By David Hencke | 7 July 2011

Hundreds of councils and other authorities spending more than £6.5 million a year are to be able to adopt a business model for appointing auditors.

The government’s proposed shake-up of the auditing of local authorities, which accompanies the scrapping of the Audit Commission, means that 353 local authorities and 215 other public bodies with an annual spend above £6.5 million will, like companies, be able to appoint their own auditors. Other bodies in this group include fire and rescue authorities, national parks and conservation boards.

The auditors would also be allowed to act as consultants to the same public body on non-audit work. This potential conflict of interests arose at Enron, the failed energy giant, where its auditors had also been financial advisors to the group.

“Lucrative contracts for consultancy could compromise the independence and objectivity of auditors”
– Audit Commission submission

The Audit Commission is alarmed by this, saying in a paper to the House of Commons communities and local government committee: “Lucrative contracts for consultancy could compromise the independence and objectivity of auditors.”

Meanwhile, the monitoring of the audit work would transfer from the Audit Commission to professional supervisory bodies for the auditing profession. The Financial Reporting Council, an independent City regulator sponsored by the Department for Business, Innovation and Skills, would become responsible for overseeing the work of professional bodies.

The cost of this would be added to auditors’ fees to local councils, which face other extra costs under the new system.

The government is using the Companies Act as the model for auditing local councils. The government’s consultation paper on the proposals said: “The Financial Reporting Council is the regulator for ‘Companies Act’ audit, and we propose that it takes on a similar role for the local public audit regulatory regime in England, provided that it can assure the government that it has both the resources and the expertise to undertake the role, and wishes to do so.”

The government hopes that new firms will spring up to audit public bodies, although it says that it will set extra criteria to ensure that they are rigorous enough. This would ensure, says the consultation paper, “that auditors have the necessary experience to be able to undertake a robust audit of a local public body.”

The list of auditors would be published on a public register. “This register could be kept by the recognised supervisory bodies for local public audit, or it could be kept by another body.”

Grant Shapps, housing and local government minister, says in his forward to the consultation paper: “Auditors would be regulated under a system which mirrors that of the audit of companies with a role for the Financial Reporting Council and the professional audit bodies.

“We envisage that the National Audit Office will set the code of audit practice, and we have put forward options for the scope of audit in the new framework.”

However, the National Audit Office has shown no enthusiasm for taking on this role, and is not keen on auditing local government as well as central government.

Under the government’s plans, councils will set up independent audit committees. But this underlines the question over the independence of the new auditing regime, and would increase costs further.

The Audit Commission says in a paper to the parliamentary communities and local government committee: “We consider this to be wrong in principle because it undermines auditors’ independence. Those responsible for raising taxes, or spending and accounting for public money, should not decide who scrutinises how they conduct their business.”

Referring to ‘special interest’ reports, which are published by auditors to expose misuse of public money, it continues: “Local authorities often make great efforts to prevent auditors issuing ‘public interest’ reports, and in some cases have sought to have the auditor removed. Auditors would be less able to resist pressure without the safeguard of independent appointment.”

The committee today published its report also criticising the lack of independence of auditors under the proposals.

The secretary of state would be able to force public bodies to appoint an auditor if they refused to do so or appoint a suitably qualified one. At present, the Audit Commission appoints all auditors for such bodies.

The proposals stipulate that an auditor can only stay in office for ten years to help ensure independence.

Shapps argues: “If our local services are going to be genuinely responsive, tailored to the needs of local people, then they must be accountable to those same people. This is why we want to put in place a new locally focussed audit regime, which is open and transparent but retains the high quality of audit that we expect.”

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