Mind the gap

By Gillian Fawcett, head of public sector, ACCA

The UK government's decision to scrap the Audit Commission leaves some serious questions to be answered about the future of public sector audit. The proposals should really be looked at by the House of Commons' Public Accounts Committee (PAC) - despite their already over-flowing in-tray - as the behind-the-scenes way in which the changes are being made is stifling any kind of productive debate. Besides, it looks like it will be the PAC left picking up the pieces after the Audit Commission's demise.

There are 10 key questions and issues that need to be addressed:

1. How will the independence of the auditor be safeguarded? Who will appoint the auditors? Might the ruling party in a council exert undue influence over the choice of auditor and the setting of the terms of reference? Or will the local electorate be making the appointments? Where are the checks and balances? Auditors were appointed locally in the 19th century and were found to be ineffectual then; independent audits were introduced to improve the system, so why turn back the clock after 150 years?
2. How will we ensure an acceptable relationship between the provision of external audit and other non-audit services? Arguably, as shown in the private sector, audit firms also performing non-audit services for organisations could compromise the auditor's obligation to carry out an audit fearlessly and independently. The Audit Commission currently imposes a blanket ban on consultancy work carried out by the provider of external audits. Will the changes mean more consultancy work is now carried out by external auditors?
3. What are the implications for value for money reporting? Value For Money (VFM) reporting could pass to the National Audit Office (NAO) and the House of Commons' Public Accounts Committee (PAC). This could cause problems: the PAC is already struggling to cope with its workload; lines of accountability become blurred as local council chiefs may have to answer to central government, not local bodies; unlike the Audit Commission, the NAO does not have the authority to comment on government policy if it is badly designed or poorly implemented.
4. How will audit fees be regulated, if at all? The Audit Commission has been able to keep audit fees in the public sector stable. Without an equivalent framework, there is nothing to stop big hikes in audit fees for local authorities.
5. What are the implications for the auditor's liability? In the private sector, auditors have resisted widening the scope of audit as this would increase their already considerable liability; the scope of audit in the public sector is already much wider, covering governance and performance as well as the financial opinion. This could push audit fees up to cover the extra liabilities and could also introduce much more costly litigation to the public sector.
6. Is the National Fraud Authority (NFA) adequately resourced to take on the Audit Commission's anti-fraud and corruption unit? While the shift of anti-corruption and fraud work is a relatively welcome move, the change should not threaten the good work that the Audit Commission does already, such as the National Fraud Initiative. The NFA would need extra resourcing - that may not be available - to undertake the Audit Commission's work.
7. Who, if anybody, will have the power to intervene in cases of emergency? It has not clearly been set out whether there will be some form of regulatory function/body that could intervene where there are severe operational failings. Will this responsibility pass to the NAO?
8. To whom will auditors report? Eric Pickles stated that auditors will be expected to report ‘in the public interest'. But to whom will they actually report? The council? The council executive? The public?
9. Where will the auditors be able to look for guidance and support? It is unclear how a response to significant co-ordinated action by councils could be co-ordinated by firms. If left to their own devices, audit firms could increase fees in response. This would lead to an inconsistent audit response.
10. How will we ensure that the accumulated experience of the Audit Commission is not lost? If the new audit and VFM arrangements are not implemented effectively, both local and central government will lose the capacity to address the 'wicked issues' across and between services, capture comparisons and benchmarks to drive up standards and ensure the overall economy, efficiency, and effectiveness of public services.