Where next for local government audit and assessment?

February 16, 2011

The Localism Bill is an attempt to reverse “decades of increasing central government control”, by “cutting thousands of central targets, stripping away red tape and abolishing the burdensome inspection regime run by the Audit Commission.

While the number of Indicators and performance metrics local authorities and their partners had to report on was criticised by local authorities themselves, the sudden void left by the abolition of the Inspection regime, and the uncertainty regarding the future of local government audit, have profound implications for the future of local government performance assessment. Is this the dawn of truly independent local authorities, or will one set of burdens be replaced by another?

Audit

Following the abolition of the Audit Commission as the principal body of local government audit, the coalition government is keen on introducing “market mechanisms” to conduct local government audit: “audit functions will be moved to the private sector; councils will be free to appoint their own independent external auditors from a more competitive and open market”. The ultimate justification for this would be to “save council taxpayers’ money and decentralise power”

Special attention should be given to the mechanisms put in place in order to ensure that the proposed solution will be, on the whole, cheaper, transparent, and would retain the same level of quality as the previous arrangements.

Unless the process is rigorously examined, problems relating to conflicts of interest and market distortions could arise. Many firms provide both auditing and consultancy services. Lessons from the private sector should be heeded, and mechanisms should be put in place to ensure that no conflicts of interest arise. There is currently no provision preventing auditing firms from conducting both external audit and internal audit services to the same authority.

Aside from conflicts of interest, special attention will have to be paid to costs: Studies from the LSE have shown that audit fees increased by 2.4% following the reduction from five large auditing firms to four, following the near-demise of Arthur Andersen in 2002. It is far from certain that costs will be reduced across-the board by replacing a public funded body such as the Audit Commission, which was able to offer discounted rates, by private audit firms. This is especially problematic for smaller councils, geographically distant ones, or small public bodies.

It is also worth examining how audit will take into account the myriad of relationships, partnerships, and commissioning that local authorities have been engaged in with regards to public service delivery. Will the work of charities or social entrepreneurs, commissioned from councils as part of the Big Society, be audited too? What about private contracts? Or joint service delivery as part of front-office shared services? The delivery of public services today involves a range of organisations, spread over a large geographical area, providing different facets of a service. Untangling the complexity of these arrangements will be a substantial task, and any new system must ensure that the new approach will enable citizens to get a clear picture of how their council is spending their money.

This problem is exacerbated by the dilemma of whether audit should consist purely of financial probity (ensuring that funds are spent legally and are accounted for), or whether this should encompass concepts such as “value-for-money” and “good governance”. The latter implicitly includes a value judgement about the partnerships, contracts, commissioning that a local authority has engaged in. Will this be optional, or mandated by central government? If local authorities are free to choose what “level” of audit they are subjected to, this will raise important questions relating to comparability and standards. One of the historic purposes of audit has been to ensure that councils can be compared to one another, that the data that comes from audit is “universal”, and not simply reflective of specific accounting methods. It is difficult to envisage a mechanism whereby central government does not mandate for some sort of common standard, with local authorities free to go above and beyond it if they so wished.

Transparency should be an important principle underpinning any audit regime, as it should provide a platform for “arm-chair” auditors to inspect the accounts of authorities. This should provide an additional layer of scrutiny, complementing, but not replacing, the audit work carried out by auditing firms.

Inspection

It should also form the basis of a new assessment framework for the assessment of performance by local authorities and their partners. Previous research from NLGN has demonstrated that the process of assessment and inspection of local authorities should comprise of the following elements:

- Increasing the input of citizens as drivers of both priorities and improvement.

- Enabling the Local Government family to own, design and conduct the risk-based assessment process, which would focus on area self assessments, peer-review, mentoring, and best-practice sharing.

- Allowing citizens to flag up deficient services to the Local Government Family in order to put them forward for peer-review.

- Instigating a risk-based approach to the inspection of services for vulnerable individuals such as schools, care homes and hospitals, through a system of random weighted sample inspections.

- A mechanism allowing citizens to petition for external inspection to flag up poorly performing services in these areas

- Increased focus of inspection and peer-support for poorly performing services dealing with vulnerable individuals

Audit and inspection are both integral part of the democratic governance process. They ensure minimum standards, transparency, legitimacy, and legality in the provision of public services. While the aim of making this process cheaper, more transparent, and more “local” is to be welcome, special attention must be paid to the mechanisms designed to transform these intentions into realities.

NLGN is currently carrying out a project into the issues of financial audit and would be keen to engage with all those with an interest in this agenda.

Nigel Keohane & Olivier Roth, NLGN


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