Draft Local Audit Bill ad hoc CommitteeMemorandum submitted by SE7 Group

Local Audit Bill 2012

Introduction

1.1 The South East 7 Group (“SE7”) is a voluntary partnership of local authorities committed to collaborating to deliver efficiency savings and service improvements. We have a proven track record of working together on a programme of vital service areas and we are motivated to explore all opportunities to deliver better outcomes for our 5.5 million residents. Our membership is both county and unitary and consists of Brighton and Hove, East Sussex, Hampshire, Kent, Medway, Surrey and West Sussex.

1.2 As part of our partnership work, SE7 regularly makes representations to government which are supported by all member authorities.

1.3 SE7 welcomes the opportunity to submit a letter to you as Chair of the adhoc committee conducting pre-legislative scrutiny of the Draft Local Audit Bill. As discussed with your office, while this letter will be received after your published deadline for written evidence, it outlines SE7 authorities’ shared views in relation to particular aspects of the Local Audit Bill which we believe are relevant in your consideration and scrutiny of the Bill.

Abolition of existing regime

1.4 SE7 authorities welcome moves to reduce regulatory burden and reduce audit fees and costs. We support the local appointment of auditors rather than the appointment by a central body. We also welcome the emphasis on the scope of audit around the accuracy of financial statements and probity issues rather than performance and improvement. As authorities within the South East, SE7 authorities should be able to source cost effective and timely audits from suitable audit practices. We recognise that Councils in more remote areas of England may face more challenge.

1.5 We do however have some concerns about the potential extension of the current contracts until 2020 over which SE7 or other authorities do not have any control. Effectively this means that authorities will not be able to appoint external auditors potentially until 2020. This delays one of the key objectives of the Bill—the “localism and decentralism” design principle. It is important that any potential extension of the contracts should be done in full consultation with audited bodies and consideration could be given to transferring the current contracts to audited bodies or groups of such bodies (eg SE7).

1.6 Also we urge that the existing contract management function is securely transferred post closure of the Audit Commission to ensure that authorities can have recourse in light of any areas where the current auditor (not appointed locally) is underperforming in accordance with their five year (possibly extended to eight year) contract.

Appointment of Auditors

1.7 SE7 members support the proposal that local authorities should be responsible for appointing their own external auditors and that there should be adequate safeguards to maintain the independence of the audit/auditor and to ensure that public trust in the process and outcomes is preserved.

Independent auditor panels

1.8 However member authorities have concerns about the Bill’s proposals in relation to the appointment of independent Auditor Panels to advise local bodies on the appointment of their auditors.

1.9 The Bill proposes that this independent auditor panel must consist of a majority of independent members and have an independent chair. An independent panel member is defined as:

not a member or officer of the body within the last five years

not at that time a relative or close friend of a member or officer of the body

1.10 We are concerned about the proposals for the process of appointment of Auditor Panels and the additional bureaucracy that this will bring. Whilst we welcome the proposals to allow existing audit committees to become the recognised Auditor Panel we remain concerned that the requirements for the independent auditor panel detailed above restricts the ability to utilise the current audit committee arrangements of SE7 authorities.

1.11 Currently members of the Audit Committee are drawn from Elected Members who are not part of the Executive (and therefore independent from the executive). SE7 Elected Members take very seriously their stewardship role in ensuring that their Authorities act responsibly and have high standards in relation to corporate governance arrangements. Elected members’ wider role in the activities of the authority puts them in a strong position to do this. These arrangements embed local democratic accountability—a fundamental element that would be lost through the appointment of independent auditor panels as described above.

1.12 As a result of this there are some inevitable practical issues about the establishment of Auditor Panels that would need to be considered and could lead to problems in implementation eg

shortage of suitably qualified independent individuals willing to volunteer for these roles particularly in the absence of significant remuneration

resources required for process of advertisement, recruitment, selection and retention

Joint arrangements

1.13 We welcome the clarity on the role of the auditor panel within the latest consultation and the flexibility this provides for authorities to set up separate auditor panels shared with other bodies that could meet to advise on the auditor appointment and independence and after that only as needed. This would enable joint appointment of auditors going forward and would be particularly beneficial if regional lots were to be commissioned.

1.14 However again we have some concerns about the practicalities surrounding the opportunity for such joint procurement arrangements. This would include:

The risk of conflicts of interest for authorities who wish to jointly procure based on the recommendations of a shared panel but may be already commissioning other services from audit service providers (eg consultancy) who wish to bid for the audit contract

There would need to be support from audited body officers who would take the recommendations to the respective audited bodies for consideration by their respective full Councils. This would involve a certain degree of administration and support on top of the existing audit committee support arrangements required in each authority.

As detailed previously, the ability to appoint suitable independents to act on behalf of authorities jointly would be challenging; particularly to attract appropriate calibre candidates who have the necessary skills and meet the “independent” criteria detailed in the bill.

1.15 In light of these concerns, groups of audited bodies would need the right to put in place suitable governance arrangements to ensure that regional contracts could be awarded to achieve the necessary desired outcomes whilst overcoming practical difficulties.

Impact on fees and costs

1.16 Whilst SE7 supports the reduction in proposed audit fees, there are some additional drivers that should be taken into account which could have an impact on authorities.

1.17 Audit firms appointed recently are already clarifying their expectations in order to achieve the new scale of fees and there is the potential that audit firms will levy additional fees for work that is deemed not to be covered within the core fees. This is a risk that will need to be actively managed during the current contracts to ensure true transparency of costs when appointment becomes a local decision.

1.18 It is likely that if the bill remains in its current format, there could be significant costs in setting up and resourcing independent audit panels. It is more likely that independent audit panels could only be supported as a one off body that would meet to consider the appointment of the auditor due to the cost and resource implications of supporting a standing committee. If instead the Bill enabled existing Audit Committees in their current format to make recommendations in relation to local appointment this would achieve the “localism and decentralisation”, “transparency” and “lower audit fees” design principles whilst still maintaining high standards of audit. We would like to see the legislation reflect these concerns and allow for greater local flexibility.

1.19 The Bill also makes proposals in relation to legal costs arising from an appeal by a potential individual objector against a decision reached by the local auditor. It implies that legal costs of both the independent external auditor and the appellant resulting from an unsuccessful appeal could be charged to the audited body. Given that the decision being appealed is that of the local auditor, we do not believe that this is a reasonable proposal.

Data Matching

1.20 We are supportive of the National Fraud Initiative (NFI) and would wish to see it continue and develop into a more flexible, real time, risk based and proportionate model. Our preference would be for the NFI to transfer to the National Fraud Authority (NFA). The NFA has recently launched its local government strategy “Fighting Fraud Locally—the Local Government Fraud Strategy” and is actively engaging with local government and other sectors in order to work collaboratively to combat fraud. The NFI would fit well with the NFA’s core objectives and its work engaging with local authorities, NAFN and other sectors.

Inspection studies and information

1.21 We support the premise that the NAO will not be able to assess the performance of individual councils nor hold them to account in the way it does government departments. In relation to the NAO undertaking thematic value for money reviews, SE7 authorities support the NAO undertaking such reviews as long as the studies are proportionate, add value to the sector as a whole and do not add to the cost of local public audit. There are concerns over the impact on council resources in collating and presenting any required information and care needs to be taken to avoid mission creep. It is also important that there is no duplication in work that other sector led bodies may be undertaking and that there are clear limits on the number of studies that the NAO is able to carry out.

Conclusion

1.22 This letter details the key points which SE7 authorities wish to be considered as part of the pre-legislative scrutiny process. We welcome the opportunity to submit this letter for your consideration and hope that this will help inform your deliberations. We would be happy to discuss any of the above further or attend to provide evidence if required.

November 2012

Prepared 16th January 2013