House of Commons - Draft Local Audit Bill: Pre-legislative Scrutiny

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

3 Independence: appointment and removal of Auditors

Principles of public audit

30. Independence has been a core value guiding the audit of local bodies responsible for public funds in England for the last 150 years.[35]Indeed, it was the perceived need for a more independent audit regime that inspired the Government to establish the Audit Commission in 1983. Lord Heseltine argued that in instances where "local authorities appoint their own auditors, audit is not seen to be obviously independent of local government".[36] Lord Sharman's 2001 report has since reiterated the importance of independent audit and independent appointment.[37] While the Communities and Local Government Select Committee explored the principle of independence in detail, we have focused on whether the mechanisms in the draft Bill adequately safeguard the independence of audit for local bodies.

Auditor appointment

31. The Government acknowledges that "independence is a key principle of public audit" and states that "safeguarding independence during the process of appointing an auditor is vital".[38] In order to safeguard independence, Clause 11 of the draft Bill sets out a requirement for local bodies to take into consideration the advice of an independent auditor panel ("auditor panel") before appointing an auditor. The local body would not be bound by the audit panel's recommendations; the draft Bill stipulates only that their advice is sought. Moreover, the draft Bill makes provision for local bodies to nominate their existing audit committees provided that they meet the independence criteria established for the auditor panels. Furthermore, there is scope within the draft Bill for separate local bodies to share an auditor panel and jointly procure audit.

32. In terms of constitution, according to Clause 12 of the draft Bill, auditor panels must consist of a majority of independent members and must have an independent chair. Moreover, the draft Bill stipulates that in order to be considered independent, a panel member must not have been a member or officer of the audited body within the previous five years and must not, at that time, be a relative or close friend of a member of the body.

33. All witnesses agreed that independence is fundamental to a successful audit regime. The Government's intention in the draft Bill to allow public bodies to appoint their own auditors has proved to be a controversial issue throughout our inquiry. The majority of our witnesses raised specific concerns about the auditor panels. Professor Heald, University of Aberdeen, described them as a "crazy idea".[39] Both the Audit Commission and the LGA suggested that the proposals would not be practicable because some authorities would struggle to recruit a sufficient number of independent persons;[40] the LGA went as far as to recommend that the proposals should be deleted from the Bill.[41] The Associated Chartered Certified Accounts (ACCA) argued that auditor panels would duplicate and confuse existing governance mechanisms within local bodies (for example scrutiny and audit committees).[42]

34. The proposals within the draft Bill seek to reach a compromise between ensuring the independence of audit and furthering the Government's localism agenda. In terms of ensuring the independence of audit, witnesses argued that central procurement is the stronger option, whereas in terms of fulfilling the Government's commitment to localism local appointment would be the more appropriate approach.[43] Some of our witnesses, including Professor Heald[44]and Lord Heseltine,[45]expressed strong opposition to local auditor appointment and insisted that it would be preferable to retain a central capacity to procure audit. Other witnesses argued that the provisions in the draft Bill could be made practicable by replacing the provisions for auditor panels with a requirement to strengthen existing audit committees within local bodies.[46]

Retaining a capacity for procuring audit

35. We heard strong arguments for the retention of a central procurement capacity and were informed that, to date, national procurement has been an effective way of appointing auditors.[47]In particular, witnesses emphasised how the Audit Commission's unique twin powers relating to the procurement of audit and the appointment of auditors enabled it to negotiate a reduction of 40% in audit fees during the Commission's 2012 procurement exercise.[48]

36. Witnesses noted that the Commission's "Post Office" approach to pricing ensured that bodies of similar size pay the same fees which benefited the sector as a whole. Here the Commission's ability to appoint auditors directly to bodies avoided some of the independence issues which could arise where auditors are locally appointed. For example, the Audit Commission currently avoids conflicts of interest by ensuring that firms were not appointed to bodies with which they shared a significant existing business relationship. In the absence of a central procurement capacity witnesses were concerned that there would be greater variation in fees and audit quality; while larger authorities might experience reductions in audit fees, smaller and more geographically remote authorities are likely to experience rising audit fees (see chapter 7).[49] Overall, some form of national (or regional) procurement capacity for audit appointment remained a preferred option for most of our witnesses. We heard evidence that while larger bodies might benefit from local appointment, other bodies might find the cost of the process disproportionate and administratively burdensome. Joanna Simons, Chief Executive of Oxfordshire County Council, stated that even large local authorities might find the proposals for local appointment difficult to put into practice. She told us that recruiting just one suitable independent member for Oxfordshire's audit committee had been "hard going" and suggested that other bodies might encounter greater difficulty.[50] Recruiting additional independent members for auditor panels might prove especially difficult when existing audit contracts expire at the same time and a substantial number of local bodies will therefore be required to procure audit over the same period. Gareth Davies, a Partner at Mazars LLP, told us that this "congestion" in the audit market might be alleviated if local bodies were "given the ability to roll forward their existing audit appointment for a limited time period".[51]

37. Given the potential problems associated with local appointment, we recommend that a capacity is retained whose functions are limited to the procurement of audit.

Strengthening Audit Committees

38. Should the Government retain its commitment to local auditor appointment, we heard that that the current proposals for auditor appointment in the draft Bill could be improved by replacing auditor panels with a statutory requirement for local bodies to form strengthened audit committees.

39. Replacing the provisions in the draft Bill for auditor panels with a requirement for strengthened audit committees would ensure that existing governance arrangements within local bodies do not become confused and duplicated in the new regime. It would also make the proposals for local authorities consistent with health bodies. The Department of Health has recently announced that rather than using auditor panels, health bodies will appoint auditors using their audit committees.[52] There is a statutory requirement for health bodies to form an audit committee. This is not the case for local authorities, although the LGA informed us that 80% of local authorities have an audit committee in some form.[53] We received evidence that existing audit committees could be strengthened and independence could be safeguarded by:

a) Placing a statutory requirement on local bodies to have an audit committee

b) Prescribing that the chair should be an independent person, and

c) Ensuring that the majority of members are independent.

40. Witnesses also argued that the directly-elected and thus political nature of local government requires that further measures should be taken to ensure independence of audit appointment.[54] The C&AG suggested that a 'double lock' mechanism was a "sensible one" for auditor appointment.[55] Others indicated that this might be difficult to put into practice and offered a "more pragmatic solution" whereby the audit committee should make a recommendation to the full council or equivalent governing body.[56]

41. Should the Government persist with its proposals for local auditor appointment, we recommend that the draft Bill is amended so that the provisions for auditor panels are replaced with a statutory requirement for strengthened audit committees which have an independent chair and a majority of independent members. We also recommend that, in order to safeguard the independence of audit, the Bill stipulates that full councils, or the equivalent governing body, should appoint auditors following recommendations from their Audit Committee.

Joint Procurement Arrangements

42. Witnesses suggested that local bodies could achieve economies of scale in the new regime by jointly procuring audit. For example, the National Association of Local Councils (NALC) and Society of Local Council Clerks' (SLCC) have proposed a sector-led body to undertake the procurement of audit services for smaller bodies.[57] Similarly, the LGA suggested that a body, perhaps the LGA itself, could instigate a sector-led approach for procuring audit for local authorities.[58] We also heard from Stephen Hughes, Chief Executive of Birmingham City Council, who suggested that larger bodies might be willing to invite smaller bodies to enter into a framework agreement with surrounding authorities so that economies could be made on tendering costs for smaller organisations.[59]There is also scope within the Bill for separate bodies from different sectors, for example Health and local authorities to share an audit committee and jointly procure audit to ensure that the tendering process for local bodies does not become administratively burdensome or excessively costly.

43. We welcome the NALC/SLCC's proposal for bulk procurement of audit and are pleased to see that Government has registered its support for their initiative. Should the Government remain committed to local appointment of auditors, we recommend that local bodies are encouraged to jointly procure auditors where it is possible to do so, and establish framework agreements where appropriate, in order to achieve economies of scale and value for money in audit procurement. The Bill should provide for maximum flexibility in order to enable local bodies to undertake a variety of joint procurement arrangements.

Strengthening proposals for the Police

44. We heard concerns that Clause 9 of the draft Bill fails to provide sufficient mechanisms to safeguard the independence of Police audit. The draft Bill states that a Chief Constable should not appoint an auditor.[60] Instead the Police and Crime Commissioner (PCC) is empowered to appoint an auditor for both the PCC and the police in their area.[61] Notwithstanding the existence of Police and Crime Panels, clause 9(4) states that the PCC should consult the auditor panel although the PCC would not be not bound by its advice. We are concerned that this provision places too much unchecked responsibility into the hands of the PCC and that it ignores the accountability frameworks recently established by the Government for the Police. Furthermore, Tom Winsor, Her Majesty's Chief Inspector of Constabulary, argued that HMIC should be able to exercise a veto power to ensure that police bodies were not overburdened with data requests as a result of the C&AG's VfM work.[62] HMIC was awarded a power of veto in the Police Act 1996; however, the power has never been used.

45. We recommend that Police and Crime Commissioners should appoint or dismiss auditors after consulting its Police and Crime Panel instead of a separate auditor panel. In instances where two thirds of its members vote to do so, the Police and Crime Panel should be able to veto the Police and Crime Commissioner's decision. The Police and Crime Commissioner should only be able to appoint or dismiss an auditor once agreement has been reached with the Police and Crime Panel. Moreover, we are convinced that HMIC no longer requires a veto power in respect to audit and inspection of the police given that the Audit Commission's role is coming to an end.

Managing outstanding audit contracts

46. The draft Bill does not make clear which body will become responsible for contracts agreed by the Audit Commission which conclude after its abolition. Many of our witnesses identified this as a substantial risk and called on Government to make clear how these contracts would be managed in the new regime. Marcine Waterman, Comptroller of the Audit Commission, described the lack of assurance about the future management of contracts which are worth £89.4 million per year[63], and expire in 2017 (with the option to be extended until 2020), as "one of our biggest concerns about gaps in the Bill".[64] We heard evidence that the body exercising the central procurement capacity could become responsible for managing outstanding audit contracts which extend beyond the Audit Commission's abolition. Central appointment of auditors would also negate some of problems with respect to removal of auditors which are outlined later in this Report.

47. Given the potential problems associated with many hundreds of separate procurement processes, we recommend that the Government reconsider the current proposals in the draft bill for the local appointment of auditors and retains a capacity limited to the procurement of audit. The Government should identify which body will become responsible for managing outstanding contracts on the face of the Bill. If a capacity is retained for procuring audit, this capacity should also be responsible for administering outstanding audit contracts. We recommend that the NAO is well placed to take on this responsibility.

Auditor removal

48. Currently the Audit Commission removes or reappoints an auditor where appropriate. The resignation and removal of auditors is provided for in Clause 17 of the draft Bill but will be heavily shaped by subsequent regulations. In the private sector, removal of an auditor is considered to be a serious matter and a report is made directly to the shareholders.

49. The draft Bill states that in cases where the auditor is dismissed, the audited body is required to provide a statement outlining the reasons for dismissal and give notice of its intent to remove the auditor to both the auditor panel and the auditor. The auditor would be entitled to respond to that statement and the auditor's response should be considered by the auditor panel. Under the provisions in the draft Bill, it is ultimately the audited body's decision whether or not to terminate the appointment but it must give consideration to the advice of the auditor panel. We heard evidence that the draft Bill does not provide clear and incontestable protections for assuring the independent of Audit Committees and audits.[65]

50. We recommend that the decision to remove an auditor should only be made by the audit committee in agreement with full council or the relevant governing body. This would provide a "double lock" and ensure that neither body could dismiss an auditor without the agreement of the other.

35 Communities and Local Government Committee, Fourth Report of Session 2010-12, Audit andinspection of local authorities, HC 763, para 27 Back

36 HC Deb, 18 January 1982, col 53 Back

37 Holding to Account, The Review of Audit and Accountability for Central Government, Report by Lord Sharman of Redlynch, HM Treasury, 13 February 2001 Back

38 Draft Local Audit Bill, Cm 8393, July 2012, p 7 Back

39 Q 107 Back

40 Q 2 & Written evidence from the Local Governance Association Back

41 Written evidence from the Local Governance Association Back

42 Written evidence from the Association of Chartered Certified Accountants (ACCA) Back

43 Q 426 Back

44 Q 106 Back

45 Q 475 Back

46 Q 425 Back