In my 30 years as an auditor I’ve never seen the profession as under the spotlight as it is now. High-profile company collapses have dented public confidence in accountants, auditors and our regulatory regime. It hurts to see my profession pilloried in the press. And although attention has focused on the corporate sector, there is an obvious risk of contagion to the public sector. I now worry about the attractiveness of audit as a career for our new finance professionals. This is a shame as most public sector audit work is of a high quality and has a positive impact on public services. Audit has also provided me with a great career, full of variety and challenge.
The reality is that high-quality public sector audit has never been more important. Declining budgets, increasing demand and political uncertainty bring risks. The auditor general for Scotland, Caroline Gardner, concluded last year that decisive action is required to secure the future of Scotland’s health service. Words not said lightly. Meanwhile, recent work by the Accounts Commission highlighted that recurring control weaknesses are becoming apparent in Scottish councils. South of the border, the problems at Northamptonshire County Council are an extreme example of what can happen when things go wrong.
We’ve had a flurry of reviews and reports in response to corporate failures and audit quality issues. Failure of independence, failure in the scope of audit, failure of audit quality and failure of regulation have all been highlighted. So how does public sector audit measure up against this?
Beyond the numbers
In Audit Scotland we are confident, but not complacent. Scottish public bodies do not appoint their own auditors – the auditor general and the Accounts Commission do this. Auditors are rotated every five years to avoid overfamiliarity and to bring a fresh eye to the audit. Financial audit work is undertaken by a mix of Audit Scotland auditors and firms (big four and non-big four), so we don’t have the same issues of market concentration and lack of competition.
‘Our code of audit practice for financial auditors... goes beyond whether a body is a going concern, with auditors looking to the medium and longer-term financial horizons’
Debate has accused auditors of focusing on the numbers in the financial statements over considerations of financial sustainability and that they are being insufficiently challenging of management estimates.
The wider scope of public audit in Scotland goes beyond the numbers. Our performance audit work considers how well public money is used to implement policy, address risks and improve services and outcomes for people. Our code of audit practice for financial auditors ensures a judgment that goes beyond whether a body is a going concern, with auditors looking to the medium and longer-term financial horizons. For example, in addition to reviewing financial and savings plans, our auditors are increasingly expected to comment on the realism and likelihood of success of these plans, and report on that publicly.
We all recognise that complexity, lack of transparency and the extent of estimation are all factors in public sector accounts, particularly in local government where the financial statements attempt to present the position in both accounting and funding terms. This means that some financial statements do not “tell the story” as clearly as they should. We know auditors can do more to work with their clients to streamline financial statements and improve clarity. To help, we’ve produced a good practice note on improving the quality of the performance report in central government and are planning a similar publication for management commentaries in local government.
Despite the wider scope of public audit, and arguably because of it, there remains a gap between what we do as public sector auditors and what the public think and expect. We don’t have the power to stop things, change policy decisions or force public bodies to act in response to our findings. We need to be clear and unapologetic about our role and what it does and doesn’t do.
We also shouldn’t underestimate the power of public reporting and political scrutiny. There is nothing like the thought of an appearance at the Public Audit and Post-legislative Scrutiny Committee (PAPLS) – the Scottish equivalent of the Public Accounts Committee – to concentrate minds and galvanise action in response to audit findings. And we have clear escalation processes when needed. The controller of audit can make a statutory report to the Accounts Commission on any local government issue and the auditor general can make a statutory report to PAPLS. This provides a very public means of holding organisations to account.
Escalation, of course, only works if the auditor has found the issue in the first place. As soon as something goes wrong the cry goes up of “where was the auditor?” Sometimes they will have found the issue and reported it, but no action was taken. Sometimes there will have been a failure of audit quality – the auditor should have spotted the issue but didn’t. Sometimes, however, the issue is simply not something the auditor could be reasonably expected to detect.
The right balance
Fraud is a good example of this. Auditors design their testing to detect material fraud, error and irregularity. But materiality extends to several million pounds in most public sector bodies, while I imagine most members of the public would consider a fraud of £10,000 as a sum of some importance. Public sector auditors also evaluate the adequacy of the arrangements that public bodies have in place to detect and prevent fraud. In Audit Scotland, we are thinking how we could better target this work to focus on high-risk areas. Could we do more? Of course we could, but at what cost? There is a debate to be had about the level of assurance we want from the auditor and what we are prepared to pay for it.
High-quality audit cannot be assured through rules and standards alone – by its nature it is judgmental and based on human decisions. The Financial Reporting Council (FRC) has highlighted that recent failures in audit quality have also included a failure to show appropriate scepticism.
It’s a skill influenced by personality and circumstances, so some of us are just naturally more sceptical than others. But we do train our auditors on what is needed to deliver a sceptical audit through knowing the organisation, gathering the right evidence, asking the right questions and challenging judgments through team discussion and peer review.
As in most things, there is a balance to be achieved. A team full of auditors at the extreme scepticism end of the trust/doubt spectrum would never finish an audit or develop a constructive relationship with their client. Care is needed to get the right blend in an audit team. And we need to equip our auditors with the right skills and support to make difficult judgments. Even technical accounting questions are rarely black and white, and judgments can be more difficult in our performance audits or when considering questions of financial sustainability, leadership and culture. The stakes are high for getting it wrong. We aren’t exposed to the high fines imposed on firms by the FRC, but we report in public on some very sensitive issues. Every member of our staff is acutely aware that the reputation of the organisation lies in their hands.
In Audit Scotland we already benefit from a team that isn’t only comprised of accountants. Our performance audit team come from a wide variety of backgrounds and increasingly work in mixed teams with our financial auditors. But there are still gaps in our skill set. Sometimes we fill this by bringing in specialists for short-term assignments or using panels to test our findings. For example, we have recently established a youth panel to work with us to identify priority issues for young people and improve the relevance and targeting of our work.
Digital future
‘We need to equip our auditors with the right skills and support to make difficult judgments. Even technical accounting questions are rarely black and white’
New technology is also having an impact on what we audit and the way we do our audits – auditing digital and digital auditing. We are increasingly using new visualisation tools to present our work. We have only started this journey but recognise that a lack of digital skills is slowing us down. We are reliant on a small number of skilled enthusiasts and need to both increase the size and resilience of our specialist team and train our audit teams to conduct data-enabled audits. This will not be easy as digital skills are scarce and expensive, but we can’t afford not to.
As new financial powers come to Scotland, the impact of the performance of the Scottish economy on public finances is increasing so we need to improve our economic analysis skills to enhance our audit. In the future we are likely to make greater use of specialists, such as actuaries and valuers, to support the financial audit given the level of estimation and complexity in the accounts, and the increased focus on questioning management’s judgments.
The audit of the future may look quite different from what we do today, with routine work automated and greater use of specialists to ask the right questions and interpret the results. But the mission of public sector audit won’t change. We’ve seen the difference our work can make, with action taken by government before the ink is even dry on some of our reports. Our aim will be to continue to be constructive and forward-looking, providing assurance on the use of public money, identifying areas for improvement and recommending and encouraging good practice. That’s the best way to build trust.
