2 The new audit regime
11. The draft Bill distributes the remaining
functions of the Audit Commission amongst a myriad of other organisations
and seeks to better align the procedures for public sector audit
with the practices already in place for the private sector. Most
witnesses agreed that the proposed new audit regime is more complex
and fragmented than past arrangements where the Audit Commission
effectively acted as regulator, commissioner and provider of audit.
The new regime applies to a number of bodies (listed in Schedule
2 of the draft Bill) which are accountable to a range of Government
departments other than the Department for Communities and Local
Government.[16] This
means that there will be a significant challenge to ensure that
the new audit regime will provide value-for-money and be co-ordinated
effectively across departments.
12. In the proposed new audit regime, the Government
intends that the National Audit Office (NAO) take on responsibility
for the Code of Practice (the Code) and the Financial
Reporting Council (FRC) will become the overall regulator and
undertake a quality review of a sample of "major audits".[17]
Professional accountancy bodies are identified as "recognised
supervisory bodies" and will have authority to put in place
rules and practices covering the eligibility of firms to be appointed
as local public auditors and the qualifications, experience and
other criteria that individuals must have before being permitted
to carry out a local public audit.[18]
13. Whilst larger bodies could readily absorb
the changes, witnesses identified a series of risks and gaps within
the proposed regulatory framework, in particular relating to the
scope of audit; potential difficulties in coordinating the new
audit regime across departments; accountability gaps at the department
level; potential difficulties in maintaining audit quality and
the ownership of the National Fraud Initiative (NFI).
Scope of audit
14. The Government's intention to bring public
sector audit in line with procedures for the private sector led
a number of witnesses to express concern about whether the oversight
arrangements in the draft Bill would adequately cater for the
wider scope of public sector audit with respect to regularity,
propriety, probity and value for money. Steve Freer, Chief Executive
of CIPFA, asserted that:
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.[19]
15. Steve Freer argued that although the FRC
does have some experience in public sector audit, the roles ascribed
to it under the draft Bill represent a significantly different
line of work and would require the organisation to undergo a change
in culture in order to properly reflect the specific needs of
public sector audit. He further argued that public sector audit
required additional specialism; in the currently regime this is
provided by the Audit Commission.[20]
16. However, Paul George, Executive Director
of FRC, argued that the FRC had made appropriate preparations
in order to fulfil its new role. Mr George referred to the FRC's
existing work in the public sector audit; indicated that the FRC
has been working closely with the Audit Commission; and drew attention
to the experience of the FRC Chair, Sarah Hogg, who has significant
experience of the health sector.[21]
17. Furthermore, in the proposed audit regime,
the FRC becomes responsible for providing quality assurance on
"major audits". It is not clear how the Government defines
"major audit" as the draft Bill merely puts in place
a power for the Secretary of State to determine what it constitutes
at a later date. Gillian Fawcett advised us that it is likely
that the majority of local bodies will fall outside the definition
of major audit and therefore will not be subject to quality assurance
under the FRC. As a result, the pool of major audits will be so
small that it is likely that they will be quality reviewed multiple
times. We are not convinced
that the Financial Reporting Council understands the wider scope
of public sector audit. The Government should take appropriate
steps to assure Parliament that the Financial Reporting Council,
in taking on its new role, reflects the importance and character
of public sector audit. The Bill, when presented to Parliament,
should also define "major audit" and clarify how the
quality of audit for bodies which fall outside this scope will
be reviewed. We recommend that the performance of the new regulatory
framework should be addressed directly in the Government's post-implementation
review.
The Code of Practice (The Code)
18. Amyas Morse, Comptroller and Auditor General
(C&AG) of the National Audit Office (NAO) was confident that
he will be in a strong position to take up responsibility for
determining the Code of Practice and has made preparations to
make this possible, including recruiting staff to the NAO who
have experience of working for the Audit Commission.[22]
However, the C&AG told us that the Code would only provide
high level information and would therefore be open to "too
much flexibility and interpretation" as a result.[23]
We
recommend that the draft Bill should be amended in order to provide
the C&AG with a duty to publish detailed mandatory guidance
to accompany the Code and that the C&AG should report annually
to Parliament on the effectiveness of the Code.
Coordinating the new audit regime
19. Schedule 2 of the draft Bill lists the bodies
which would be subject to the new audit regime. Many of these
authorities are currently accountable to departments other than
the Department for Communities and Local Government, for example
Department of Health, Home Office, Department for Environment,
Food and Rural Affairs and Department for Business, Innovation
and Skills. Therefore some consideration will have to given as
to how the new audit regime will be co-ordinated across departments.
20. The C&AG told us that the proposed regime
could be made to work but that its success would largely be dependent
on how the regime is implemented. He suggested that:
It is not the only workable model, but it is a workable
model. The proof of the pudding will largely be in the implementation
and in how we work to improve that implementation over time.[24]
21. The C&AG told us that effective integration
by DCLG would be key to making the governance work, and suggested
that "if it stands back, it will not work very well, and
if it was actively and energetically involved, it can work well".[25]
The C&AG further argued that:
There are various issues where, if the Department
is asking questions about how individual authorities are functioning,
if it shows active interest in that, and if it sees published
reports from auditors and picks them up and asks questions about
them, that will make it efficient. If it is curious and constantly
on the alert, that will send a message through the whole system.
[26]
The C&AG further argued that proactive engagement
by the Department would be critical to the success of the new
arrangements. Given this evidence, we were concerned to hear that
the Secretary of State describe his Department's role as "very
much one of last resort".[27]
We agree
with the C&AG that the DCLG and other departments must engage
fully in the new audit process if it is to be effective. In its
response to this Report, the Department should set out it what
steps it will take to achieve this.
Accountability gaps
22. It is a fundamental responsibility of an
Accounting Officer to manage and control resources used in a government
department. In performing this duty an Accounting Officer is responsible
for signing-off a key governance statement included in the department's
annual report. This statement is vital because it provides assurance
to Parliament that resources are being used economically and effectively
and that there are proper internal controls, including use of
internal and external audit.
23. However, the draft Bill does not address
how the Accounting Officer will be able to fulfil this duty when
no information is provided to the department on local body VfM
achievements, audit of accounts, or implementation of major initiatives
(for example IFRS).[28]
Currently, the Audit Commission collects and analyses this
information to provide Parliament with assurance through an annual
report.[29]
24. Several witnesses identified a critical department
level "accountability gap" in the new regime which,
unless it is addressed as a matter of urgency, would mean that
there would be no mechanism within the draft Bill to assure the
Accounting Officer and, in turn, Parliament that public money
was being spent appropriately.
25. Under the proposed new arrangements it is
unclear how Accounting Officers or Parliament will obtain assurance
that the audit regime is performing effectively and that the approximately
£200 billion spent by local bodies annually has been used
effectively.[30] We
recommend that, as part of the new arrangements, a publically
accessible register be established by DCLG which identifies when
a body has not appointed an auditor, when local bodies produce
their accounts late and identifies where the auditor's opinion
on the financial statements or value for money conclusions was
qualified. In addition to the publication of this information,
analysis should be undertaken to provide departmental Accounting
Officers with meaningful conclusions. The Bill should impose a
duty on the Secretary of State to identify which organisation
will be responsible for maintaining the register, and for performing
the appropriate analysis.
Data matching and the National
Fraud Initiative
26. The Audit Commission Act 1998 enables the
Audit Commission to require data to be provided by local bodies
for the purpose of data matching. The Audit Commission exercises
these powers through a data-matching service for local public
bodies called the National Fraud Initiative (NFI). The Audit Commission's
anti-fraud and corruption work has identified £919 million
of local authority fraud, errors and overpayments since 1996.[31]
While Clause 84 of the draft Bill allows the Secretary of
State to conduct data matching exercises or arrange for them to
be conducted on his behalf, the draft Bill does not make clear
which body would carry out data matching services following the
abolition of the Audit Commission.
27. The C&AG commended the NFI and stated
that he was keen to see it relocated to an appropriate body but,
concomitantly, made it clear to us that he considered an executive
body to be best placed to take responsibility for the initiative.[32]
The National Fraud Authority (an executive agency of the
Home Office), the Department for Work and Pensions and the Cabinet
Office (ERG) have each expressed an interest in taking on operational
ownership of the NFI.[33]
We were encouraged to hear that Government values the National
Fraud Initiative (NFI) and recognises that a suitable home must
be found for it.[34]
We further welcome the Secretary of State's invitation to
recommend a body to take on responsibility for the NFI.
28. We recommend that the Cabinet
Office takes on responsibility for the NFI. The Government must
identify where the NFI will be located on the face of the Bill
to Parliament.
29. The Secretary of State should
provide the House with clarification on the wording of clause
84(2), 91(1) and 91(3) and should provide evidence to assure the
House that the clause would not allow data to be used beyond the
remit of identifying fraud. We recommend that all possible uses
of the NFI should be set out on the face of the Bill and that
any amendments should be made by primary legislation.
16 Including the Department of Health, Home Office,
the Department for Environment, Food and Rural Affairs and the
Department for Business, Innovation and Skills Back
17
Clause 55 Back
18
Clause 37 Back
19
Q 377 Back
20
Q 378 Back
21
Qq 382-383 Back
22
Q 582 Back
23
Q 587 Back
24
Q 571 Back
25
Q 574 Back
26
Q 575 Back
27
Q 637 Back
28
Q 405 Back
29
Written evidence from the Audit Commission Back
30
Draft Local Audit Bill, Cm 8393, July 2012, p 155 Back
31
Draft Local Audit Bill, Cm 8393, July 2012, p 14 Back
32
Q 632 Back
33
Draft Local Audit Bill, Cm 8393, July 2012,p 14 Back
34
Q 666 Back
| 
