Power to the audit

5 Jul 19

Public audit must create a clear, concise dialogue with people to regain their confidence and call out abuse where it sees it. But to do this, its independence must be protected, because without it we would all be poorer

Imagine there’s no audit. I wonder if you can? No, not an extra verse, subsequently discarded, from an earlier draft of that song, but, perhaps, a timely thought given the chorus of anger and concern about the effectiveness of audit. If we don’t have confidence that auditors will flag issues that threaten the sustainability of public services, or the survival of companies in the market, why bother?

Let’s contemplate for a moment a UK in which tax-funded public bodies must report each year on what they’ve done with the money entrusted to them. There might even still be a set of standards setting out how they should do so. But what they say they’ve received and spent, and what they claim to have achieved, is not subject to independent external audit. The argument might be that public bodies are accountable to government, to Parliament or to their electorates and so their assertions can be challenged by the media, politicians and by the public – including those armchair auditors we’ve heard about. It might be said that it is in the court of public opinion, and ultimately through accountability to the electorate, that the value of public services is truly tested.

Continue with this thought, turn it over in your mind. Imagine…

So, even where minimum standards exist by which public bodies report their financial position, performance and achievements, what will the leaders and managers in this UK do when the going gets tough? When there are hard choices to make involving winners and losers, uncertainty and risk, how transparent and rigorous will the reporting be? Even in the most straightforward scenarios – for example, how much was spent? – there will be varying ways by which bodies could present their financial performance and position.

How confident would the public feel about what they are being told? How sure would we be that the way one body measures what it owns and owes is comparable to another’s? To whom would we turn if we needed an objective and trusted view on whether public bodies are doing what we expect of them by making good use of our taxes?

Private sector lessons


‘It is essential that the public has reliable assurance about how local bodies use and account for their money’


Let’s abandon my thought experiment. To have trust in public bodies, there has to be independent assurance about what public bodies say they do with taxpayers’ money. 
It’s needed to support effective transparency and accountability for the decisions of those who are stewards for the public purse, and to examine objectively what works and what doesn’t in the pursuit of value for money. But that assurance must be relevant and reliable.

Even in the private sector, where criticism of auditors has been the angriest and loudest, there is no serious suggestion that we should do away with external audit completely and just leave companies to their fate in the market. The public’s stake in these entities is too great and we recognise it is essential to have someone independent of management to provide assurance to the providers of capital. This is fundamental to the deal that goes with enjoying limited liability. Instead, rightly, there are calls to strengthen audit, bring in more safeguards to ensure its independence, and better and more timely reporting based on a deeper understanding of the business and governance of the audited body.  

In this respect there may well be lessons for private sector auditing from the public sector. Across the UK you’ll see that public audit generally has stronger arrangements to ensure its independence, is wider in scope than company audits, and has an impressive track record of reporting without fear or favour. Public audit has the most impact when it can use its wide powers to cast new light and gain fresh insights on problems concerning governance, legality and regularity, and value for money.

Auditors can access people, information and systems, examine and report on annual accounts, and look at how well public servants exercise proper stewardship. But with these privileges and powers comes a heavy responsibility to support effective accountability, promote improvement in the use of public money and seek to improve the quality, impact and value for money of the audit process itself.

A new code of practice

What more can be done to further strengthen public audit?

Local public bodies in England are subject to audit under the Code of Audit Practice published by the National Audit Office (NAO). The NAO is currently considering how local public audit in England can be strengthened through a new code of audit practice – a new code that’s needed no later than spring 2020.

Local public services in England account for a significant amount of public spending. In 2017-18, 495 local authorities, police and fire bodies were responsible for approximately £54bn of net revenue spending, and 442 local NHS bodies received funding from the Department of Health & Social Care of approximately £100bn. These bodies are also responsible for delivering many of the services local taxpayers rely on every day.

It is essential that the public has reliable assurance about how local bodies use and account for their money. But are local auditors focusing on the right things? Should they instead be looking to report more effectively on the present and future challenges facing local public bodies? For example, the effects of austerity, uncertainty arising from the UK’s withdrawal from the EU, climate change, and the demographic changes increasing demands for services. Public bodies need to continue to innovate and find new ways of responding to these challenges, while maintaining the trust of taxpayers.

To take just one example, in recent years, the number of local bodies entering into partnerships with other organisations – including private companies – and the number looking into “commercial” activities to generate income streams to support new ways of delivering services has grown rapidly. When entering into these more commercial activities, the need to manage risk well and account properly for assets and liabilities is becoming more important. Private companies and lenders expect assets and liabilities to be properly accounted for in accordance with recognised standards.

Local auditors have a key role in providing independent assurance, not only about financial statements, but also arrangements to transform and manage services and finances sustainably. This integrated approach is a defining strength of the wider scope of public audit. However, there are concerns that auditors’ work on arrangements to secure value for money has been crowded out by a combination of the volume of work needed on financial statements and the constraints of significantly lower fees. Through the NAO's work on a new code we want to look at how the focus and balance of work within an integrated local public audit has the right focus and impact.

To have impact, it is vital that when local auditors report findings, and especially when they flag concerns, their reports are relevant and accessible, especially to people without a finance background.

When organisations fail, or encounter significant difficulties, people often ask what the auditors were doing. Auditors need to ensure that where they are identifying risks and issues they draw attention to them promptly and clearly, so bodies can take appropriate action and the executive can be held to account.


‘Auditors should use the most appropriate form of reporting available and be clear what actions the audited body should take and when’


The new code should play an important role in setting the expectations for when and how local auditors report issues to the bodies they audit. One way it could do this would be by introducing explicit principles of effective reporting, to make clear that local auditors should report on a timely basis – clearly, concisely and objectively, without fear or favour.

When reporting in public, auditors should use language that the readers will understand. Auditors should use the most appropriate form of reporting available and, if making recommendations, be clear what actions the audited body should take and when. More should also be done by auditors to follow up actions taken and to escalate their reporting if bodies aren’t doing enough to address concerns.

Public audit matters hugely, but it must have the right impact. When so many are questioning the effectiveness of auditors we should reinforce the principles of public audit, its independence, wider scope and reporting.

As I embark on my term of office as NAO comptroller and auditor general, I am determined to see public audit – both nationally and locally – evolve to meet the needs of a changing society. Never has there been a greater need for independent, relevant and trusted auditing in the public interest. 

 

  • Gareth Davies

    Gareth Davies Joined Mazars as UK public service head after leading the DA Partnership bid for Audit Commission external audits. Former MD of the commission's audit practice

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