House of Commons Communities and Local Government Committee Audit and inspection of local authorities Fourth Report of Session 2010–12 Volume I Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/clgcom Ordered by the House of Commons to be printed 27 June 2011 HC 763 Published on 7 July 2011 by authority of the House of Commons London: The Stationery Office Limited £24.50 The Communities and Local Government Committee The Communities and Local Government Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Communities and Local Government. Current membership Mr Clive Betts MP (Labour, Sheffield South-East) (Chair) Heidi Alexander MP (Labour, Lewisham East) Bob Blackman MP (Conservative, Harrow East) Simon Danczuk MP Rochdale (Labour, Rochdale) Stephen Gilbert MP (Liberal Democrat, St Austell and Newquay) David Heyes MP (Labour, Ashton under Lyne) George Hollingbery MP (Conservative, Meon Valley) James Morris MP (Conservative, Halesowen and Rowley Regis) Mark Pawsey MP (Conservative, Rugby) Steve Rotheram MP (Labour, Liverpool Walton) Heather Wheeler MP (Conservative, South Derbyshire) Mike Freer MP (Conservative, Finchley and Golders Green) was also a member of the Committee during this inquiry. Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/clg. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Huw Yardley (Clerk), Judith Boyce (Second Clerk), Josephine Willows (Inquiry Manager), Kevin Maddison (Committee Specialist), Emily Gregory (Senior Committee Assistant), Mandy Sullivan (Committee Assistant), Stewart McIlvenna, (Committee Support Assistant) and Hannah Pearce (Media Officer). For this report they were assisted by David Davies (Committee Specialist). Contacts All correspondence should be addressed to the Clerk of the Communities and Local Government Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 1234; the Committee’s email address is [email protected] Audit and inspection of local authorities 1 Contents Report Page Summary 3 1 Introduction 5 2 Abolition of the Audit Commission 7 Localism context 7 Abolition and fragmentation 7 Savings from abolition of the Audit Commission 10 Armchair auditors 11 3 Auditor independence 13 Principles of public audit 13 Local appointment 14 Public interest reporting and objections to accounts 16 Public interest reporting 16 Right of objection 17 4 Audit scope 19 Responsibility for the audit code, standards and consistency 19 Scope of audit: key elements 20 Value for money in audit 20 Financial resilience and grant claim certification 21 Proportionate and risk based 22 5 Competition in the audit market 23 Domination by the few 23 Audit Commission audit practice 24 Audit fees 25 6 Inspection—improving services 27 Development of inspection 27 A driver of improvement? 27 Sector-led performance management 29 Performance indicators and public reporting 31 Variation, failure and intervention 32 7 National Value for Money studies 34 The studies programme 34 Their value 34 NAO to take on the role 35 8 Conclusion 37 Conclusions and recommendations 39 2 Audit and inspection of local authorities Formal Minutes 45 Witnesses 46 List of printed written evidence 47 List of additional written evidence 48 List of Reports from the Committee during the current Parliament 49 Audit and inspection of local authorities 3 Summary The Government has announced the abolition of the Audit Commission and substantial changes to the way in which audit of local government is to take place. It has already terminated comprehensive area assessment (CAA) as part of its commitment to cutting inspection of local authorities. These changes raise significant questions of principle and implementation in regard to public audit and performance management. Until now the Audit Commission has been the regulator, commissioner and major provider of local government audit services. Under the Government proposals, local authorities will, via independent audit committees, have responsibility for appointing their own auditors. Some of the Audit Commission’s functions—responsibility for drawing up the scope of audit (the Code of Audit Practice) and for national value-for-money studies— will pass to the National Audit Office (NAO). Other functions will transfer to other bodies or cease entirely. The changes are part of the Government’s localism agenda, devolving powers to local government and a move away from the “command and control” approach that, the Government argues, has characterised central-local government relations over the past decade. It is clear that these proposals involve both opportunities and risks. We heard concerns that some fundamental principles - particularly that public bodies should not appoint their own auditors—were being breached. However, on the advice of the Comptroller and Auditor General, we are prepared to accept that the vital principle of auditor independence can be safeguarded, provided that adequate legal and practical arrangements are put in place. We emphasise the heavy responsibility this places on the Government and the NAO to ensure that the new system delivers the key objectives set out in the Department for Communities and Local Government’s consultation document. Devolving powers to local government means that central government must ensure that it first establishes an audit framework that is effective, efficient and robust. The Government intends to introduce a public audit bill in the autumn. This will provide the proper opportunity for scrutiny of the detailed proposals. In our Report, we set out the principles that we believe should govern public audit arrangements in the future, including: x Auditor independence must be strictly maintained; x Local audit committees must have a majority of independent members; x Additional safeguards are needed to ensure the continued effectiveness of public interest reporting, and x The scope of local government audit should be proportionate and risk based. It should allow for local innovation and application, particularly with regards to local value for money work. 4 Audit and inspection of local authorities If local audit committees are to have a choice of audit provider, a competitive audit market will be crucial. Presently the Audit Commission undertakes 70% of the local government audit; the remaining 30% is undertaken by five private audit firms, under contracts with the Audit Commission. The Audit Commission audit practice is to become a stand-alone body, able to compete for local government audit work. We recommend that the Government assist the Audit Commission audit practice over this transitional period so as to ensure that its audit skills are not lost and that it continues as a major player in the public audit sector. There are already too few audit firms in the public audit market. We would be firmly opposed to one of the “Big Four” firms taking over the Audit Commission. Our favoured outcome is the establishment of a stand-alone company, preferably a mutual. The end of CAA and inspection was widely welcomed by local government and others. An over-burdensome inspection regime seems to have been the principal reason why the Audit Commission lost the support of its local government stakeholders. (Its work as auditor is still held in high regard.) Local government will no longer be required to submit performance indicators to government. The responsibility for driving improvements in service standards and efficiency will lie with local government and “armchair auditors”. Consequently there will be a lack of comprehensive, consistent data on which authorities can be compared. We recommend that the need for and adequacy of comparative performance data be reviewed two years from now, once the new arrangements have bedded in. We accept that the time for centrally-prescribed inspection of local government services and governance has passed. We welcome the LGA’s proposals for sector-led performance management. We reiterate the call in our Localism report for the Government to examine the role which robust local government scrutiny arrangements could make to improving local government performance. The Government needs to clarify arrangements for intervention in the exceptional cases of serious corporate or service failure. The manner in which the Audit Commission’s abolition was announced and progressed may have resulted in a missed opportunity for what could have been a valuable reassessment of the arrangements for public audit. In the short term, the Government should concentrate on successful implementation of the changes it proposes. Once new arrangements are in