Following the Money: Creating a New Local Government Audit Regime

April 20, 2011

When the Coalition came into power, it promised to reduce central interference in the affairs of local government. When it comes to performance management, by abolishing first Comprehensive Area Assessments, then the Audit Commission, it seems as though the Government’s policy is to “abolish first, ask questions later.”
The current policy and financial context in which local authorities operate was a critical factor in attempting to design a new system for audit. Considering that the Audit Commission might be in existence for another three to four years, it was important to design a system that would function in the long-term, and which took into account the greater financial autonomy councils should have acquired by then. The knock-on effect of this greater financial independence is that councils’ financial accountability is shifting from central government towards the taxpayer and citizens. Audit should therefore be “local”: driven by citizens, not central government.

It was also important to recognise that local authority budgets will be extremely tight for the foreseeable future. Any new audit regime should therefore endeavour to keep costs as low as possible. This means that a competitive market is essential in ensuring audit firms of different sizes could offer attractive rates to councils of different sizes.

The final consideration was that public confidence in politicians and in public institutions is at an all-time low. Audit provides assurance that the system is robust, free of corruption, and that taxpayers’ money is being spent legally. Should a financial scandal emerge, citizens’ faith in political institutions could be fatally undermined. It is therefore critical that the system is robust, both in the public perception and in reality. Auditors should be free to conduct their audit without fear or favour.

These three principles – localism, market vibrancy, and independence – have underpinned our lines of enquiry. The difficulty resided in marrying those three objectives. To take one example, the best way to ensure independence of auditors would be to have a centralised body appointing auditors on behalf of councils, but this would not be a “localist” solution. Similarly, enabling councils to appoint their own auditors would be a localist solution, but would jeopardise their independence. How, then, do we square these circles?

In auditor appointment, NLGN advocates devolving responsibility to statutory independent audit committees. These would be chaired by a lay expert, and comprise a majority of non-council members. Currently, around 90% of local authorities have audit committees, so the cost of making them mandatory and placing them on a statutory basis would be relatively cheap and straightforward. Such a solution would be localist and would ensure independence.

The role of citizens should also be enhanced, both to foster political engagement and participation in the activities of local councils, but also as an additional safeguard mechanism. The financial reporting should be simpler, more accessible, and stream-lined. A ‘Right of Appeal’ should also be created, so that citizens can challenge appointment decisions, under specific circumstances: for example if councils were to discontinue their relationship with a firm following a Public Interest Report.

Audit itself should also be simplified and streamlined. While Value-for-Money (VfM) studies can bring potential benefits, NGLN believes they should not be mandatory. Audit should be about ensuring income and expenditure are properly and legally accounted for. VfM is fundamentally a value judgment, based on political assumptions, and therefore politicises the remit of independent auditors. Removing mandatory VfM considerations would have the additional benefit of increasing the number of firms able to carry out audit functions. VfM could become optional, or be undertaken by a council’s Scrutiny Committee, separate from the auditor.

With regards to the Audit Commission Practice, NLGN believes the firm should be mutualised, rather than sold off to private competitors. This would have two-fold advantage: it would enable the Commission to retain its expertise and experience of public audit, and ensure the existence of an additional player in the audit market. Selling the Audit Commission, either wholly or in chunks, would only serve to reinforce the dominant position of the firms with the resources to purchase the Practice.

The system will have to be tightly regulated, with professional accounting bodies, the National Audit Office, and the Financial Reporting Council all having a role to play. The Government should also monitor the development of any future regime closely, and review the new system in order to ensure all its aims are fulfilled, and that the system is working as expected.

NLGN’s new model of audit would not only reinforce local accountability but also provide a unique chance to ensure an open, competitive and inclusive audit market.

Olivier Roth, Researcher, NLGN
eGov Monitor


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