4 Public Interest Reporting
and Whistleblowers
51. Vernon Soare, Executive Director, Professional Standards, Institute
of Chartered Accountants in England and Wales (ICAEW), argued
that 'with some further work, [the draft Bill] can work in what
one might call "the normal circumstances"'. However,
he continued, "we are not quite so sure that, at the moment,
it actually caters for extreme or difficult circumstances where
allegations of malpractice are alleged".[66]
Public interest reporting
52. Public interest reports (PIR) are currently
produced by an auditor where there are grounds for suspecting
that a public body has misspent substantial amounts of money through
poor governance or has acted outside its legal powers. During
our inquiry we were keen to gain assurance that the proposed mechanisms
in the draft Bill for public interest reporting (PIR) and whistleblowing
would be sufficient to ensure that the proposed audit regime would
operate effectively in those situations.
53. The Secretary of State's asserted that PIRs
on principal bodies are a "very rare thing".[67]
We also heard that PIRs are a vital element of public sector audit
and an essential tool in holding public bodies to account and,
as such, the Government should ensure that the Bill makes the
mechanisms for Public Interest Reporting absolutely clear and
provide audit firms with confidence that they will be appropriately
remunerated should they encounter a situation where it is necessary
to issue a report in the public interest.
54. The CLG Select Committee reported that 131
PIRs were issued between 2002 and early 2011.[68]
According to that Committee, many of these PIRS were issued in
response to the non-publication of accounts by parish councils;
it is likely that the majority of these authorities would receive
only a limited assurance audit or no audit at all in the proposed
regime.
55. PIRs have also been issued in high profile
and controversial cases involving vast sums of public money and
serious governance issues.[69]
The most protracted, high-cost and high-profile case was the report
of the district auditor into Westminster City Council which concluded
that senior councillors had misused public money by selling council
homes in order to influence voting patterns.[70]
The case took 14 years (from 1987-2001) to resolve and was finally
settled in the House of Lords on appeal by the Audit Commission.
More recent examples of governance failures occurred in Doncaster
(2008) and the Wirral (2012).
56. Although, as the Secretary of State argued,
there are more tools available to individuals including Freedom
of Information requests to hold officials to account, and local
government is more transparent than it was at the time of the
Westminster case, the majority of witnesses were convinced that
PIR remains a fundamental way of holding those responsible for
public funds to account.
57. Previously the Audit Commission has acted
as a "sounding board" for auditors considering issuing
a PIR and provided an indemnity to firms should they face litigation.
CIPFA Chief Executive Steve Freer told us that the Commission's
functions in this regard were valued and well-respected.[71]
Under the proposals in the draft Bill an auditor must consult
the audited body's auditor panel before issuing a PIR and there
is no mechanism for providing indemnification.
58. Some witnesses stated that the auditors'
professional standards and regard for their reputation would ensure
that a PIR would be pursued where necessary in the majority of
cases. However, Gareth Davies of Mazars LLP warned us that a system
of local appointment of audit "puts the auditor in a more
exposed position—particularly as currently drafted—when
things get very difficult".[72]
Lord Heseltine argued that a pressure to be reappointed and a
fear of being branded with a reputation for being a "difficult
firm" might compromise the auditor's independence which,
in turn, could mean that they would be less likely to issue a
PIR. [73]
It is worth noting that no PIR has been raised with respect to
Foundation Trust (FT) hospitals since these bodies have had the
power to appoint their own auditors despite a number of well-publicised
instances of serious financial and governance problems.[74]
59. In addition, the draft Bill requires the
auditor to consult the audited body's auditor panel if there is
an expectation that additional work is required in the public
interest. Our witnesses were in agreement that the auditor must
be free to pursue a line of investigation regardless of whether
or not the auditor panel or audit committee agrees.[75]
Furthermore, witnesses agreed that the draft Bill lacked a clear
mechanism to ensure that the auditor is appropriately recompensed
for the costs, including additional work, associated with a PIR,[76]
a role currently undertaken by the Audit Commission.
60. We consider auditor independence
to be vital. We recommend that the Bill should include provision
for an auditor to raise a Public Interest Report (PIR) without
prior reference to the audited body's auditor panel or audit committee.
The draft Bill should be amended to enable the National Audit
Office to provide advice and support to auditors, if necessary,
before a PIR is issued and throughout the PIR process. The Bill,
when presented to Parliament, should place a duty upon auditors
to inform the Secretary of State of circumstances where they have
a concern about serious governance and financial failure.
61. We consider that the lack
of a clear mechanism to ensure that an auditor is appropriately
recompensed for costs associated with a PIR to be potentially
dangerous omission. We call on the Department for Communities
and Local Government to make clear future arrangements for indemnifying
bodies and suggest that it would be appropriate for the DCLG to
seek advice from the C&AG prior to issuing any indemnities.
Whistleblowers
62. We recognise that in many instances, serious
cases of financial or governance failure are not identified through
audit itself but are brought to the attention of the appropriate
authorities by individual whistleblowers. Currently the Audit
Commission and its appointed auditors are both identified as prescribed
persons. [77] The Audit
Commission also operated a hot line for whistleblowers. Witnesses
argued that with the abolition of the Audit Commission there is
a real risk that responsible workers who witness wrongdoing may
not feel comfortable approaching a private auditing firm that
has a commercial relationship with the local body or council.
A possible consequence of this is that a worker may believe that
the only option they have is to raise the concern with the media
or to leak information anonymously. The other possible consequence
is that the whistleblower may remain silent, an even more undesirable
outcome. The C&AG told us that in this context he would be
willing to fulfil a 'backstop' role but said that he would require
additional powers to instruct auditors to undertake appropriate
investigations in response to the whisteblower's information.[78]
63. We strongly recommend that
in addition to the appointed auditor, the C&AG should also
be named as a prescribed person in the Bill. The C&AG should
continue to offer a hot line for whistleblowers and be given power
to instruct auditors to investigate whistleblower's information.
66 Q 386 Back
67
Q 647 Back
68
Communities and Local Government Committee, Audit and inspection
of local authorities, para 41 Back
69
For example, Lincolnshire county Council (2002), Merseytravel
(2008), Doncaster (2008) and Wirral Council (2012). Back
70
Communities and Local Government Committee, Audit and inspection
of local authorities, para 41 Back
71
Q 377 Back
72
Q 426 Back
73
Q 479 Back
74
Q 265 Back
75
Q 37 Back
76
Qq 386, 427 Back
77
"Whistleblowing and the Public Interest Disclosure Act 1998:
Internal Policy and Procedure", Audit Commission, May 2006,
p 4, www.audit-commission.gov.uk Back
78
Q 571 Back
| 
