Draft Local Audit Bill ad hoc CommitteeMemorandum submitted by National Association of Local Councils

This Written Evidence has been prepared for the Select Committee by John Findlay OBE (Chief Executive) and Peter Lacey FCA (Accounts and Audit Adviser) on behalf of the National Association of Local Councils. The Association is the nationally recognised membership and support organisation representing the interests of around 9,000 parish councils and many parish meetings in England.

In addition Peter Lacey FCA is currently Chairman of the Joint Practitioners Advisory group (JPAG). This is an independent group formed to set standards for accountability and governance at small public bodies in England. Membership of JPAG includes The Association of Drainage Authorities, relevant Government Departments, CIPFA and the Audit Commission. We understand that time constraints preclude JPAG from offering any Written Evidence.

Evidence:

Summary of Evidence:

1. Parish and Town Councils are part of local government and it is our belief that the general high requirements for public money audit and governance should apply without exception. There is clearly some room for a proportionate approach given the lesser values of funds in this sector. Nevertheless, there have been examples of poor governance, theft and fraud at parish councils just as there have been at other public bodies.

2. The Association sees the overall Policy proposal as driven by the needs of central Government and the principal bodies—therefore the effects on the small authorities will be unintended consequences rather than deliberate attempts to improve the present accountability, audit and reporting of parish councils and other small bodies. There is a risk that matters that are important to the sector will be left to secondary legislation away from the proper scrutiny in the House.

Detailed evidence:

A: Localism and decentralisation—specifically, whether the provisions empowering local bodies to appoint their own independent external auditors will work and provide adequate safeguards, for example, to ensure independence and the extent to which the provisions in the draft bill are future-proofed to take account of emerging changes such as the accounting arrangements for community budgets and the sharing of services;

3. Given the political imperatives of localism and cost-effectiveness; the proposal for a sector-led, self-financing, body that has been drawn up by us and which is supported by other stakeholders should enable the procurement duties and costs to be shared. This should provide sector control (localism component) with savings compared with individual councils making individual local appointments (cost component).

4. We consider that local individual appointment by small bodies will be expensive and will be at a high risk of a lack of independence in audit appointment.

5. The small bodies present low value, low priority but high numbers which increases the risks of some poor governance and behaviour.

6. It is unclear how there will be reassurance to Ministers and the Department that 100% audit coverage of the sector has been achieved—with no Register of all local authorities (compared with companies, limited partnerships, and charities). In the small body sector there is a high level of mobility as the “office address” tends to be the home address of the chief officer (The Clerk), this can present a risk that the body can “drop out of the system”.

7. The Association is not convinced that the opportunity to opt-out of the sector-led procurement body will be for the benefit of the whole sector. There may be scope for involvement of the largest of the small bodies in the procurement process—an offer that could not effectively be made to all 9,500 bodies.

8. Comments made by other stakeholders indicate a proper need to ensure due independence of the sector-led body.

B: Transparency—in particular, whether the provisions in the draft Bill will ensure that results of audit are accessible to the public in a transparent and intelligible manner and data of interest to the public is easily available so that local bodies can be held to account for local spending decisions;

9. Our first concern with transparency is to see that the papers and formal Accounts of the small bodies are intelligible to the public. There is a widespread view that the full Accounts of local authorities and companies are just not understood by the majority of the groups that are expected to read them. The “armchair auditor” must have papers that are meaningful to the user. There is a reluctance to admit it but we wonder how many Councillors understand the Accounts documents that they formally approve, and for which they required to take responsibility.

10. The current Transparency Code is followed by some but not all parishes in disclosing payments over £500. The Command Paper on the Draft Audit Local Bill suggested that greater transparency could be offered in exchange for the exemption from audit (below a “turnover” of £25,000 pa). Further discussion with officials is required on the detail of the “greater transparency”. In particular there is a significant conflict with Data Protection principles, the use of detail within Minutes or Schedules for internal financial control purposes, and the publication of all payments for transparency. The payments of net salary to the lone employee, the amount payable to Pension Fund (if any) and the amount payable to HM Revenue & Customs for Income Tax and National Insurance need to be shown in some way without infringing the privacy rights of individuals. In some cases we are aware of Compromise Agreements with employees that result in the transaction and payment not being recorded anywhere within the public record of the Council. Making exceptions to the general rule always leads to additional time and cost in administration; when starting from a low base (one part-time employee, paid below the Lower Earnings Limit) there is a risk of a cost that is no proportional which leads to pressure on the employee to permit disclosure of their personal data for the benefit of the local authority and local taxpayers.

11. The continuation of the old procedures and principles of Public Audit and the opportunity to question and to object (the challenge regime) is welcome together with the strengthening of the ability of the auditor to resist such invitations for further work where the challenge is seen to be vexatious, trivial or frivolous. Initial complaints are often found to be based on “personalities”.

C: Lower audit fees—will the draft Bill ensure that the audit fees paid by local public bodies are competitive and offer value for money as well as securing the reduction in the overall costs which the Government has predicted;

12. For smaller bodies the abolition of the Audit Commission and the current arrangements for procurement will result in higher audit costs. For some there is a risk that the increases are seen to be working from a free service to a relatively significant amount. Any increase from a “nil” charge will produce some outcry. The costs of procurement, of providing proper practices and guidance, advice and support to both auditors and the audited, are rolled up within the current Commission Fee Scales. With change in any service provision come costs of change—who pays for those costs of change? Do they produce value for money? The reputational risk of substantial outcry and complaint on the costs is seen to be very high; this is a risk for the Department in the future as there will be no Commission to assist in addressing the issue.

13. Over time, as the costs of implementing change have been dealt with, there will still be a likelihood of additional costs for limited assurance audit for the smaller bodies. Considerable economies of scale have been introduced in the last round of appointments with the use of four firms to deal with all small body audits. Perhaps this is the limit for reductions in the number of suppliers without re-creating the issues that arose in respect of the Commission as the single or largest supplier of audit services.

D: The market in auditing service—specifically, whether the operation of the market in audit services is sufficiently competitive to allow smaller firms and organisations such as mutuals and co-operatives to be able to compete with large well-established companies and the effectiveness of the draft Bill in promoting competition in the delivery of audit services;

14. The Association is not convinced that smaller firms and organisations such as mutuals will be interested in addressing this small body market. Specialist knowledge and skills are required to address Public Interest Reporting and “challenge” work effectively. There is a risk that any increase of the list of suppliers will not be to the benefit of the standards applied in the sector.

E: Auditing standards—specifically, whether the draft Bill will ensure that there is an effective and transparent regulation of public audit, and conformity to the principles if public audit and whether the arrangements in the draft Bill will ensure both good practice and lessons to prevent failure are disseminated adequately;

15. The arrangements for audit in smaller bodies were significantly changed in 2001 when the limited assurance audit procedure was introduced. This asked for less arithmetic checking and much more of the review of the proper governance procedures and of risk management. This was viewed at the time with suspicion by some but is now regarded as wholly appropriate and generally fit for purpose.

16. It is unclear in the Bill where the regulation of smaller body auditors will fall.

17. The limited assurance audit could be undertaken by firms that are not “registered auditors”, but how the competence of such firms can be assessed by lay people is presenting a challenge to the Association. We wonder if the general public (or the general parish councillors) really understand the differences between Audit, Limited Assurance Audit, Accountant’s Reports, the Report of the Internal Auditor, and a Report in the Public Interest.

18. There is a division of views on the possibility of exemption from audit on the grounds of turnover. Low value does not necessarily mean low risk. Prosecution authorities take a dim view of theft from public funds by the employees—always apparently seeking a conviction rather than a police caution. Relatively small thefts have occurred at smaller councils over the years—the Association expects high standards in dealing with public funds and is, on balance, against the audit exemption. Every so often, as with all criminal activity, there may be a case that gets the headlines and is well-reported. The risk to Ministers and the Department is that there is one of those cases that gets significant publicity—publicity that is out of proportion to the total amount of public funds under the control, supervision or purview of the Minister or Department. We are aware of one pending case where the losses to the Parish Council are of the order of £600,000 (this is currently within the Court processes).

19. More seriously, governance failures also arise, ranging from the simple administrative failure to complete the necessary simple Annual Return to the complete breakdown of governance standards due to the presence of undeclared interests and general bad management practices.

20. It is clear from anecdotal evidence that the standard of internal audit at some parish councils is not as high as it could be—steps will be taken to offer further training in internal audit activities. Too many in the sector wrongly see the internal auditor as providing the services of the external auditor but from an unqualified person.

21. It may be appropriate for arrangements to be made within the profession regarding training and qualification of individuals and firms that may undertake the limited assurance audit of public bodies.

22. We note the absence of a mechanism for the wide dissemination of Reports in the Public Interest. The only publicity being required is in the area of the authority in question. This is an example of a necessary function currently carried out by the Commission that will cease with its abolition. Appropriate publicity is not just about reaching the locality but is also about the wider interest of the whole sector.

F: The objectives of the new arrangement—specifically, what are the objectives for the new arrangements and how will their impact be measured;

23. The Bill should have as its objectives for smaller bodies being the cause of a little change at each council as possible. The proposal for a sector-led, self-financing, body to provide procurement services is part of the solution to this objective.

24. The Bill still leaves open the ways of achieving the production of relevant proper practices, appropriate advice, guidance and support previously provided by and through the Joint Practitioners Advisory Committee, the other stakeholders, and the Commission.

25. The continuation of the rules for Public Interest Reporting, Advisory Notices, and challenge work (with safeguards for vexatious, frivolous and trivial) is also an Objective for the Association.

26. The use of Audit Committees at principal authorities will be followed with interest by many of the 150 largest of the Town Councils but these will clearly at this stage only optional as part of good governance. We see the corporate responsibility for good governance and control as paramount at all sizes of authority.

27. The Association sees the overall Policy proposal as driven by the needs of the principal bodies—therefore the effects on the small authorities will be unintended consequences rather than deliberate attempts to improve the present accountability, audit and reporting of parish councils and other small bodies. Impact will be measured by the level of complaints and queries brought about by the changes brought on by this Bill.

G: The winding –up of the Audit Commission—for example, whether the arrangements in the draft Bill for winding—up the Audit Commission made adequate provisions for liabilities and that expertise built up by the Commission is not dissipated;

28. Small bodies share some of the contractual issues with the principal authorities in that audits will be closed at different dates according to the individual issues arising at each authority.

29. Currently the Commission holds the intellectual property rights to the Practitioners Guide and the publishing rights are held jointly by the National Association and the Society of Local Council Clerks. The transfer and future of the provision of this guidance, forming in general as it does the “proper practices” required under present legislation, must be addressed as a matter of some urgency for the sector.

H: The intended role of the National Audit Office—specifically, whether the arrangements for value for money are adequate and whether in time the NAO will take over the role of the Audit Commission;

30. We see the NAO taking some very high level overview interest in the audit arrangements for small bodies. NAO is not seen to be a suitable organisation for the procurement, advice, guidance and support roles presently undertaken or supported by the Commission. A separate unit could be hosted to continue the existing work of the Commission at a reasonable central cost. Some detailed work will be necessary to identify the staffing, costs and income that could be established.

31. Others have identified that the proper place and mechanism for a quality control review of limited assurance audits that needs to be addressed. There is a possibility of a relationship with the sector-led, self-financing body on this.

I: Audit arrangements for health services, with particular reference to the new NHS “system architecture” and new health responsibilities for local authorities under the Health and Social Care Act 2012, which will take effect from 1 April 2013.

32. The Association has no comment to offer on the work for health services but the principles of transparency and challenge should equally apply in this sector and in all areas of public expenditure.

October 2012

Prepared 16th January 2013