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.
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".
Lord Sharman's 2001 report has since reiterated the importance
of independent audit and independent appointment.
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.
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".
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".
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;
the LGA went as far as to recommend that the proposals
should be deleted from the Bill.
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
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. Some of
our witnesses, including Professor Heald
and Lord Heseltine,
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.
Retaining a capacity for procuring
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.
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.
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).
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.
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".
37. Given the potential problems
associated with local appointment, we recommend that a capacity
is retained whose functions are limited to the procurement of
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.
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.
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
c) Ensuring that the majority of members are
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.
The C&AG suggested that a 'double lock' mechanism was a "sensible
one" for auditor appointment.
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.
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.
Similarly, the LGA suggested that a body, perhaps the LGA itself,
could instigate a sector-led approach for procuring audit for
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.
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
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.
Instead the Police and Crime Commissioner (PCC) is empowered to
appoint an auditor for both the PCC and the police in their area.
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.
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,
and expire in 2017 (with the option to be extended until 2020),
as "one of our biggest concerns about gaps in the Bill".
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
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.
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.
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
HC Deb, 18 January 1982, col 53 Back
Holding to Account, The Review of Audit and Accountability
for Central Government, Report by Lord Sharman of Redlynch,
HM Treasury, 13 February 2001 Back
Draft Local Audit Bill, Cm 8393, July 2012, p 7 Back
Q 107 Back
Q 2 & Written evidence from the Local Governance Association Back
Written evidence from the Local Governance Association Back
Written evidence from the Association of Chartered Certified Accountants
Q 426 Back
Q 106 Back
Q 475 Back
Q 425 Back
Q 462 Back
Q 87 Back
Q 463 Back
Q 153 Back
Written evidence from Mazars LLP Back
Written evidence Department of Health Back
Written evidence from the Local Government Association Back
Q 469 Back
Q 571 Back
Q 27 Back
Written evidence from the Society of Local Council Clerks Back
Q 155 Back
Q 176 Back
Clause 9(2) Back
Clause 9(3) Back
Q 501 Back
"Audit Commission will reduce audit fees by 40 per cent",
Audit Commission, 5 March 2012, www.audit-commission.gov.uk Back
Q 71 Back
Q 29 Back