Audit Commission’s audit practice must be stand-alone company, say MPs

The request comes as the communities and local government select committee published its report on the audit and inspection of local authorities following the abolition of the Audit Commission.

Committee chair Clive Betts said: ‘The government must help the Audit Commission’s own audit practice to realise a smooth transition to becoming a stand-alone body that retains its skilled staff and remains a major player driving best practice in the public audit sector.

‘In a crowded market already dominated by too few players, we favour the establishment of a stand-alone company, preferably a mutual, and firmly oppose one of the “Big Four” commercial audit firms taking over the Audit Commission’s audit practice.’

The government has already said its ‘initial’preferred option is for the commission’s audit work to be outsourced to the private sector from 2012/13 but it has not confirmed this or its plans for the in-house audit practice. The watchdog says it is ready to launch itself as a joint business venture and compete in the open market pending the nod from ministers.

Today’s report warns that the proposed new arrangements for local authority audit present ‘significant risks’ to the accountability for public money.

Betts said: ‘The government is proposing a departure from the established practice that public bodies should not appoint their own auditors. It therefore bears a great responsibility to create adequate legal safeguards and to help local government establish capable and independent local audit committees.

‘Ministers and the National Audit Office must move rapidly to establish a new audit framework for local government in the future that is effective, efficient and robust.’

The group of cross-party MPs also condemn the manner in which the watchdog’s abolition was ‘announced and progressed’ by ministers, saying it might have resulted in ‘a missed opportunity for what could have been a valuable reassessment of the arrangements for public audit’.

Betts added: ‘Once such new arrangements are in place, the government should also instigate a wide-ranging review of public sector audit.’

But the committee welcomed the government’s abolition of the ‘costly’ and ‘over burdensome’ Comprehensive Area Assessment regime and backed the Local Government Association’s proposals for sector-led performance management.  

The Audit Commission said the select committee had highlighted many of its own concerns, particularly around the need to preserve auditor independence. It described the MPs’ report as an ‘important contribution to the debate’.

Chief executive Eugene Sullivan said: ‘The report recognises that our in-house audit practice is “held in high regard” and that its audit skills and expertise must not be lost in a new competitive market.’

Simon Parker, director of the New Local Government Network, also backed the MPs' findings. He said: ‘With the demise of the Audit Commission, there remain real dangers of the market becoming a closed shop, barring new business entry and raising costs for councils. The committee is therefore right to seek to encourage competition by looking to set up the Audit Commission practice as a mutual.'

Local government minister Bob Neill responded to the report. He said: 'This government has set in train measures to radically scale back centrally driven, bureaucratic and costly inspection and auditing, saving council taxpayers money. The committee is right to acknowledge these proposals deliver greater localism and financial independence for local government.

'Our proposals for a new audit framework will maintain the principle of auditor independence and audit standards. Councils will simply be free to choose independent, external auditors from an open field.

'No decisions have yet been taken on privatising the Audit Commission's in-house practice. We are working closely with the commission on options and will be announcing next steps shortly. We've always said we'd be happy for staff to set up a mutual.'

A public audit Bill will be introduced by the coalition in the autumn.