Risk & Economy » Audit » Local audits go back to the future

LAST YEAR the Audit Commission outsourced its audit practice and brought an almost unnoticed end to 168 years of history.

It was in 1844 that the District Audit Service was set up to ensure probity and proper stewardship of public money. Originally part of the Treasury, it was incorporated in the newly established Audit Commission on 1 April 1983. Although the name District Audit was dropped some years ago, there was an essential continuity until the outsourcing took effect on 1 November.

While a final verdict on the changes cannot be made until after the 2012/13 final accounts process, initial indications are that the changeover has gone with few problems. The director of finance of a Midlands local authority tells Financial Director that it had gone “smoothly”.

“Both the Audit Commission and Grant Thornton managed the transition well and we are building positive working relationships with the new audit team. Whatever framework the government chooses to put in place, we will work constructively within it,” the director in question says.

The changes will also result in significant savings for audited bodies over the five years of the new contracts, with a reduction in audit fees of 40% compared to previous arrangements. As the commission is about to embark on a retendering exercise for the 30% of audit work that was already contracted to the private sector, all audited bodies can expect to see savings at a time of severe financial pressures.

A step back
With the ending of the inspection regime for local authorities, the Audit Commission has been reduced to core functions of commissioning audits and overseeing the quality of audit delivery. Late last year the government issued a draft bill to abolish the residual Audit Commission. This provides for audited bodies to appoint their own auditors after the current contracts end in 2017, and for the Financial Reporting Council to assume oversight of audits and for remaining functions to be transferred to the National Audit Office. Abolition of the Audit Commission is expected to happen in 2015.

The proposals are a step back to the future for local authorities which, until 1982, appointed their own auditors. The proposal is that the appointment should be made by an audit panel, separate from an authority’s audit committee, which must include members who are not elected members of the authority.

Concerns about auditor independence were raised both by the commission on its response to the consultation and by the Parliamentary Ad-Hoc Committee on the draft Bill whose report states: “The draft Bill fails to provide adequate safeguards to guarantee the independence of audit.”

Doubts were expressed about the ability of authorities to find enough people of the right calibre to fill the audit panels. The MPs favoured a continuation of arrangements where auditors are appointed centrally. Nonetheless, as one auditor commented, NHS Foundation Trusts and academies already appoint their own auditors and this has not caused any problems, and while there have been issues with auditor independence in the private sector, these have been the exception, rather than the rule.

A further concern relates to cost. The commission is of the view that it is the best guarantor of value for money as a bulk purchaser of audit services and that there could be significant increases in audit fees if bodies make individual arrangements.

The government, on the other hand, thinks that opening up the market to new providers will result in more competitive pricing. The problem here is barriers to entry. Public audit is specialised, and capacity-building takes time. If bodies are permitted to form purchasing consortia for audit services then this is likely to favour larger providers. The outsourcing exercise has awarded more than 90% of audit work to three large firms: Grant Thornton, KPMG and Ernst & Young.

Closely linked to the commission’s role on outsourcing this function is its position in overseeing audit quality and ensuring consistency is applied. This is a significant issue for Whole of Government Accounts (WGA), as shown by its qualification for 2010/11.

A significant matter raised by the National Audit Office was diverging treatments of property, plant and equipment by local authorities, treatments accepted by its auditors. This function will now be transferred to the Financial Reporting Council, which raises the question of whether the FRC will be too remote from the needs of the public sector and the requirements of WGA to exercise this role effectively.

Leaving a hole
Although many accounting advisers might be expected to breathe a sigh of relief at the commission’s demise, there are those who take a different view. A senior finance manager at a London borough says that “the commission will leave a hole that will be difficult to fill”.

“I am not convinced that the new arrangements for oversight of audit are adequate. The commission also did valuable research work. This too will be missed,” he says.

Public sector accounting institute CIPFA, however, is sanguine about the implications of abolition. Assistant director, policy and technical, Paul Mason points out that auditors will be bound by ethical standards, which require them to act independently. “Auditor panels and audit committees will also have a role in ensuring auditor independence. Nevertheless, it is important that appropriate safeguards are built in to the draft Bill,” he says.

Inevitably, the demise of the Audit Commission will leave a hole that must be filled. However, other bodies will be able do this: CIPFA/LASAAC – the standard setter for local government – also has representatives from Wales Audit Office, Audit Scotland, Northern Ireland Audit Office and the firms, with the NAO to attend in an observer capacity, so the technical capability of CIPFA/LASAAC will not be jeopardised.

CIPFA will also work closely with all involved to support the process, and it recently ran what it describes as “a very successful” series of events to assist local authorities with the closedown of the 2012/13 accounts, filling the gap left by the Audit Commission’s workshops.

It must, however, be a matter of concern that, nearly three years after the government announced its intention to abolish the commission, significant questions remain unanswered. The government’s response to the matters raised by MPs is expected in the coming weeks, ahead of publication of the Bill.

Audit Commission timeline

1844: District Audit service set up
1983: Audit Commission formed, which absorbed District Audit
1990: Audit Commission given responsibility for NHS audit work
2010: MP Eric Pickles announces the abolition of the Audit Commission; local government moves to IFRS
2011: Majority of Audit Commission audit work, still undertaken by its own staff, put out to tender
2012: Audit Commission’s work divvied out to successful bidders; former AC staff spin-off DA Partnership subsumed into Mazars after failing to secure enough contracts; Jeremy Newman appointed Audit Commission chairman to wind it down
2013: Public Accounts Committee chair Margaret Hodge says the draft Local Public Audit Bill, which includes details over audit, “will result in a more complex and fragmented audit regime”; final tranche of ‘old’ Audit Commission work, worth £25m a year and already undertaken in the private sector, to be retendered