Holding councils to account

June 7, 2011

Independence, affordability and localism should be the three main objectives of any audit reform, say NLGN’s Olivier Roth. But achieving those aims is likely to prove problematic as tensions emerge when trying to balance them

When the abolition of the Audit Commission was announced, much public debate focused on tangential matters such as string quartets, horse racing and office chairs. As entertaining as this was, it did not contribute to providing an effective replacement for the Audit Commission-led regime of local government audit.

While the media focused on these stories, important developments were taking place under the guise of various inquiries. A House of Lords inquiry focused on the audit market in the private sector, a European Directive on private audit was being drafted, and a CLG select committee on local government audit was taking place. Audit was being discussed at a local, national and European level – a clear sign of its importance. NLGN, meanwhile, was busy producing its own report on the future of local government audit entitled Show Me the Money.

Why should audit, a subject that can be dry at the best of times, play such an important role in both the public and private sector?

Audit provides confidence and certainty in the system. In the private sphere this allows for investment and market valuation. In the public sphere it provides citizens with assurances that their money is being spent legally and is accounted for. In other words, audit ensures that the foundations of the system are robust. When these foundations are shaken, as in the private sector’s Enron saga, or the public sector’s expenses scandal, the whole system is put in danger of collapse.

For any audit regime to be successful the independence of auditors must be guaranteed. They must be able to conduct their work without fear or favour from the audited bodies. Ensuring the independence of auditors should therefore be a prime objective. In the public sector, this is especially important when public confidence in political institutions is so low.

When designing the new audit regime for local authorities, NLGN also considered the local government’s parlous financial state. With budgets increasingly squeezed, it was critical that any system would keep costs down. This should be achieved through establishing a competitive, open and plural market, creating healthy competition whereby audit firms of different sizes could offer attractive rates to councils of different sizes.

Finally, with the Audit Commission due to remain in existence until at least 2014, it was important to design a system that would be sustainable over the long term, and which would anticipate the greater financial autonomy that councils should acquire over the next few years. If a greater proportion of local authority finance comes from local taxpayers, the burden of accountability should shift from parliament to local citizens. Audit should therefore be local.

Independence, affordability, and localism should therefore be the three main objectives of any audit reform. This triumvirate can be problematic, however, as tensions emerge when trying to balance them. For example, the safest way to ensure independence would be to have a central body appoint auditors. This, however, would remove any element of localism. Similarly, allowing councils to appoint their own auditors would be a very localist solution, but would auditors really feel independent from the council? Would they feel confident in issuing a Public Interest Report, when this could damage their chances of being reappointed?

NLGN’s solution to the appointment of auditors would be to devolve responsibility for such appointments to statutory independent audit committees. These would be chaired by a lay expert, and comprise a majority of non-council members. Currently, around 90 per cent of local authorities have audit committees, so the change in making them mandatory and placing them on a statutory basis would be straightforward. Such a solution would be localist and would ensure independence.

The role of citizens should also be enhanced. A right of appeal should be created so that citizens can challenge appointment decisions under specific circumstances: for example, where councils were to discontinue their relationship with a firm following a Public Interest Report.

The process of audit itself should also be simplified and streamlined. NLGN believes value-for-money (VfM) considerations should not be mandatory; audit should be a technical, rather than political exercise. Removing the VfM requirement and making it optional instead, would have the benefit of increasing the number of firms able to carry out audit.

With regard to the Audit Commission practice, NLGN recommends that it be mutualised. This would enable the commission to retain its expertise and experience of public audit and would ensure one more player existed in the market. Selling the Audit Commission (wholly or in chunks), would only reinforce the dominant position of the firms able to purchase it.

Professional accounting bodies, such as the National Audit Office and the Financial Reporting Council, should have an important role to play in regulating the system, through codes of practice and accreditation. Finally, the government should monitor the development of any future regime and review the system after a few years to ensure its aims are fulfilled, and that the system is providing assurance to citizens.

Olivier Roth, Public Service


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