Held to account?

David Walker, former managing director for communications and public reporting at the Audit Commission, questions the Government's changes to local audit.

Sir Bob Kerslake, head of the civil service as well as permanent secretary at Communities and Local Government, has not been in Whitehall that long, but seems quickly to have acquired a mandarin skill. That is to express misgivings in code.

He has never said anything about the demise of the Audit Commission. Indeed as permanent secretary at CLG he was at the right hand of Eric Pickles when, after the most cursory consultation (most of which was inside Whitehall), the Secretary of State announced the Commission’s abolition in August 2010. Sir Bob does not appear to have said ‘no, minister’ at any point prior to what was widely judged a hasty and ill-considered decision (see House of Commons Communities Committee Audit and inspection of local authorities, 4th report, July 2011).

And yet Accounting Officer Accountability System Statement for Local Government published by CLG in March, under Kerslake’s signature, is cautionary, especially when read in conjunction with Accountability: Adapting to decentralization, the paper he wrote for the Cabinet Secretary, published in September 2011.

The very fact Kerslake coined the phrase ‘accountability system’ could be taken as a corrective to the government line that abolishing the Audit Commission produces more ‘freedom’ and accountability. The word ‘system’ is not one that readily spring to mind contemplating what the government envisages for local audit as promised in the Queen’s Speech (see the background briefing).

According to the civil servant, auditors remain one of the ‘principal local checks on regularity and propriety’, alongside the duties of the Chief Finance or Section 151 Officer. If councillors were to decide on unlawful expenditure, the auditor will still be there to pursue them in the courts: Sir Bob as good as says that sections 17 and 24 of the Audit Commission Act 1989 will have to be re-enacted (par 25 of the Accountability Statement for Local Government). Councils will be required to have annual external audit (so section 2 of the 1998 Act lives on). Sir Bob event appears to say (par 28) that section 8 of the 1998 Act as amended by the 2003 Local Government Act will also roll forward.

This isn’t the tenor of ministers, in their press releases or in the note on the forthcoming legislation. For example, the Bill will "align the regulatory regime for audit in the private and public sectors", through the agency of the Financial Reporting Council. This is likely to entail upheaval and possible confusion. The Financial Reporting Council is a hybrid corporation, which has had little directly to do with the public sector and seemed, until recently, to want to focus on company audit – rightly so, some might say, given controversy over the accounts of banks and directors’ remuneration.

Auditors of companies don’t ‘report in the public interest’, but Kerslake mooted the retention of precisely such a duty, and for the auditor’s report to be considered by the full council. But exercising that duty is a matter of auditor discretion. The principal audit law textbook, Local Government Audit Law by Reginald Jones, bursts with examples of auditor activism (and a fortiori passivism). But Jones’ auditors were civil servants or public officials and audit has now been privatized.

In the nearly two years since the announcement of the Audit Commission’s close down we have seen the abolition of the vestigial district audit service, meaning a corps of public officials with an ethos and a sense (still bright in some quarters) of historical continuity with a public audit tradition going back at least the Poor Law Amendment Act of 1834.

The question is what happens to their functions, many of which (according to Kerslake) remain highly relevant.

The Audit Commission no longer employs auditors. All local audit work has now been contracted to profit-seeking companies and partnerships. The Audit Commission did previously contract out a portion of England’s local audit work but – I can report from personal experience – surrounded its contractors with not just a regulatory regime but a culture in which private sector auditors were encouraged, even push to behave in a not dissimilar way from the public auditors. The critical case was Magill v Porter, Magill v Weeks, where the district auditor had been from the private sector, working on contract.

Now it’s an open question whether a private sector auditor would, if circumstances pushed, rush to carry out duties under section 8. The auditor, as a partner in or an employee of a profit-maximising firm, would also have to consider reputational risk and commercial disbenefits, let alone the specific costs of mounting legal action.

With a flourish the Audit Commission announced large savings from letting all its audit contracts. They amount to a 40% cut in the fees payable by larger local authorities. It does not specify how such large amounts are to be saved – surely not from further shrinkage of the Commission’s corporate centre, which is already a shadow of what it had been.

The major thrust of the legislation abolishing the Audit Commission will be freedom, say ministers, meaning that local authorities will, like private companies and certain other public bodies such as universities and foundation trusts, choose their own auditors. But not immediately and not without hedging – the detail in the legislation when it finally appears will be worth watching.

For the next five or so years there will be an interim regime involving the Commission then perhaps some sort of residuary body that will ‘manage’ contracts. Presumably the Financial Reporting Council will monitor firms’ compliance with the regulatory requirements set out in the Audit Commission’s Standing Guidance for Auditors.

But the statutory Code of Practice for local audit will belong to the National Audit Office rather than the FRC. The NAO – which is an agency of the House of Commons for most practical purposes, even though it has separate governance and its chief executive, the Comptroller and Auditor General has independent powers – is already getting to grips with council spending, and the forthcoming legislation will extend its value for money inspectorial powers.

Local government applauded the abolition of the Audit Commission, believing ministers’ talk of a new localism. They may find they have opened the town and county halls both to a new central bureaucracy and to auditors who do not have the public interest at heart.

David Walker was managing director, communications and public reporting at the Audit Commission until 2010. He is contributing editor at Guardian Public.