Opinion: who’ll watch the watchmen when the auditors are away

Have a thought for the Audit Commission. This ‘public spending watchdog’ is not well understood. Its principal function is to be an auditor cum audit regulator. It is also tasked with producing national studies into good practice in local government (and to some extent the NHS). Its more famous, but essentially minor, inspection role – now anyway abolished – was bolted on recently by the dirigiste regime of Blair and Brown.

Three issues now need urgently to be tackled.

First: will communities really benefit from councils being able to appoint their own (private sector) auditors? The private sector already supplies a minority proportion of the work, but under the regulatory supervision of the Commission. What seems to be proposed is that councils will be like a private company – choosing their own auditors and getting rid of them if relations do not work out.

In the private sector there are various protections to ensure that an auditor cannot easily be sacked when it starts to question management decisions. But these safeguards depend essentially on direct appeals to the shareholders.

Worse still: in certain spectacular cases the safeguards have utterly failed. Andersens connived at Enron’s suspect accounting policies. And Madoff ensured that his auditors were a tuppenny bit local firm entirely unable to grasp the enormity of his Ponzi scheme.

The question arises: how do we ensure that a future Doncaster does not employ a weak audit firm in order to conceal its misdoings?

The National Audit Office, the parliamentary agency which audits central government, can of course assume a regulatory role: but this must be more proactive than the feeble stable- door-closing efforts of City regulators. There needs to be a list of approved auditors and compulsory rotation every five years. Auditors should be barred from selling consultancy services to their clients.

Second, there is the matter of national studies. The Commission produces a number of these each year and they have formed invaluable analyses of good and bad practice within the sector. Some have been key to radical change: the whimsically entitled ‘We can’t keep meeting like this’, for instance, challenged the clunky committee and sub-committee system that some of us claim fondly to remember.

The loss of objective research-based thinking at worst hobbles the local government improvement agenda and at worst hands it over to the Daily Mail. Again the NAO could take this on – but will find it difficult unless private sector auditors are obliged to co-operate with the research process.

Third: what happens to value for money? Councils will be delighted that the ‘burden’ of the current regime is lifted. But local taxpayers want to know not only that the incomprehensible financial statements produced by their council are objectively true and fair but also that their council tax has been wisely spent.

Let’s ensure that value for money is not the baby in the bath water.

Chris is a member of the Audit Commission board but writes in a personal capacity

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16 Comments

  • Ozymandias

    I met a traveler from an antique land
    Who said: Two vast and trunkless legs of stone
    Stand in the desert. Near them, on the sand,
    Half sunk, a shattered visage lies, whose frown,
    And wrinkled lip, and sneer of cold command,
    Tell that its sculptor well those passions read
    Which yet survive, stamped on these lifeless things,
    The hand that mocked them, and the heart that fed;
    And on the pedestal these words appear:
    “My name is Ozymandias, king of kings:
    Look upon my works, ye Mighty, and despair!”
    Nothing beside remains. Round the decay
    Of that colossal wreck, boundless and bare
    The lone and level sands stretch far away.
    by Percy Bysshe Shelley

  • Great article, Chris. I am very pleased that senior Lib Dems such as yourself in the LGA are at least making a bit of noise about what appears to be abolition by Eric Pickles’s whim. As a former local government officer, I can confirm that I and others in my council, read, and drew on material put together by the Commission as good management practice. Staff there and others writing had had extensive local govt experience, so what they wrote was not just powder puff stuff.

  • toryboysnevergrowup 17th Aug '10 - 5:18pm

    Without getting into the arguments as to whether or not the Audit Commission was performing its functions well or not, the behaviour of this govermnent in getting rid of a body without first addressing how its functions should be performed really does suggest that they are driven by political ideology and that basic managerial competence is a secondary consideration. Much the same pattern was seen with the announcements regrding the FSA. Past experience tells us that managerial reorganisations carried out in such a manner usually lead to long term problems.

    The involvement of that intellectual colossus Eric Pickles doesn’t inspire much confidence either – I somehow doubt that he has much basic knowledge of what an audit entails, and was probably more driven by the fact that some of his mates had been given a hard tme by the Audit Commission in the past. Dave’s limited past experience with Carlton also suugests someone who doesn’t have much time for the restraints imposed by good corporate governance.

  • @ Cowley-jon

    “these people are our core voters”

    Not just the 2000 public sector professionals and accountants, but, teachers, nurses, university staff, local government, all the people the tories want to sack or put into private sector agencies. Former NHS nurses now will be hired back by private agencies to privatised NHS-costing far more. Same with teachers or anyone with a skill. Privatise their job, remove their employment rights, charge what’s left of the public sector more for their services.Worse than USA. No point staying in England any more..

    These people WERE your core voters.
    If you had retained your integrity and remained as one party, debating these undemocratic measures in Parliamentand voting against unfair measures -your core voters( myself included ) would have ensured your poll well above the current 11%.

  • Some LAs already employ the Big 4 (at huge cost) to do their Internal Audit.

    The point made by Cowley Jon about commercial auditors having little experience of local government is a valid one. Also to be noted is the much more stringent nature of public sector audits. As I understand it, commercial auditors only have to give an opinion on the year-on-year accounts, while the Audit Commission is required to give a VFM opinion, which is rather more subjective and ideologically loaded.

    What is going to happen to the Audit Commission’s power to give general directions? For instance, the instruction 18 months ago to PCTs to separate their commissioning and provider arms?

  • Two of the “big 4” gave Colleen McCabe, headteacher of a Bromley school who stole £500,000 from her employer a clean bill of health over a 3 year period. Public sector auditors (ie specialists) found her out after less than half a day.

    Short-sighted ideological cuts from this coalition govt. Again.

  • Rob Sheffield 17th Aug '10 - 9:41pm

    It won’t save money nor will it be any more impartial (LG CE’s are worried it will be less impartial and used by this government to politically target municipalities run by their oponents). As if.

    But saving money is not the point of the abolition.

    Which is ideological: “we don’t care if it costs the public purse more money ultimately, as long as its not done by the state”

  • Frank H Little:

    You may be referring to the decision of the House of Lords in Caparo v Dickman (1990). The ratio of the case is that auditors cannot be liable in the tort of negligent misstatetment to those purchasing shares in a company on the faith of an audit opinion unless there was knowledge of specific reliance.

  • Thanks Chris – good post.

    I worked at the Commission about 10 years ago and thoroughly enjoyed my time there – the passion, skill, integrity and willingness to innovate and to listen was inspiring and I’ve seldom encountered anything like that in other jobs since both in public and private sector.

    From the conversations I’ve had there has been surprise that the Lib Dems are not doing more to temper some of the strange and hasty decisions that seem to be being made. That Pickles was no friend of the Commission wasn’t a surprise, sadly same with Vince, but more was expected of the rest of us. I expected more of us.

    A shame that Chris, as someone connected with the Commission, has been the only Lib Dem prepared to stand up and state reservations about this move – and remind us that inspection was only a recent and minor role in the Commission, and one that was foist upon them.

  • how about Eric Pickles new aspecially adapted £70k Jag (replacing a nexus)
    while telling us all we need cuts

  • A ghastly mistake. Sweeping away the principle of independent appointment of auditors that has been in place since 1844, when District Audit was set up to audit the accounts of local authorities. Madness. God knows where we’ll end up…which is just as well, since Pickles obviously doesn’t.

  • Better go anony 18th Aug '10 - 5:53pm

    When I was a Lib Dem councillor on a sleepy Yes Minister Tory council, the officers effortlessly managed to prevent any effective scrutiny of their activities by the councillors. The CPA inspections, which required the council to produce reams of long-winded bullsh*t to be judged against bullsh*t criteria, were equally ineffective at finding out what the council’s real strengths and weaknesses were. Cutting through all this obfuscation were the occasional Audit Commission reports, which really got down to business and found out the truth about what went on.

    Not that it always did much good. The council took the report, hid it, and then issued a sanitised version to be debated by the councillors. On one occasion, we were one of five councils chosen to be audited by the inspectorate, and we councillors were solemnly told by our officers that our council had been included on the list as an example of excellent standards so as to set a benchmark to all the other backsliders out there. Well, the actual report was obtainable by Googling the Audit Commission website, though no councillor but me would ever have dreamed of doing any such thing. It told me that yes, the Commission had picked an excellent exemplar as one of their five, but, it wasn’t us. We had been picked as a sinner at potential risk (and, in the event, given a just-about-passable rating).

    When I turned up to the committee meeting and explained all this, it was so totally at variance with what the officers had been saying that nobody, including fellow Lib Dems, really believed me!

  • AC Employee-for now 20th Aug '10 - 8:34am

    @Steve Horgan “As a point of fact, Councils can already appoint a private firm to do their financial audit. The Audit Commission service is just one option in this regard”

    Whilst it is true that some councils do have their audit undertaken by the Big4, that is not their choice. The AC contracts out around 30% of its work to the Big4, and that work is carried out under the AC’s Code of Audit Practice. Councils cannot choose their own auditors, which is the big change coming.

    Who is best placed to deliver bad news on council performance, or raise public interest reports. Auditors who may need to bid to keep their contract for the following year? The demise of the current audit appointment system will affect us all.

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