Councils' audit costs could rise under government's plan, argues O'Higgins

1 Apr 11
The Audit Commission today warned of 'significant extra costs' that could hit local authorities under the government’s proposed new audit regime.
By Lucy Phillips

1 April 2011

The Audit Commission today warned of ‘significant extra costs’ that could hit local authorities under the government’s proposed new audit regime.

Responding to the consultation on the future of local audit, published by ministers on March 30, commission chair Michael O’Higgins said: ‘Once the Audit Commission is abolished, local public bodies will not have to pay the element of audit fee that is levied to fund the commission’s core statutory functions, such as audit regulation and national studies. In 2011/12, this amounts to around £11m or 7% of audit fees.

‘But we are concerned that the [government’s] proposals will introduce extra costs, which could lead to increases in audit fees for many bodies.’

The watchdog, which will be disbanded from 2012, said these extra charges, ‘which could be significant’, would arise from: pricing in the legal risks audit firms face when dealing with local bodies; the loss of economies of scale from bulk purchasing; premiums levied on bodies deemed commercially unattractive to audit firms; compliance to fund a new regulatory framework; costs incurred by councils to set up the proposed new independent audit committees; and potential changes to the structure of the market, which might reduce competition and force up fees.         

O’Higgins also reiterated that he was ‘keen to preserve the specialist knowledge and expertise of the commission’s in-house audit practice, through the establishment of a new, employee-owned audit firm (or ‘mutual')’. This would boost price competition, he said.

The commission also expressed concern that the independence of audit could be compromised under the new regime, which would allow local bodies to appoint their own external auditors. Some councils went to ‘extraordinary lengths’ to prevent an auditor issuing a public interest report, according to the watchdog. 

O’Higgins said: ‘The government’s proposals for [statutory] audit committees with a majority of independent members will go some way to safeguarding auditors’ independence, but it is too early to judge if the safeguards will be sufficient.

‘The independence of auditors has a long history. In our view, and the view of Parliament when this was last debated, it remains an essential safeguard and should not be discarded lightly.’

But the Local Government Association’s response to the government’s consultation said statutory audit committees would be ‘unnecessary’.

LGA chair Baroness Margaret Eaton said: ‘The overwhelming majority of local authorities already have audit committees. It is a robust and accountable system which won’t be improved by renaming and reintroducing a new version of the old statutory standards committees which were recently scrapped for adding too much red tape.’      

Eaton also called on the government to ‘avoid introducing restrictive bureaucratic measures which discourage smaller accounting firms from bidding for work’. She added: ‘The development of a proper marketplace, offering the services of a wider variety of different audit firm,s will create greater competition, bring down costs and give councils access to the most skilled practitioners.’    

CIPFA has also warned that costs could rise under the new regime, in its evidence to the communities and local government select committee inquiry on the future of public audit.

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