Conclusions and recommendations
Introduction
1. The Department of Health failed to provide the Committee with appropriate and timely information in advance of our pre-legislative scrutiny of the draft Bill. It is very disappointing that the Department of Health acted in this way. As a result, we have been unable to consider this evidence properly and remain very concerned that proper scrutiny of the audit and accountability arrangements for Health trusts and commissioning groups should be carried out by Parliament. Nevertheless, we welcome the opportunity to look at the draft Bill in general.
(Paragraph 5)
2. The Government should include in the impact assessment an assessment of the savings made from abolishing the Audit Commission in its residual form. In order to make accurate assessments of the total savings made by the draft Bill itself, the Government should use figures from 2011/12 as a baseline. Given uncertainties about the figures in the impact assessment and the cost of local body compliance, we recommend that a new financial impact assessment is published alongside the Bill.
(Paragraph 8)
3. We are not convinced that subjecting such regulations to negative procedure only is satisfactory; and neither has the Government provided any justification. In the interests of proper Parliamentary scrutiny, regulation should be subject to the affirmative procedure.
(Paragraph 9)
The new audit regime
4. 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.
(Paragraph 17)
5. 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.
(Paragraph 18)
6. 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.
(Paragraph 21)
7. 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.
(Paragraph 25)
8. 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.
(Paragraph 28)
9. 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.
(Paragraph 29)
Independence: Appointment and Removal of Auditors
10. Given the potential problems associated with local appointment, we recommend that a capacity is retained whose functions are limited to the procurement of audit.
(Paragraph 37)
11. 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.
(Paragraph 41)
12. 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.
(Paragraph 43)
Strengthening Proposals for the Police
13. 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.
(Paragraph 45)
Managing outstanding audit contracts
14. 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.
(Paragraph 47)
15. 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.
(Paragraph 50)
Public Interest Reporting and Whistleblowers
16. 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.
(Paragraph 60)
17. 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.
(Paragraph 61)
18. 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.
(Paragraph 63)
Value for Money Studies (VfM)
19. The scope of the Audit Commission's work on VfM expanded over time at the request of the Government. While we received conflicting evidence about the value of the Audit Commission's work in this area, we are disappointed that the Government failed to undertake a review of the Commission's Value for Money work prior to its termination.
(Paragraph 69)
20. We are very concerned that the draft Bill makes no provision for comprehensive like-for-like value for money comparisons which would enable informed judgements about whether taxpayer money had been spent effectively. The Bill should be redrafted to include a systematic process to enable benchmarking and like-for-like comparisons between public bodies in the new regime.
(Paragraph 70)
21. We note the C&AG's confidence that the NAO will be capable of undertaking the additional VfM work imposed by the draft Bill. The C&AG should monitor closely whether he has sufficient resources to meet this requirement and, if necessary, request additional resources from the Public Accounts Commission to discharge his new responsibilities.
(Paragraph 72)
22. We recommend that the C&AG consult widely in order to identify the core issues which need to be addressed by its six Value for Money Studies. We expect the C&AG to work closely with the Committee of Public Accounts in developing its expanded VfM programme.
(Paragraph 76)
23. We recommend that the Bill include a provision to confer on the C&AG an additional power to instruct auditors to collect consistent information on his behalf. The Secretary of State should provide detail on how auditors will be reimbursed for this additional work.
(Paragraph 78)
24. We are concerned that as a result of the draft Bill there a vacuum surrounding Value for Money work for individual local bodies which sector led organisations, including the LGA, are expected to fill. This places a substantial amount of responsibility on the LGA which is essentially a membership organisation and is primarily accountable to its members, rather than directly to the taxpayer.
(Paragraph 81)
25. We consider that the effectiveness of the LGA's peer-led improvement work is undermined by that organisation being a membership body, and the absence of a formal mechanisms to identify poorly performing local authorities who may, or may not, choose to participate.
(Paragraph 82)
26. We recommend that the NAO should undertake a review of the effectiveness of the LGA's sector-led approach one year from the commencement of the scheme.
(Paragraph 83)
Audit Fees and the Market in Audit
27. While we recognise that there would be scope for achieving economies of scale through joint procurement in the new regime, we also consider that substantial economies could be realised through central purchasing and appointment. This reinforces our view that a central procurement capacity should be retained. However, should the Government maintain its commitment to local appointment, we recommend that local bodies be encouraged and supported in jointly procuring audit in an effort to secure more competitive fees than could be achieved if each individual body appointed its own auditor. We consider the LGA to be well placed to potentially play an active role in facilitating this process.
(Paragraph 90)
28. Given the uncertainties surrounding the level of future audit fees, we recommend Government conduct a post-implementation review following both the first and second self-appointment exercises.
(Paragraph 91)
29. We are concerned that the provisions in the draft Bill will not produce an open and competitive audit market as envisaged by the Government which is an aim that we support. The Bill should not result in contracts being awarded to a small number of audit firms. We recommend that the Government consult further appropriate bodies including the Competition Commission, FRC, LGA and professional accountancy bodies in order to amend the Bill so that effective competition can be realised.
(Paragraph 96)
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