The Audit Commission’s success in outsourcing its work offers little insight into the future of local audit – as it is only a halfway house
There is a lot to like about the way the Audit Commission handed out its contracts last month: a successful tendering process, cuts of up to 40% in fees and the introduction of two new players into the market.
As a halfway house between the commission’s old role as an audit provider and its eventual abolition, this does not seem so bad. But it is only a halfway house, and the tendering process leaves open as many questions as it answers.
The reduction in fees would appear to vindicate Local Government Secretary Eric Pickles’ promise of cheaper audit, except that it was achieved solely by the commission’s buying power. As a huge bulk purchaser of audits, it can offer high volumes in return for lower unit costs.
That power goes when the commission does, and the worry for smaller and more remote councils must be that fees will start creeping back up once they start appointing their own auditors. A free market might well result in cheaper fees for Birmingham, but what about for a Cumbrian district?
The introduction of two new players into the market – DA Partnership and Ernst & Young – offers some comfort in the sense that it will encourage greater competition after the commission’s demise. Everything we know about the audit market tells us that concentration puts up prices: costs went up by 2.4% following the near demise of Arthur Andersen in 2002.
But a lot depends on the future of the DA Partnership. The much vaunted spin-out from the commission has won only £5m of almost £90m on offer and so lacks the critical mass to become a mutual. It will now go by the name of Mazars DA, a wholly owned subsidiary of its backer, in a move that effectively brings to an end the District Audit service that currently provides 70% of public audit.
With just one contract in the Northeast & Yorkshire, will DA be big enough to drive competition in a post-commission world?
Meanwhile, the commission looks like it still has a few more years left in it, albeit as a shadow of its former self. It will certainly be around by the end of 2013 and there are suggestions of it surviving into 2014.
It has even been reported that the Department for Communities and Local Government is going through the absurd process of appointing a new chair to replace Michael O’Higgins, whose term ends in October.
O’Higgins says he wants to shut the place down as soon as practicable, but the commission’s press release heavy-handedly points out what a good deal its new five-year contracts will achieve for the public purse. Some form of reprieve remains unlikely, but perhaps not impossible.
Looking forward, the big question is about the frameworks and regulations the government needs to put in place to manage the competitive market of the future, without the Audit Commission as referee or guarantor of quality. Independence, public engagement and accountability are the key principles here.
Councils need a clear process for appointing auditors with some degree of independent input, financial reporting needs to be simplified to aid public comprehension and we need to develop clear national codes of practice, probably policed by the National Audit Office.
Eric Pickles abolished the Audit Commission because he didn’t like inspection; audit always appeared to be an afterthought. The new Bill that ministers have promised to bring forward needs to correct that with a clear and compelling vision that can ensure probity, accountability and cost effectiveness.
Simon Parker is director of the New Local Government Network
This article first appeared in the April edition of Public Finance
