Public sector regulation faces a big shake-up with the sudden demise of the Audit Commission. So what comes next?
At the beginning of September I gave a lecture at a university in Osaka, Japan. Imagine my surprise when, among questions on implementation of international standards and good financial management, I found myself fielding enquiries about the abolition of the Audit Commission.
It speaks volumes for the commission and its staff, past and present, that news of its demise had travelled so quickly around the world and that my audience of accountants, academics and students had immediately recognised it as an event of considerable significance.
Their questions were very well thought-out too. Did this mean the UK was moving away from the principle of independent appointment of public auditors? Would Comprehensive Area Assessments continue? Would private firms carry out the lion’s share of audits in future? If so, what steps would be taken to ensure that the market remained price competitive?
In responding to these questions, I found myself making a clear distinction between the commission’s inspection and audit functions.
Inspection or performance assessment has, of course, been the commission’s most high-profile role in the past decade. Its work in this area has been innovative, though also at times controversial, and widely credited with ensuring continuous improvement in services.
But all good things come to an end – all the more inevitably so when other approaches and methodologies are available. We should not be too surprised that, in an era of localism, smaller government and spending cuts, inspection comes under scrutiny. However, it may also come to be missed.
There may be other ways to ensure improvements but, without a strong external driver, will they be given priority in a time of major funding reductions?
In local government, there is also a real issue about reputation management. The objectivity and independence of the Comprehensive Performance Assessments has given credibility to councils’ claims to be improving rapidly and to be one of the best managed and most efficient parts of the public sector. Will a plethora of different local approaches to improvement, probably rooted in self and peer assessment, command similar confidence?
To maintain the sector’s much improved reputation, local government may need to design a new national approach to organisational assessments, to which all councils would be encouraged to subscribe. This would require strong independent inputs from citizens, businesses and other stakeholders.
The commission’s audit functions raise very different issues. Unlike inspection, audit is not an optional extra. It is a prerequisite for effective accountability that must be discharged to proper professional standards. Importantly, there is an absolute need for continuity of service.
Personally, I am a strong supporter of the model of independent appointment, with regular rotation, which helps to mitigate the risk of the relationship between the auditor and the audited body becoming too cosy. It also helps to allay any fears that the auditor might be tempted – with an eye to reappointment – to pull punches.
The costs of audit services also need to be considered carefully in the design of any new regime. There are several potential problems here. Will individual local purchasing be as efficient and drive as hard a bargain as the commission’s national arrangements? How will prices change if there is no large public sector audit provider competing with firms? To what extent will prices vary between plum assignments in large conurbations and those in remote locations?
Hopefully, these are issues we will be able to address and resolve in the design of the audit regime that succeeds the commission. This is critically important work. The UK public services are about to enter the most financially difficult era in living memory. High-quality audit will be a vital defence against some of the problems that are likely to arise as public bodies attempt to downsize their organisations and services to live within significantly reduced budgets.
If we do not find the right answers, the demise of the commission might come to be regretted at home as well as abroad.
Steve Freer is the chief executive of CIPFA
