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

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.


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

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Prepared 17 January 2013