Writing on the Audit Wall

If the original ‘writing on the wall’ noted in the biblical Book of Daniel charted the imminent Babylonian demise, the August 2010 writing on the newsroom wall of CLG (Department for Communities and Local Government) by Secretary of State, Eric Pickles, did much the same for the Audit Commission. For as Mr. Pickles then wrote in a news release: ‘The corporate centre of the Audit Commission has lost its way.’ In his view, ‘[r]ather than being a watchdog that champions taxpayers' interests, it has become the creature of the Whitehall state’.

Therefore, whilst audit will remain to ensure proper spending of taxpayers’ money, ‘this can be done in a competitive environment, drawing on professional audit expertise across the country’ with the ‘Commission's auditing function become independent of Government, competing for future audit business from the public and private sector’.

End of Line for DA

So although currently ‘District Audit’, the Audit Commission’s in-house audit supplier, delivers approximately 70% of local public service audits, this is to change in October 2012 when the Commission’s in-house auditors will transfer to four private sector suppliers.

This signals the end of the historic office of district auditor which can be traced back to 1844 where the Poor Law Commissioners were required to designate ‘districts for the audit of accounts’ and local Boards of Guardians had to elect ‘an auditor of the district’. As Audit Commission Chief Executive, Eugene Sullivan remarked in March 2012: ‘. . .this is a pivotal point in the history of public service.’ For we ‘. . .will be losing a distinctive, and publicly-owned, local public audit service and its District Auditors who have helped to protect the public purse effectively for over a hundred and fifty years.'

Policy Principles of Draft Bill

But whilst a much slimmed-down Audit Commission will endure for the moment to manage audit contracts, ‘oversee the public audit market and deliver its other statutory functions’, further writing on the wall for the Commission itself appeared in July 2012. For it was then that the Draft Local Audit Bill was published. This (covering ‘relevant authorities’ in Schedule 2) was formulated in the light of ‘four key design principles¹:

‘a. Localism and decentralisation - enabling local bodies to appoint their own independent external auditors, subject to appropriate safeguards.
b. Transparency - ensuring that results of audit are accessible to the public, enabling local bodies to be held to account for local spending decisions.
c. Lower audit fees - ensuring that the audit fees paid by local public bodies are competitive.
d. High standards of auditing - ensuring that there is effective and transparent regulation of public audit, and conformity to the principles of public audit.’

The policy overview of the draft bill also indicates that regard was had to the principles of local public audit with its ‘deep historical roots’, namely:

‘a. Independence of public sector auditors from the organisations being audited;
b. The wide scope of public audit, covering the audit of financial statements, regularity, propriety and value for money; and
c. The ability of public auditors to make the results of their audits available to the public, to democratically elected representatives, and other key stakeholders.’

Nuts and Bolts

With one hefty swing of the proposed axe, the draft Bill fells the Audit Commission and the Audit Commission Act 1998 mercilessly to the ground in clause 1. However, although the administrative architecture of local audit will change markedly (with some streamlining and centralising) many of the core familiar audit principles will remain. So there will continue to be a Code of Audit Practice (albeit now under clause 55 the responsibility of the Comptroller and Auditor General), public interest reports and relevant publicity requirements will continue (clauses 63 to 72) as will inspection of statements of account and auditors’ reports (clause 73) and inspection of documents (clause 74). The right to make objections at audit is retained (at clause 75) but there is discretion for the auditor to reject frivolous, vexatious or repeat objections. The long standing friend of auditors (declaration that an item of account is unlawful) has moved house from section 17 of the 1998 Act to clause 76 and advisory notices now kick off at clause 77. Local auditors will also still be able apply for judicial review under clause 80.

As mentioned, however, the administrative architecture looks quite different in the proposed absence of the Audit Commission.  As the Ministerial Foreword to the draft bill indicated: ‘The Bill gives new responsibilities to the Financial Reporting Council, which will act as the overall regulator for auditors; the National Audit Office, which will set the code of audit practice;1 and the professional audit bodies will also have a role in regulating and monitoring auditors’. When the Bill principles become law, (per Part 3) it will be authorities (and not an outside body as at present) to select and appoint their external auditor, providing that person is eligible under Part 4 and that the authority has consulted and taken into account the views of its auditor panel.  An auditor appointment may not last more than 5 years but the incumbent auditor may be reappointed (clause 6).

Given the disappearance of the Audit Commission as the auditor appointment body, the auditor panel is a new creation (clauses 11 to 14) consisting of a majority of independent members and being chaired by an independent member.  ‘Independent’ for these purposes means having not been a member or officer of the authority in question (or a relative (clause 12(4)) or close friend of such person) within the preceding five years. The auditor panel’s functions are specified in clause 13 and the authority must provide the panel with any of its documents or information which the panel requires to exercise its functions. A member or officer of the authority may also be required to attend a meeting of the panel to answer questions (clause 14). Any authority failing to appoint an auditor may (per clause 15) be directed to do so by the Secretary of State who may alternatively appoint an auditor on behalf of the authority.

To be eligible for appointment as a local auditor a person must be a member of a recognised supervisory body (per clause 23 and Schedule 3) and eligible for appointment under the rules of that body (clause 18). Independence requirements for local auditors are contained in clauses 20 and 21, and where a partnership is appointed as auditor (per clause 22) the appointment is of the partnership itself and not of the partners. Auditors will need to hold an appropriate qualification which could either be a qualification recognised under Part 42 of the Companies Act 2006, or another qualification recognised under the draft Bill (clause 25).

The Secretary of State has powers to require information, notification and documents under specified circumstances (clauses 26 to 28) and clause 40 provides for criminal liability for misleading, false and deceptive statements. Clause 43 enables the functions of the Secretary of State in connection with the eligibility and regulation of auditors to be delegated but with the functions exercisable concurrently by the Secretary of State. And as is the modern way there are copious powers through the draft bill for the Secretary of State to make regulations including: specifying an authority’s financial year (clause 2(5)), power to amend intervals at which local auditor must be appointed (clause 6(4)) and the application of the bill to smaller authorities (clause 5). The current intention is that smaller local public bodies having a turnover of less than £25,000 will not be subject to external audit.

Shaking the snow globe

Whilst a good shake is necessary from time to time to remove any dysfunctional cultural inertia and self-serving behaviour from any established organisation, the way the flakes re-land may well introduce a new suite of problems.

But although like any human institution, the Audit Commission fell well short of perfection during its tenure, it nevertheless did what was asked of it largely effectively, albeit at times with some Stalinist tendencies. If some of its processes became over-engineered (which they did), this may well have been to align with the then prevailing political zeitgeist.  And that, so it appears, was one of the items on Eric Pickles’ charge sheet which (according to the Daily Telegraph in August 2010) complained that (amongst other things) the Commission had a ‘senior echelon of officials dominated by Labour sympathisers’.

Nevertheless, despite criticisms from various quarters (some of which have substance) the Commission did over the years produce some valuable practice and value for money papers for local authorities and other audited bodies. Whilst these will cease with the Commission’s disappearance, the draft bill material does envisage ‘a smaller, coherent and complementary programme of value for money studies on local issues’ to be developed by the National Audit Office. So the revolving stage of local audit will keep turning although the lighting and music may well be rather different. However, time will tell what this will feel like on the ground for both audited bodies and those they serve.

Dr. Nicholas Dobson is a Senior Consultant with Pannone LLP specialising in local and public law is also Communications Officer for ACSeS. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.

© Nicholas Dobson July 2012.

¹ By Schedule 3, paragraph 2(1) of the Budget Responsibility and National Audit Act 2011 the National Audit Office must provide resources for the Comptroller and Auditor General's functions as required by the Comptroller.