15.We have recently reported concerns in relation to external audit and how it is too difficult for citizens to find out about local issues that are important to them. Residents and taxpayers have a right to know if there are serious problems at their local authority. However, we heard from CIPFA and the Centre for Public Scrutiny that there is a lack of transparency in situations where an authority is heading toward failure and other organisations are seeking to prevent that. CIPFA told us that “we were all aware that Northants was going in the wrong direction. We were working with the CFO and the LGA was working with members and the chief executive. The Department was aware.” The LGA agreed that “Northamptonshire was an open secret”. However, this activity was conducted ‘under-the-radar’ and kept out of the public domain. LGA peer reviews are an important source of information for the Department about problems in local authorities but, unlike Ofsted reports, these do not have to be published.
16.The Local Government Association told us firmly that greater transparency was not appropriate: “I think people who know what is going on know what is going on, and people who don’t, don’t. There is a good reason for that and I do not think it should change.” The Department appears to have a more balanced view, accepting that “there are very important and valid arguments about the private space” but also understanding that this leaves the public outside and ignorant of the government’s worries. Given the Department’s commitment to localism and local democratic accountability we trust that informal attempts to address governance in an individual authority only take place where there are serious concerns. Where there are serious concerns, there are strong reasons for these being made public without undue delay. The Department is committed to the value of transparency and is keen to explore tools for delivering greater transparency in this situation.
17.The Department said that it “agreed with the recommendations in the NAO Report.” One of these referred to greater transparency and openness in relation to formal interventions. We asked the Department if they would publish lessons learned from statutory interventions. The Department described this as “a useful suggestion”, “something that could definitely add to the debate”, “an important part of learning” and a “discipline of knowing that it has been done”. However, as in responding to a similar recommendation by another Committee, the Accounting Officer did not make a firm commitment and suggested that “it may be other sources will do it better than we can”.
18.There are two types of lessons that can be learned from the experience of statutory intervention: lessons for the councils involved about how best to engage with the process, but also lessons for the Department about its processes and decision making. In relation to the first type of lesson, the Centre for Public Scrutiny also felt there was a gap for councils that wanted to learn from others that had been subject to intervention. We agree with the Accounting Officer that here the Department may not necessarily be best placed. However, we are clear that Departmental self-reflection without defensiveness, leading to the second type of lesson, is an essential discipline. It is what the Department expects of councils. Self-reflection cannot be carried out by another organisation.
19.The Department emphasised the importance of external audit more than once when giving evidence. When we asked the Department about assurance that robust and well-integrated financial governance was in place at each local authority, the response was that “first of all, we would rely very much on external audit”. The Permanent Secretary was very clear that “External audit is an extremely important part of the system. It is where I get my assurance that value for money arrangements are in place in councils.” When we pressed the Department about its assurance over council commercial ventures, the Permanent Secretary emphasised that “The more complicated the activities that councils engage in, particularly as they get more commercial, the more we need to ensure that the professional oversight is there as well, which is why I go back to audit”. Similarly, when we explored the Department’s assurance about council activity carried out through companies, the response was that the external auditor’s value for money conclusion “is the safeguard that I would rely on. That is, if you like, the line of defence. … As things get less standard, the more external audit has to do for us.”
20.There are a number of issues with external audit. Some council chief executives, finance directors and heads of internal audit raised concerns with the National Audit Office that the contribution of external audit to local governance has reduced recently. CIPFA told us that it shared this concern, which it linked to the change to reduction in audit fees. 25% of finance directors at single tier and county councils felt that their audit fees in 2017–18 were too low relative to the risk that their authorities face. Over half of finance directors at single tier and county councils (which have responsibility for social care services for vulnerable people) wanted some change to their external audit. The most common change, wanted by 26% of these finance directors, was more value for money work, particularly in relation to financial sustainability.
21.The Department recognises that concerns about external audit have been expressed from a range of directions and that “we have a lot of questions that we need to answer”. For example, the Department recognised that some finance directors want more from external audit than they are getting, calling this an ‘expectations gap’. The Department said the gap existed because these finance directors wanted “assurance locally about how their organisations are working and about whether value for money decisions are being taken”, as opposed to value for money arrangements “which is what the audit actually looks at”. It added that “If there is a gap, the way the system is supposed to work at the moment is that it is to be filled through peer review and the performance, improvement and oversight side there, rather than through audit. We perhaps need to be clearer about that.” In addition the Department accepted “There is some work we need to do with the Local Government Association” about putting their performance, improvement and oversight work “on a slightly tighter footing”.
22.The Department has committed to carrying out a post-implementation review of the new audit regime in 2019, and invited us to hold it to account for the progress and quality of this work. The Department told us that the review will cover the cost of audit. It also said that “we haven’t yet decided whether it will be an independent review, done for the Secretary of State, or whether it will be work that we corral inside the Department through a consultation.”
52 Qq 22, 28, 29
53 Q 22
54 Qq 95, 76–78
55 Q 30
56 Qq 75, 77.
57 Qq 75–76
58 Q 62.
59 C&AG’s Report, recommendation e.
60 Q 125
61 Qq 125–128; C&AG’s Report, paragraph 3.21
62 Q 24
63 Qq 46 to 51
64 Q 45
65 Q 61
66 Q 110
67 C&AG’s Report, paragraph 2.36.
68 Q 3.
69 C&AG’s Report, Figure 17.
70 C&AG’s Report, paragraphs 2.40 and 2.41, and Figure 19.
71 Q 42
72 Q 69
73 Q 76
74 Qq 42 to 45
75 Q 73
76 Q 44
Published: 15 May 2019