of the complexity of the services it offers.

Q480 Mr Bacon: And you cannot sell the shares in the public sector if you do not like what is being done.

Lord Heseltine: Well, we have done our best.

Q481 Chair: We haven’t done a very good job. I can tell you that we on the Public Accounts Committee worry about the value for money of some of that as well.

Lord Heseltine: This is trespassing on your tolerance, but your report on the regional growth fund did not give me a lot of pleasure.

Q482 Chair: The money should have been got out there.

I am thinking back to when you established the Audit Commission. You were very keen then to have private auditors do the audit, and in the end that did not happen. Now we have more of a mix. I know there was a bit of a mix, but it tended to be the old way: the district auditor went in to the Audit Commission, and that became the basis for the audit of local authorities. Now it will be entirely private auditors. What are your views on that? Why, at the time when you were establishing the Audit Commission, did you go for a different mix of institutions that were responsible for audit?

Lord Heseltine: You have to go back another Government to when I started on this journey, under Mr Heath. Then the auditing was all district audit, and I began the process of introducing private audit alongside the district audit. It made no progress at all-

Q483 Chair: Because?

Lord Heseltine: Because we lost the election. But I have a long memory, so when I returned in 1979, I asked where the plans were that I had put in place in, I think, ’72. It was no great surprise to me that somehow they had been mislaid, and nothing had happened. So I began the journey again, and if my memory serves, in the first of the local government Bills I introduced in the new Parliament of ’79, I failed to get the Audit Commission in, because-can you believe it?-the Treasury resisted the idea.

Q484 Chair: Why?

Lord Heseltine: I cannot answer for the Treasury. Nobody can. But they did prevent me in the first Bill. The second year, I managed to get it in, and if I remember, I tried to get it to apply to central Government as well, and I could not. That was a bridge too far, but in doing that, I got agreement to the Audit Commission, and being a hugely reasonable fellow, I agreed that this would not be a doctrinal exercise; we would allow the district audit to retain certain parts of the auditing function. I did not need to take that decision. You could argue that it was perfectly reasonable and rational in the circumstances, but personally, I have no problem at all with moving to a totally private sector audit of the local authorities, subject to the appointment and accounting processes.

Q485 Mr Betts: The Audit Commission developed somewhat after you first created it and took on lots of other functions, especially the various comparability assessments within authorities and between authorities. Do you think that it actually outgrew its original core purpose, and that is what has really attracted the criticism?

Lord Heseltine: It is very possible that that is the case. The question should be, surely, what did it outgrow, did it serve a purpose and should we ungrow it if it did not serve a purpose? That seems to me a very simple intellectual concept and one that I would fully support, but I do not know what would be on the agenda to be removed because I have never done that exercise. The work that the Audit Commission did in value-for-money studies created massive economies, and benefits therefore, simply by turning a spotlight on what you could achieve in a well-run authority. It has elevated the practice of the best to a standard that others could copy.

Q486 Mr Bacon: Is there any reason why the National Audit Office could not continue that work? Under the new proposals, it will now have a remit to do six, at least initially, value-for-money studies a year-broad thematic studies of the kind that the Audit Commission did in its early days.

Lord Heseltine: I do not know the detail of that. Is that six involving examination of all local authorities in a category or just-

Mr Bacon: No, I think it will be at their discretion. It will not be on the basis of a comprehensive trawl, necessarily.

Chair: It will be much more thematic and sort of jumping into a few.

Lord Heseltine: This is a question of public accountability. It is unrealistic in this society of ours to think that there is a body of people with sufficient power and influence in each locality to burrow into every local authority account to come up with every set of statistics that will enable them to exert political pressure. You only have to take it step by step to realise that it is not a concept that has any teeth in it. To me, beyond the probity and integrity of actually adding up the books and making sure that there is no one fiddling them and that there is nothing missing, which is very important, comparative studies of value for money are absolutely an essential part of what the public sector should always be on its guard to do. So across a very wide range of public sector activity-I would probably go the whole range-I believe in that sort of process. I do not see what other creative pressure there is to bring the results that are attainable.

Q487 Chair: The argument is that you have all this data out there-all expenditure over £500-and the local electorate will, in the end, be responsible. That is the argument.

Lord Heseltine: All 25% of them.

Chair: Or less. It’s wonderful; we agree.

Q488 Ian Swales: Given that this Bill implies a move a bit more towards a private sector type of model, what do you think the learning would be from the private sector-either good or bad-that ought to inform our thinking? I am thinking particularly of the pressure on audit fees, meaning that the private sector might demand the minimum level of audit, which could happen in the public sector under these provisions. What do you think we ought to learn from that?

Lord Heseltine: This goes back to the independent body laying down standards that are appropriate and that would not permit a cheapskate audit, which is what you are implying. I am not saying that there would be such a thing, but that is what you may have to make sure does not happen. In fairness to the auditing profession, in the private sector today there are very real standards, and compliance with them is observed very widely, so it can be done provided that somebody is laying down the standards and making sure that they are maintained.

Q489 Ian Swales: So national standards. I think you implied from your value-for-money comments a few minutes ago that you would want to see some pretty clear definition of scope in the Bill of what is expected to be covered. Also, you implied earlier data standards for that part of the work as well, so national standards for audit and then a definition of the other work on top of that?

Lord Heseltine: Yes. If you want to exert local pressure-I would be much keener on doing so than many people; there is not much manifestation of it, but I would like to go much further in encouraging it-and you want it to work, then somebody has to be able to say that to empty a bin in South somewhere or other costs something and it costs twice as much in North somewhere or other elsewhere. Unless you can provide that information in a form that is credible, that debate is unlikely to take place.

Q490 Heather Wheeler: Could perhaps the LGA bring this together? Only two councils are not members of the LGA.

Lord Heseltine: The Local Government Association is a body representative of local government. I think you need a body representative of the taxpayer, and that is central Government, because that is where the money comes from.

Q491 Mr Betts: Coming back to the point about independence, the Government propose that audit panels be set up with perhaps some independent membership. There have been suggestions that we might simply enhance the existing audit committees on local authorities with independent members and maybe an independent chair. After all, that is what happens in the health sector. NHS trusts are audited in that way. They appoint their auditors-the foundations trusts do-and they have independence on the audit committee. Is that not a way of ensuring independence within local government as well?

Lord Heseltine: Depends what information they are provided with. They can be no better than the facts in front of them. If they do not have comparative facts about the costs of dispensing a prescription in one authority as opposed to another, for example, they cannot make the sorts of judgment that you are talking about.

Q492 Chair: Can I just move on a little bit? One of our concerns is that the Audit Commission-I think probably after your time-took over responsibility for monitoring health. I do not know whether you did that or whether that came later-it came later. We have now the evolution of independent foundation trusts that appoint their own governing bodies. It is a bit self-perpetuating, so there are so-called elections in a locality to appoint new members, and they appoint their own auditors. We in the Public Accounts Committee have observed this a little.

Up to 20 of the new foundation trusts are in deficit, and more are in financial difficulties-I have probably got my figures a bit wrong, but it is of that order-and yet there has not been a public interest report from any of the auditors, appointed by the trust bodies, who are responsible for the audit of those trusts. It is all in an environment where there will be less money for health with the deficit reduction programme. Finally, the Department of Health has so far not put forward proposals as to how it is going to ensure accountability and allow us to follow the taxpayers’ pound in this new landscape. Have you any thoughts on that?

Lord Heseltine: Yes. You are the Public Accounts Committee, not me.

Q493 Chair: Is it satisfactory to you?

Lord Heseltine: As you describe it, of course not, but the way you describe it may not be the way the Government would describe it. I do not have the brief or the experience to have a view.

Q494 Chair: Equally with academy schools? There will be a similar position where they will be independent of local authorities with their own governing bodies able to appoint their own auditors.

Lord Heseltine: All my answers will always be based on the same starting point. You need financial integrity and proper financial auditing-adding up. No theft or anything like that. But if it is public sector money, you need value for money, because there is no equivalent in the public sector that compares with the competitive process of the marketplace. Frankly, the systems are so much more complex that if there were a marketplace, I think it would still be quite difficult to do and to be sure that you were getting value for money. As there is no marketplace, and you are dealing with monopolistic circumstances, the only way to ensure that you are getting value for money is to have the figures analysed for comparative purposes-one organisation compared with another. That is the intellectual rationale that I believe to be right, and I don’t know of any alternative.

Q495 Chair: This has been such a clear bit of evidence. Is there anything you feel that we haven’t asked you that we should?

Lord Heseltine: In the piece of paper that I have here, there is a lot of reference to savings-£160 million over some years. It would be interesting to know what the Audit Commission thought they had saved on their value-for-money services over an equivalent period. When you think about the scale of value for money-in this case, in the local authority service-a minuscule part of 1% is a huge sum of money. I am quite a long way removed from all this, but I know that, in its time, some pretty dramatic figures were produced as a result of the comparative value-for-money services.

Let us just start with one of the recommendations in my recent report: the district councils should be permitted to become unitary county authorities, if they so wish. You may not know, but I did this by prescription in Scotland and Wales in the 1990 reorganisation and did it permissively in England. The advice to me is that £10 million or £15 million a year per county is achieved by the unification process. It seems an awful lot of money to forgo.

Q496 Chair: I agree. We had a discussion in the other evidence sessions whether or not that saving is real and what will happen to audit. It is very difficult because, at the moment, the Audit Commission negotiates for a whole range of authorities, rather than individual negotiation. The procurement process will become more expensive. There will be authorities that will be attractive to private auditors and some that will be less attractive, so I think that it looks very iffy as to what will happen to audit fees over time. Clearly, if you do less value-for-money work, you save money in that short term, but it seems unclear to some of us round the table whether audit fees will go down, and therefore whether all those savings will be realised and whether or not the loss of value-for-money studies will actually over time lead to the broader landscape that there will be costs rather than benefits.

Lord Heseltine: It is probably unprovable because you are looking into the future, but the fact is that that is what you are weighing. You are weighing any change in the level of audit fees against the potential savings from proper comparative statistics.

Q497 Mr Betts: Before today-and you have helpfully given us your advice based on your long experience-has anyone else asked for your views about these matters?

Lord Heseltine: On the audit? Only in private conversations. Who else would? It is not a burning issue. They are not marching. The demos out there are not all about the Audit Commission going.

Q498 Mr Betts: But they probably are about how you spend public money.

Lord Heseltine: If you widen it, I have just done this report of which we sent you a copy, so you may have seen it. It is all about these things. To take procurement, I am sure that your Committee has looked at public sector procurement, but the figures are that 60% of all Government contracts are either over time or over budget-60%. Those are the Government’s own figures. Just think what that might mean in terms of value for money if they were more disciplined. That is essentially the prerogative of a Public Accounts Committee question, but I have a different question: just think if those British companies that are over time and over budget actually were sufficiently disciplined not to be either, how much more competitive would they be in the world marketplace? You have a double whammy, but the fact of the matter is that the Government’s statistics show 60% over time or budget.

Q499 Mr Bacon: The central criticism of the Audit Commission seems to be that it was a very good idea, but it got top-heavy, burdensome and bureaucratic. Certainly, from talking to local councillors, they would say that the various iterations of it, such as best value, the comprehensive performance assessments and so on, became really very burdensome. They would say that, wouldn’t they? But it is also true that there was, I think, a quite widespread view that it had started to lose its way. On its value-for-money reports, the quantity had increased and the quality had declined. What is the way of making sure that you get all the things you want from a central capacity without its bloating and becoming burdensome?

Lord Heseltine: Change the chairman. It is no more complicated than that.

Q500 Mr Bacon: Just the right management?

Lord Heseltine: Just the right management. Always show me the guy at the top when you’ve got a problem.

Mr Bacon: Very clear.

Chair: Thank you very much indeed.

Lord Heseltine: Glad to have been here.

Chair: Short, sweet and I think we agree. We are very grateful.

Lord Heseltine: A great pleasure.

Chair: Thank you very much indeed.