Draft Local Audit Bill: Pre-legislative Scrutiny - Draft Local Audit Bill ad hoc Committee Contents

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

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Prepared 17 January 2013