It was at a graduate recruitment fair in 1986 when the Audit Commission first caught my eye. The commission was in its heyday and public audit was an exciting place to be. In those days I learnt not just about the accounts, controls and stewardship, but also about economy, efficiency and effectiveness in public spending. I delved into planned and responsive housing repairs, the operation of direct labour organisations, legality of land sales and vehicle fleet management. We talked about probity, public interest, reasonableness and the Wednesbury principles. Audit was about making a difference and driving improvement. There was engagement with members and, in the extreme, the issuing of high-profile public interest reports and even surcharge.
Others, like me, were drawn to what is unique about public audit. I still work alongside colleagues who joined the commission the same time as me. We are all steeped in public audit, we care about how public money is spent and what excites us goes far beyond simply auditing the accounts.
It wasn’t all plain sailing. I had a wobble, just after I’d passed my CIPFA exams. It was soon after, when I found myself sitting in front of a chief constable, discussing the correlation between control room demand (999 calls) and supply (resourcing), that I realised that public audit is the best job in the world.
I never looked back – until now. My year as CIPFA president has given me the chance to reflect and look to the opportunities that lie ahead.
The nature of public audit is significantly different now. We seem to have lost sight of what is important, those very things that attracted me and others to public audit in the first place. So how did we lose direction?
First, the commission was abolished. While the commission had lost its sense of purpose and suffered from scope creep, reform – not abolition – was the answer. Instead the failings of the commission were conflated with the public audit model underpinning it, and the principles of public audit (independent appointment, wider scope and public reporting) were cast aside.
The result was that trust was eroded, the expectations gap increased, and the impact of audit diminished. Auditors are no longer appointed independently in the NHS and independence has been weakened in local government. The scope of the audit (not to be confused with quality) has become too narrowly focused on the accounts. Value for money work is no longer having an impact at a time when the financial sustainability of the sector is precarious, finance colleagues are under immense pressure and risk in service delivery is increasing. Auditors are reporting less in public, yet the public’s expectation of them is rising.
It is interesting that the debate about trust, the expectations gap and impact is very much alive in the corporate sector and are areas being considered by Sir Donald Brydon in his review.
‘Local government accounts have become far too long and complex in areas that do not impact on the general fund’
The various functions of the commission have been dispersed and the regime has become fragmented. The scope of audit is set by the National Audit Office (NAO) in the Code of Audit Practice; procurement in local government is managed by Public Sector Audit Appointments (PSAA); and quality is regulated by the ICAEW and the Financial Reporting Council (FRC). The broader oversight role of the commission has gone – notably its ability to look up and across local government and the NHS – so things tend to fall between the gaps.
Second, local government accounts have become far too long and complex in areas that do not impact on the general fund. This means that scarce audit resources are being diverted away from value for money and directed instead at technical areas of the accounts that appear to be of least relevance to taxpayers. Local government in England has done well in delivering early close, but this has created a significant peak in audit workload that the agencies in Scotland and Wales can not deliver. This can create pressure for NHS and local government audit teams working long days, weekends and bank holidays over a three-month period, causing recruitment and retention challenges. This at a time when, more generally, the respect that specialism in audit should command is at risk of being eroded.
Third, the regulatory regime is no longer tailored to public audit. In his review last year, Sir John Kingman pointed out that the FRC, which in the future will have a much wider remit, “is an expert in private sector corporate audit; and its expertise on, and detailed understanding of, issues relevant to local audit are currently limited”. The complex accounting standards are also requiring the regulator to focus on aspects of the accounts that councils frequently tell us are of least relevance to local government. Other aspects of the corporate regime do not sit well, for example, the definition of “public interest entities” as authorities with listed debt bears little relation to where real risk lies in local government.
Finally, there is the matter of cost. Since 2012 the audit of local bodies in England has been provided exclusively by audit firms and fees have fallen by about 60%. Regimes in Scotland and Wales have not seen the same reduction. The consequence is that over time the number of firms involved has reduced. Firms have spent many years growing and investing in public audit teams around the country and remain committed to the market. At a time when over two thirds of engagement leads (a partner or director leading an audit) are over 50, this investment is critical in growing the leaders of the future. But with operating margins being squeezed it’s easy to see a regime that is unsustainable, that fails to provide the assurance local bodies need or create an environment that will inspire a next generation of public auditors.
We need to remind ourselves what the purpose of public audit is and be clear about who it is for. While wider public interest is important, I believe we may be overlooking local taxpayers as a key stakeholder and we need to define, and then focus proportionate assurance on, what is most important to them. If we get that right, then we will have a chance of inspiring our future talent to build a career in public audit.
One solution, which Kingman proposes, is to recreate a single oversight body for public audit. The debate about that needs to happen urgently, but the government’s current response risks kicking it into the long grass. In the meantime, there’s no magic wand. Like many challenges facing public services, no one organisation holds the key. All stakeholders need to put aside short-term organisational priorities and join together behind one longer-term goal of ensuring the sustainability of public audit.
So, which road would I take?
First, we need to reset the scope of audit through the Code of Audit Practice. My firm has suggested how to do that, and increase public reporting, in our response to the NAO’s code consultation. Getting the code right is critical to providing the assurance that local bodies and taxpayers need, and also in attracting and retaining future talent – offering the same rich experience that I had.
Second, we need to refocus time within the accounts audit to where it matters most. CIPFA has a key role to play in reviewing the accounting code to improve the usefulness of local government accounts, which, in turn, will improve the effective use of audit time. In order to further smooth the workload peak, I recommend moving the deadline for value for money work from July to September.
Third, and following on from the above, the regulatory regime needs to better focus on what is important to the users of public audit. We look forward to working with the FRC in considering how its regime can best meet the needs of taxpayers and other stakeholders, and how all of our actions and reporting can support the sustainability of public audit.
Last, we need sustainable fees to encourage firms to remain in the market. This is not simply about increasing fees. While getting the accounting code and regulatory regime right is key to ensuring existing resources are focused on areas of greatest risk from a taxpayer’s perspective, PSAA also needs to have a conversation with the sector about what assurance it wants and is prepared to pay for. I welcome that the PSAA is considering how it will approach the balance between cost, scope and quality as part of the next procurement in such a way that will sustain a vibrant and balanced market, encouraging firms to remain committed to public audit.
‘All of us in the sector want the same outcome – good quality audit that meets the needs of local taxpayers’
Now is the time to take the opportunity to build on the rich history of public audit. All of us in the sector want the same outcome – good quality audit that meets the needs of local taxpayers – and we each need to embrace the challenge of change. Let’s all engage the right gear and drive on to deliver a regime that delivers for all stakeholders and ensures that public audit remains sustainable for generations to come.
