By Jaimie Kaffash
2 September 2010
The coalition government’s bonfire of the quangos has, on the whole, passed by with little backlash. But throwing the Audit Commission on to the pile produced unexpected fireworks, with claims and counterclaims exploding between Local Government Secretary Eric Pickles and the commission following the announcement of its abolition on August 13.
The government stoked the row with accusations that the commission lacked transparency, took trips to the races and inappropriately informed staff of the abolition by email. All these claims were denied by Audit Commission chair Michael O’Higgins, who championed the 27-year-old organisation’s achievements.
But while the political arguments have taken centre stage, the financial factors have yet to be scrutinised. The commission’s overall income in 2009/10 was £213m, of which £183m came from fees charged to local bodies. A city council the size of Manchester or Bristol would typically pay charges of around £500,000, covering the commission’s three functions of audit, inspection and research. This sum is agreed collectively at the start of the financial year. A further £28m of the income came from grants received from Whitehall and the remaining £2m from interest and rent.
Out of this total pot, Pickles will gain £50m a year of immediate savings from the commission’s running costs. But in a new world where local government bodies are responsible for contracting their own audit services, it is unclear whether they will get a better or worse deal overall.
In the area of audit itself, the most obvious savings will come from public bodies being able to appoint their own auditors from a free market.
Lynne Hillan, leader of the London Borough of Barnet, tells Public Finance that clusters of London councils are already considering getting together to commission auditing. ‘We would be able to commission at a very good price,’ she says.
This, of course, is Pickles’ wish. But one source close to the Audit Commission issues a note of caution about the quality of audits ‘on the cheap’. Issuing public interest reports on issues of concern, for example, is costly and will not look attractive to an auditing firm that has offered a bargain service.
It is also unlikely that well regarded private companies will want to take a huge hit on their profit margins even to win the business of all London councils.
At the moment, the commission appoints private firms to carry out around 30% of its audits. These firms – including the ‘Big Four’ (KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers) and Grant Thornton – are likely to pick up the slack when the commission winds down in 2012/13. They currently receive around two-thirds of the fee charged by the commission but are reluctant to discuss future fees while they are still working for the government body.
When it comes to inspection and the scrapping of Comprehensive Area Assessments (announced in June), there are undoubtedly financial savings to be made. Explicit inspection fees, typically around £18,000 for a medium-to-large city or county council, will cease.
According to Stephen Greenhalgh, leader of the London Borough of Hammersmith & Fulham, there will also be knock-on savings. ‘It’s not just the cost of having the Audit Commission come in and perform an inspection and an audit,’ he says.
‘That is not the point. It is the amount of office time spent satisfying the commission. It has moved away from rigorous audit into a series of tick-box, bureaucratic and over-burdensome inspections,’ he says.
But some financial savings related to inspection might prove to be false economies. Many councils improved significantly under the former Comprehensive Performance Assessment regime, including London councils Waltham Forest, Hackney and Lewisham.
Coventry City Council also benefited. When CPAs began in 2002, it was rated zero out of four stars, with the Audit Commission citing its social services department as especially poor. By 2008, it had achieved four-star rating.
Kevin Foster, the council’s Conservative deputy leader, says: ‘The 2002 CPA report caused a change in attitude. There had been a culture that dictated that doing education OK made up for the fact that social services was a disaster. The zero rating brought home that things couldn’t continue.’
However, he adds, the CPA and its successor CAAs were of their time. ‘The first round of CPA probably had more impact than subsequent reports. It brought home the truth to some councils and one of them was Coventry. By the time it ended, it needed to move on to another stage. I think performance management is now a lot more embedded.’
Ed Hammond, research and information manager at the Centre for Public Scrutiny, believes there must still be some form of scrutiny of councils. ‘One of our concerns is that by focusing on financial audit you lose some of the other aspects. Audit is just looking at financial probity, particularly if you are bringing in private sector auditors. And you will not necessarily get a corresponding view of the effectiveness of the spending.’
He suggests a method of local scrutiny committees, providing ‘locally-led, democratic, visible open accountability’ as a replacement for the ‘top-down Audit Commission-led’ inspection process.
‘It is also cheaper,’ Hammond adds. ‘The Audit Commission getting in officials to do inspections was expensive. A lot of people found the process useful and CAA and CPA helped people improve local services. But scrutiny can do this at a lower price. Councillors are there already. Even a scrutiny officer will be cheaper than the inspectors. The costs of supporting inspections was significant.’
But if the government and the public do still want their local bodies to be scrutinised above the basic financial audit, this will continue to cost money. Even if it can be done more cheaply, scrutiny officers will still take home a salary.
Other commentators, including local government select committee chair Clive Betts, have warned that the real losses from the Audit Commission’s demise will come from the end of its research functions.
‘Transferring the audit functions to the private sector is one thing,’ says Ian Magee, senior fellow at the Institute for Government. ‘But [the Audit Commission] also do work over strategic issues – crime recording, for example. It is interesting to ask whether government wants these research functions continued. They might well say the National Audit Office can do this.’
An NAO spokesman responds: ‘Parliament will have to carry out legislation. What it wants us to do, it will have to resource us to do.’
This theme of extra money is likely to recur time and time again as councils and other local services are left to plug the hole left by the Audit Commission, particularly at a time when they are feeling the heat of budget cuts across the board.
2 September 2010
Is the abolition of the Audit Commission a welcome end to top-down, tick-box regulation or a false economy that will hold back scrutiny and research? Jaimie Kaffash reports
The coalition government’s bonfire of the quangos has, on the whole, passed by with little backlash. But throwing the Audit Commission on to the pile produced unexpected fireworks, with claims and counterclaims exploding between Local Government Secretary Eric Pickles and the commission following the announcement of its abolition on August 13.
The government stoked the row with accusations that the commission lacked transparency, took trips to the races and inappropriately informed staff of the abolition by email. All these claims were denied by Audit Commission chair Michael O’Higgins, who championed the 27-year-old organisation’s achievements.
But while the political arguments have taken centre stage, the financial factors have yet to be scrutinised. The commission’s overall income in 2009/10 was £213m, of which £183m came from fees charged to local bodies. A city council the size of Manchester or Bristol would typically pay charges of around £500,000, covering the commission’s three functions of audit, inspection and research. This sum is agreed collectively at the start of the financial year. A further £28m of the income came from grants received from Whitehall and the remaining £2m from interest and rent.
Out of this total pot, Pickles will gain £50m a year of immediate savings from the commission’s running costs. But in a new world where local government bodies are responsible for contracting their own audit services, it is unclear whether they will get a better or worse deal overall.
In the area of audit itself, the most obvious savings will come from public bodies being able to appoint their own auditors from a free market.
Lynne Hillan, leader of the London Borough of Barnet, tells Public Finance that clusters of London councils are already considering getting together to commission auditing. ‘We would be able to commission at a very good price,’ she says.
This, of course, is Pickles’ wish. But one source close to the Audit Commission issues a note of caution about the quality of audits ‘on the cheap’. Issuing public interest reports on issues of concern, for example, is costly and will not look attractive to an auditing firm that has offered a bargain service.
It is also unlikely that well regarded private companies will want to take a huge hit on their profit margins even to win the business of all London councils.
At the moment, the commission appoints private firms to carry out around 30% of its audits. These firms – including the ‘Big Four’ (KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers) and Grant Thornton – are likely to pick up the slack when the commission winds down in 2012/13. They currently receive around two-thirds of the fee charged by the commission but are reluctant to discuss future fees while they are still working for the government body.
When it comes to inspection and the scrapping of Comprehensive Area Assessments (announced in June), there are undoubtedly financial savings to be made. Explicit inspection fees, typically around £18,000 for a medium-to-large city or county council, will cease.
According to Stephen Greenhalgh, leader of the London Borough of Hammersmith & Fulham, there will also be knock-on savings. ‘It’s not just the cost of having the Audit Commission come in and perform an inspection and an audit,’ he says.
‘That is not the point. It is the amount of office time spent satisfying the commission. It has moved away from rigorous audit into a series of tick-box, bureaucratic and over-burdensome inspections,’ he says.
But some financial savings related to inspection might prove to be false economies. Many councils improved significantly under the former Comprehensive Performance Assessment regime, including London councils Waltham Forest, Hackney and Lewisham.
Coventry City Council also benefited. When CPAs began in 2002, it was rated zero out of four stars, with the Audit Commission citing its social services department as especially poor. By 2008, it had achieved four-star rating.
Kevin Foster, the council’s Conservative deputy leader, says: ‘The 2002 CPA report caused a change in attitude. There had been a culture that dictated that doing education OK made up for the fact that social services was a disaster. The zero rating brought home that things couldn’t continue.’
However, he adds, the CPA and its successor CAAs were of their time. ‘The first round of CPA probably had more impact than subsequent reports. It brought home the truth to some councils and one of them was Coventry. By the time it ended, it needed to move on to another stage. I think performance management is now a lot more embedded.’
Ed Hammond, research and information manager at the Centre for Public Scrutiny, believes there must still be some form of scrutiny of councils. ‘One of our concerns is that by focusing on financial audit you lose some of the other aspects. Audit is just looking at financial probity, particularly if you are bringing in private sector auditors. And you will not necessarily get a corresponding view of the effectiveness of the spending.’
He suggests a method of local scrutiny committees, providing ‘locally-led, democratic, visible open accountability’ as a replacement for the ‘top-down Audit Commission-led’ inspection process.
‘It is also cheaper,’ Hammond adds. ‘The Audit Commission getting in officials to do inspections was expensive. A lot of people found the process useful and CAA and CPA helped people improve local services. But scrutiny can do this at a lower price. Councillors are there already. Even a scrutiny officer will be cheaper than the inspectors. The costs of supporting inspections was significant.’
But if the government and the public do still want their local bodies to be scrutinised above the basic financial audit, this will continue to cost money. Even if it can be done more cheaply, scrutiny officers will still take home a salary.
Other commentators, including local government select committee chair Clive Betts, have warned that the real losses from the Audit Commission’s demise will come from the end of its research functions.
‘Transferring the audit functions to the private sector is one thing,’ says Ian Magee, senior fellow at the Institute for Government. ‘But [the Audit Commission] also do work over strategic issues – crime recording, for example. It is interesting to ask whether government wants these research functions continued. They might well say the National Audit Office can do this.’
An NAO spokesman responds: ‘Parliament will have to carry out legislation. What it wants us to do, it will have to resource us to do.’
This theme of extra money is likely to recur time and time again as councils and other local services are left to plug the hole left by the Audit Commission, particularly at a time when they are feeling the heat of budget cuts across the board.
