Accounts and accountability: Reforming local government audit

April 1, 2011

When the coalition government decided to abolish the Audit Commission, it argued that a new local government audit system would be cheaper, more localist, and just as accountable. Competition, choice, and freedom were to be driving forces of this new regime, replacing the centralised, top-down system of the Audit Commission.

So far, discussion of supposed extravagance at the races and counter arguments of an abrupt political decision have dominated the debate. However, this was a bold move for very different reasons.

In the first place, while the Audit Commission had attracted criticism for their application of the Comprehensive Area Assessment (with the Use of Resources being especially unpopular), the audit function had not witnessed the same level of disapproval.

Furthermore, the recent financial crisis highlighted to policy-makers the potential dangers which can arise when the relationship between auditors and auditees become too cosy. And, from the demise of Arthur Andersen following the collapse of Enron, the lessons were clear to all: auditing must be regulated and properly scrutinised, lest the whole system collapse.

As the debate has unfolded over the last eight months, it is becoming clear why something as dry as audit can possess such a critical role in the functioning of a system. The answer is simple: whether the financial market, the retail sector, or governing a country, audit provides confidence. It creates certainty that the foundations are legitimate and solid, trust in the organisations being audited, and indeed trust in the system as a whole.

At a time when public confidence in political institutions is at a record low, audit is arguably more important than ever. And, if the government strips out a proper level of scrutiny and assurance then the concept of localism itself may suffer. Citizens need to know, and have the mechanisms to verify, that their money is being spent legally and legitimately, in ways that are as cost-efficient as possible so that they can hold their elected representatives to account. In other words, audit must be shown to be truly independent, adhering to strict guidelines, and also cost-effective, through a vibrant and competitive market-place.

These necessities create tensions. For instance, at first glance, the most effective way to ensure independence might be to have all audits bundled together and auctioned off to private firms by a centralised body, or commission. This commission could even undertake audit itself, since it would be funded by the state and be independent, and as a monopoly could not suffer from adverse impacts from negative audit reports. A Commission for Audit, if you will. This, however, runs counter to moves to increase the financial self-sufficiency of local authorities while strengthening accountability between councils and their residents.

Such tensions must also be managed within the current public policy context: budget cuts, transformation of service provision, shared services, the Big Society, and a general drive towards localism. This means many less resources, much greater complexity and greater divergence of local approaches.

So how can we square this circle? Perhaps the starting place should be the object of the audit itself: local government accounts and how to make these accessible to citizens. Secondly, we could also be more inventive about regulation. How can a system be both local and independent? How can we ensure a competitive, open and inclusive audit market, while ensuring rigour and robustness in the system? And can we find a way to engage “arm-chair” auditors, wherever they may be, in this process?

Marrying these aims requires a new series of solutions. NLGN’s research to be published in the coming weeks will set out how a new system of regulation can provide these safeguards in a decentralised state.

Olivier Roth, Researcher, NLGN
Public Finance


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