Audit expectations

5 Nov 19

Did we throw out the scrutiny baby with the Audit Commission bathwater? Events suggest the need for a rethink

The Best Value inspection of Northamptonshire County Council by Max Caller, in March 2018, is a painful read for anyone who cares about local government’s reputation and its integrity. 

Of course, it should never have come to that. The observation by the then chair of the Local Government Association (LGA) to the Public Accounts Committee – to the effect that the looming problems of Northamptonshire were an open secret – was correct, and only adds to the sense of local government’s failure. But moving from the political to the professional, there are and were similar questions for the auditors to answer about what they did or did not do with the knowledge they had.

The Caller report states that the external auditors were told that a section 114 notice, the local government equivalent to bankruptcy, could have been issued in October 2015 – nearly two and a half years before it happened – and had issued an advisory note on a potentially unlawful budget. What role the external auditors played in the intervening period in actually challenging Northamptonshire members and officers is unknown. As for internal audit, the report found it had been inadequately resourced.

So, what should be our expectations of auditors? I have always had a straightforward set of asks for external auditors. These include: a firm with an experienced partner dedicated to my council’s audit, and with a team that avoids moving between too many different audits; people with a developed understanding of the complexities of partnership working; a relationship built on fair and reasonable challenge, and an ongoing conversation about the authority’s financial health; a partner and lead auditor happy to engage openly with elected members; and auditors who are prepared to focus on work relevant to the authority, rather than lesser work that may suit them on a day-to-day basis – and who are able to work effectively with internal audit. 

When I compare that list with the requirements of the National Audit Office 2015 Code of Practice, currently being revised for March 2020, there is some fit in respect to the auditor’s work on value for money. But, overall, the code’s version reads like a list of routine tasks and does not guarantee a robust examination of an organisation’s financial health. (While contract price cannot be ignored, it is not the most important consideration for me or the section 151 officer.)

In relation to internal audit, my asks of the function and its personnel match those set out in CIPFA’s 2019 statement. The statement highlights, among other priorities, risk management, the promotion of best practice in governance, up-to-date awareness of organisational challenges (which can be challenging in itself), and the key relationship with the external auditor. Management and member awareness of the role of internal audit needs to be regularly tested.

When the district audit service used to provide the majority of external audit to local government, I experienced only one disappointment with an auditor (who turned out to be not a qualified auditor but a best value inspector). That was not enough for me to join in the rejoicing when the Audit Commission was abolished. I was – and still firmly am – in the “baby thrown out with the bathwater” school of opinion as to how the abolition was promoted and implemented, and the consequences that followed. 

While the government seemed to believe it was principally engaged in a money-saving exercise, the LGA was too keen on wrapping the audit function within a new accountability and performance management framework under its ownership. The appointment of auditors moved towards a process where cost could overshadow quality and – despite all the caveats – the independence and extent of the auditor’s role felt constrained.

Today, the wheel has not quite gone full circle. But the government’s announcement in July 2019 of a review, led by Sir Tony Redmond, to examine the purpose, scope and quality of statutory audits, and the supporting regulatory framework, does suggest a change of approach, reflecting concerns at the centre about current arrangements. Perhaps the review can look into the role of the auditors – mainly external, but also internal – in Northamptonshire, where there surely have to be lessons learnt.

‘The appointment of auditors moved towards a process where cost could overshadow quality’

Indexing resilience
Meanwhile, I was encouraged to read the National Audit Office (NAO) report of January 2019 to the House of Commons. In contrast to assurances from some quarters that another Northamptonshire is not around the corner – and opposition from the LGA and local authority chief executives (more so than from section 151 officers) to CIPFA’s resilience index proposals – the NAO report paints the real background to the risks local authorities face.

It flags concerns about their financial sustainability and resilience, and their fitness for purpose in that context. The origins of the report mean that the Ministry of Housing, Communities & Local Government (MHCLG) will have to respond to the select committee later this year. 

It is useful to identify the different strands of audit review that are now in play, and the reasons why the effectiveness of the outputs and outcomes of audit are being questioned (principally, it should be noted, in relation to external audit). Some of the key issues include:

  • How might the government-commissioned Kingman, Brydon, and Competition and Markets Authority reviews into the audit sector impact on local authority and public services audit? It could be a long wait, including for legislation, to find out whether changes in practice can transfer from the private to the public sector. But the matter of who is the auditor’s ultimate client in either sector deserves to be settled sooner rather than later. The Redmond Review is also relevant here.
  • Local government is well-placed to appreciate the concerns about the audit regime that have emerged with the abolition of the Audit Commission and the 2014 legislation. Take two examples: only about 60% of local authority accounts for 2018-19 were signed off on time, a significant reduction on 2017-18. That is a situation that cannot be left as it is, whether it is attributable to fee reduction or the complexity of the audits, or a combination of the two. Second, there is no one holding the ring in the manner of the Audit Commission, hence the internal disagreements in the local government sector and between some individual councils about the true state of the finances of at least a dozen or so councils. 
  • There are plenty of reasons here for local government to recognise the need for change, or else have change done to it. Local government will not be true to itself if, as too often before, it enters into a defensive mode and presents a critical or fudged response. An important footnote is that the chancellor’s spending announcement in early September, with just a one-year focus, changes nothing. Indeed, it serves to make the point about the importance of longer-term sustainability. 
  • A positive reaction from local government would be to pull these strands together in response to the NAO’s consultation on a new Code of Audit Practice, which is due to come into effect no later than April 2020 – parliament permitting. Local government really should welcome a new code.
  • Such a response could usefully set out local government’s expectations of external audit, not forgetting the relationship with internal audit, and the necessity of client trust and organisational understanding. This could be blended to form a narrative that precedes the technical requirements laid out in the code.

I would also invite the NAO, in finalising its new audit practice code, to consider whether more should be done to define good governance. The draft code defines governance as “how the body ensures that it makes informed decisions and properly manages its risks”. There really is no other reference or criterion included. In contrast, the NAO’s report of January 2019 to MHCLG includes a useful explanation of a “core local governance framework”. It would benefit auditors and, in all probability, some local authorities if this was broken down still further, since a judgment of good governance does not lend itself exclusively to a tick-box approach. Each local authority is naturally different. 


‘Only about 60% of local authority accounts for 2018-19 were signed off on time’


Sustainable organisations
Creating greater clarity over good governance should deliver a more balanced audit regime. An audit must not just ensure that accounts are technically correct, but also provide an independent view of whether the organisation is being run on a sustainable basis, as the new code envisages.

For both external and internal auditors, it is important to have an understanding of the dynamics of decision-making, which a simple listing of the roles of the executive, overview and scrutiny, audit committees and standards regimes cannot explain. For instance, key conversations about financial risk in the short or longer term will take place in private meetings, albeit ahead of public discussion, and audit committees typically will be reactive and not proactive, potentially reducing their impact. 

In several councils, now including upper-tier authorities, the cabinet system has returned to replace the executive/scrutiny model, and then there are the mayoral models. All of which emphasises the different factors that have to be taken into account. 

While statutory officers have their own responsibility to ensure internal workings are effective, auditors cannot expect to be effective in their separate roles if there is a shortcoming in their knowledge of how the authority works. Perhaps a prompt on how best to acquire this knowledge should be a requirement in the new code. Examples of good practice in the relationship between internal and external audit could also usefully feature as an addendum.

To end where I began, there are dangers in glossing over what happened in Northamptonshire – dangers for the users of local services, for individual authorities and local government representatives, and for government departments and ministers. Honesty within local government, combined with robust audit, will be crucial to avoid any repetition of past mistakes.

When the scope of the role of the external auditor first came to my attention, I was working in Liverpool at a junior level; perhaps unsurprisingly for the time, in the context of surcharge. In that era (prior to 2000) a member or an officer could be surcharged via the district auditor and the courts – or via the secretary of state – for unlawfully spending public funds. It is different now, but you wonder how the previous regime would have treated some recent events. 

In a more joined-up world, it would be sensible for a new Code of Audit Practice to be introduced into local government, alongside a government response (now delayed) to the recommendations of the Committee on Standards in Public Life on local government standards. 

And given the questioning reference to sanctions in the NAO’s report to MHCLG, I would like to think that this is a point the NAO would itself want to make to government. In so doing, it would provide food for thought for those whose constant refrain is that local government is adequately policed and that self-regulation and self-improvement are always the answer. I am not among them. 

John Sinnott is the chief executive of Leicestershire County Council

  • John Sinnott

    John Sinnott is the chief executive of Leicestershire County Council

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