Draft Local Audit Bill ad hoc CommitteeMemorandum submitted by Oldham Council

Draft Local Audit Bill ad-hoc Committee

Select Committee Announcement

Pre-Legislative Scrutiny of the Draft Local Audit Bill—Submission from Oldham Council

Summary of Key Points:

Oldham Council is in agreement with the over-arching intention of the proposals contained in the Local Audit Bill and supports their key objectives. The key challenge is that, in the current financial environment, where local authorities are responding to significant financial pressures, it is important that the changes do not result in a system which then requires excessive administration to support.

In summary, the key issues which need to be considered in advance of the bill are:

The impact of a limited supplier market based on the outcome of the recent Audit Commission procurement exercise resulting in a potential limited choice of external audit providers when individual local authorities become responsible for their own procurement .

The need to ensure that the audit fee reflects the internal control risk presented by the authority and that this audit risk is reviewed annually and improvements or increased issues are reflected in the scale fee charged.

The practical challenge for Councils to recruit and retain sufficient numbers of appropriately skilled independent members to its independent auditor panel.

The requirement to fully set out the role and detailed responsibilities of the National Audit Office (NAO). Around the setting of standards for the external auditor to comply with.

Submission:

The Council submits the following information as part of its submission. This section is structured in accordance with the recommended format of the Announcement:

Localism and decentralisation: Once the current long term contact has expired, the new arrangements should benefit this Authority which reflects its improved financial management. It will enable constructive discussions with external providers on the Council’s risk profile and the impact this will have on the fee. Under the present system there is a lack of clarity about whether the Council’s risk profile is determined by the on-site auditors or via the central Audit Commission function. The new arrangements proposed in the bill will make challenging of this fee much more transparent. This has an impact on audit fees which is covered below. As a “check and balance” to allowing individual councils to make their own appointments and ensure consistency in auditing local authorities, it is essential that there are appropriate safeguards in the arrangements to ensure an independent review of the quality of the work done by these audit providers selected by the Council. Previously this was done by a specialist unit within the Audit Commission aiming to ensure consistency in the external audit approach.

Transparency: In terms of public accountability, it is important how the scope of work undertaken by external audit is specified and reported. The principles of having an Independent Audit Panel including a majority of independent members, which is separate from the Executive as set out in the Bill seem sensible. Whilst the benefits of an Independent Audit Panel are clear the key challenge is whether there are sufficient independent members nationally to support this process given the number of local authorities who will need to recruit. This has proved a practical issue for this Council and paying appropriate remuneration will be key. In return it is essential that independent members are recruited using appropriate criteria, have no local political involvement and their performance is subject to on-going review. This should include removal for not carrying out the role satisfactory.

Lower audit fees: The real impact of these changes will not be fully determined for five years when the present Audit Commission procurement expires. However, the key issue under the present arrangements, for this Council is that it has only received a reduction in audit fees in line with the other local authorities; despite significant improvements to the financial management and control made over the last few years. These improvements have been reported by the Audit Commission in their last three Annual Governance Report (2010–11, 2011–12 and 2012–13). Authorities who could not close down their Statement of Final Accounts in accordance with the requirements of International Financial Reporting Standards in 2011–12 have received the same percentage fee reduction. Therefore this equal proportionate approach does not reflect this Council’s real risk profile given it has improved in recent financial years. Oldham Council continues to ensure continuous improvement in its financial arrangements and is of the view the audit fee should reflect the risk. This risk assessment should be carried out on an annual basis and fees reviewed in a timely manner agreed by the Independent Auditor Panel.

The market in auditing service: For the next five years, under the present contracts, the providers of external audit services will be limited to four suppliers for local authorities and health. Of which only three are contracts of magnitude. Therefore this is envisaged to be a direct challenge faced by local authorities in facilitating competition when they become responsible for procurement around the choice of suppliers on the market with experience of auditing. There will be limited incentive for any other audit provider to develop into this market until five years time.

Auditing standards: The Code to be developed by the NAO will facilitate the standard around the quality of probity audits carried out by the successor firms appointed to the Audit Commission. However, the challenge is potentially around other audit activities including value for money audits across the whole of local government given the NAO in its previous role has not been involved the detail on local government and health.

The winding-up of the Audit Commission: The loss of expertise on briefing technical developments to local external auditors is clearly a risk. One strength of the Audit Commission centrally was that it was able to produce briefings to staff on these matters. The planned structural changes in both local government and health over the next two years are not insignificant. Individual external audit managers would appear to be very reliant on local authority staff to keep them up to date on these developments. The potential liabilities arising from the winding up of the Commission cannot be assessed by this authority. There is clearly a risk of initially underestimating these liabilities, including those from deferred pension commitments. Should these liabilities be underestimated it is important they are underwritten by the Department for Communities and Local Government. It would be unfair to pass on any excess cost to local authorities. Should there be a surplus when the Audit Commission is wound up this should be distributed amongst local authorities and health, which have funded the body from the external audit fees that they pay.

The intended role of the NAO: There is a need for absolute clarity on the role of the NAO and other supervisory bodies as set out in the bill. The NAO has always been clear that it envisages a minimal role preparing the Code.

Audit arrangements for health services: Clearly the transfer of public health to local authorities is a significant risk and will involve the merging of two different cultures and systems. These risks will need to be handled by service managers and auditors will clearly need to determine how to manage this risk especially following a period of uncertainty. Any audit practice should be incorporated into any relevant Codes of Practice.

October 2012

Prepared 16th January 2013