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Replacement plans for Audit Commission ‘have serious flaws’

By Richard Johnstone | 17 January 2013

Plans to overhaul the audit regime for local public bodies contain ‘serious’ risks and gaps that could weaken accountability for public money, MPs have warned.

The ad-hoc committee convened to scrutinise the Draft Local Audit Bill said it could undermine the principle of independent audit in the public sector.

In its report, published today, the committee, which includes members of both the Public Accounts Committee and the communities and local government select committee, warned the proposals would make it ‘more difficult to ensure value-for-money’ in council spending.

The Bill will complete the closure of the Audit Commission following the outsourcing of its audit work last year. It is expected the commission will be scrapped by April 2015.

Once the existing outsourcing deals end, local authorities will be able to appoint their own auditors from 2016/17.

However, Margaret Hodge, chair of the ad-hoc committee, said the new arrangements would ‘result in a more complex and fragmented audit regime’.

Plans for every council to agree its own audit deal would not represent value for money, and could even cost more than the Audit Commission had, she said.

The report backed calls from witnesses for a ‘central procurement’ body to be established to appoint auditors in order to ‘deliver best value on audit fees’.

Hodge said there was ‘conflicting evidence’ about whether the reforms would lead to savings, and also urged the Department for Communities and Local Government to produce a new financial impact assessment for the Bill.

MPs also called for the Bill to be amended to give the National Audit Office a stronger role in the local audit regime. The auditor general should publish detailed mandatory audit guidance for town halls, alongside an audit code, and report annually on the regime. The NAO should also be named in the Bill as a prescribed person, in addition to the appointed auditor, so they could be contacted by any whistleblower.

The legislation should also be altered to ensure any decision by a local authority to remove an auditor could be made only after a full council vote.

Responding to the report, local government minister Brandon Lewis said it had been necessary to replace the Audit Commission's ‘costly audit and inspection regime’ with a more streamlined and transparent system. The reforms would save £650m over five years, he said.

He added: ‘A centralised quango to procure auditors is not necessary when local authorities are perfectly capable of doing this for themselves and know their own requirements.’

CIPFA said the report reiterated concerns that the legislation does not adequately safeguard the unique characteristics of public audit.

The recommendation to maintain a central procurement function from local audit ‘deserves further consideration’, director of policy and technical Ian Carruthers added.

‘The Bill committee has raised a number of important concerns about the draft Local Audit Bill which reinforce those previously raised by CIPFA. We urge the government to consider these issues seriously and work with us to address them.’

The Local Government Association also backed the proposal for a central body to to procure audit services.

Peter Fleming, chair of the LGA's Improvement Board, said: ‘The contracts that were let recently by the Audit Commission achieved savings of 40% for each council and we believe that in the current financial climate having a system which could achieve such savings on an on-going basis should be retained.’

However, the committee had ‘fundamentally misunderstood the concept of sector-led improvement’, he added.

‘The whole rationale for abolishing the Audit Commission was to improve local engagement and local accountability, and the report's recommendation that the National Audit Office review the LGA's sector led approach misses the point.

‘We urge DCLG to stick to the core principles of sector-led improvement and provide a positive and constructive environment in which councils can seek the advice of expert peers on how to address challenging issues and introduce innovative approaches to delivering public services.’

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Companies appointing their own auditors and then developing a cosy relationship was one of the contributing factors to the banking crisis. To have an external body appoint auditors at least offers the prospect of a less cosy relationship.

Today is the day that Ofsted announced that they are to go back into local education authorities that have been 'self improving' for several years. External appointment of auditors and inspectors will cost no more and keep authorities on their toes.

David Davies (17/01/2013 17:54:07)

One of the main gains from the reform is to free auditors and the audited from dictation by a central quango so the last thing we want is to invent another one!

The standard setter, the accountants and the individual audit managers should all be independent of each other.

Mike Keene (17/01/2013 19:24:29)