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Government consults on local audit regime to replace Audit Commission

The government has launched a consultation on “a new decentralised, local audit regime” that will take the place of the Audit Commission.

The consultation paper, Future of Local Public Audit, said: “The government believes that the current arrangements for local public audit, whereby a single organisation (the Audit Commission) is the regulator, commissioner and provider of local audit services are unnecessarily centralised. There is a lack of transparency and clarity as well as potential conflicts between the roles.”

The proposals subject to consultation include:

  • The National Audit Office would prepare the codes of audit practice and associated guidance
  • The NAO would also continue to audit Government departments providing funding to local public bodies and will continue to receive Whole of Government Accounts returns
  • Registration of audit firms and auditors, as well as monitoring and enforcement of audit standards, would be undertaken by the accountancy professional bodies, under the supervision of the Financial Reporting Council and its operating bodies
  • All larger local public bodies – those with income/expenditure over £6.5m – would be under a duty to appoint an auditor. The auditor would need to be on the register of local public statutory auditors
  • Principal local authorities would appoint their own auditors, with decisions made by full council, “taking into account advice from an independently chaired audit committee”. Different arrangements would apply for some other public bodies
  • The legislation would provide for both joint procurement and joint audit committee
  • The government will want to specify in legislation some responsibilities the audit committee should have in relation to the engagement of an auditor and monitoring the independence and quality of the external audit
  • The audit firm would be reappointed annually by the full council on the advice of the audit committee, but the audited body could be required to undertake a competitive appointment process within five years.
  • The audited body would be able to reappoint the same firm for a second consecutive five-year period, following competition. However, “to preserve independence” an audited body would need to procure a different audit firm at the end of the second five-year period
  • The safeguards in place for the resignation and removal of an auditor would broadly mirror those in the Companies Act, but would be adapted to reflect the principles of public audit.
  • A legislative framework, similar to that in the companies sector, could set out the process for setting and agreeing liability limitation agreements. “Without a liability agreement, audit firms may increase their fees to match the increased risk they face in undertaking their work.”
  • Three options for the future scope of audit for public bodies will be consulted on
  • The current publication requirements for public interest reports would be retained, as would the audited body’s responsibilities to consider the report at a meeting within one month of receipt and to publish a summary of the meeting’s decision
  • The power of an auditor to make a recommendation requiring a public response and to issue an advisory notice to the body if they have reason to believe the body is about to or has made a decision involving the unlawful incurring of expenditure would be retained
  • Auditors will be able to provide non-audit services to the audited body, “but safeguards will be built into the system to prevent any actual or perceived threats to the auditor’s independence”. Permission from the audit committee would be needed.
  • The statutory auditor will continue to be a prescribed person under the Public Interest Disclosure Act 1998
  • The “outdated and over-burdensome” formal rights for local government electors to object to the accounts would be removed. However, members of the public would retain the right to make representations to the auditor, raise issues with the auditor and to ask the auditor questions about the accounts.
  • The local public body will still be required to advertise that its accounts have been prepared and there will be increased publicity requirements for audited bodies
  • Auditors should be brought within the remit of the Freedom of Information Act 2000 “to the extent that they are carrying out their functions as public office holders”. Only information in connection with a public audit would be within the remit of an FOI request.
  • Bodies with an income or expenditure between £1,000 and £6.5m would be subject to an independent examination similar to that followed in the charities sector, rather than full audit. Those with income or expenditure of less than £1,000 would not be subject to an external examination or audit.

The consultation paper said: “We have aimed to design a local audit system which provides the rigour needed for Parliament, but allows local public bodies to take more responsibility in the way they procure audit services.” The Department for Communities and Local Government also said it wanted to strike the right balance to ensure effective audit while keeping fees as low as possible.

According to the DCLG, the new approach will be underpinned by four principles:

  • localism and decentralisation: “freeing up local public bodies, subject to appropriate safeguards, to appoint their own independent external auditors from a more competitive and open market, while ensuring a proportionate approach for smaller bodies”
  • transparency: “ensuring that the results of audit work are easily accessible to the public, helping local people to hold councils and other local public bodies to account for local spending decisions
  • lower audit fees: “removing the overheads charged by the Audit Commission to service the central government machine”
  • high standards of auditing: “ensuring that there is effective and transparent regulation of public audit, and conformity to the principles of public audit.”

Ministers insisted they were committed to disbanding the Audit Commission after 2012.

Local Government Minister Grant Shapps said: "The Audit Commission has lost its way, becoming too focused on reporting to Whitehall and supporting the previous era of target-driven Government.

"The options we are developing for a future audit regime will shift power from Westminster to people, save taxpayers money, deliver high standards of auditing practice and maintain inspection and intervention arrangements for the most vulnerable."

The consultation paper can be viewed here.

Philip Hoult