Opinion ■ Olivier Roth
Accounts and accountability
At a time when public confi dence in political institutions is low, audit is arguably more important than ever. So what should replace the Audit Commission?
When the coalition government decided to abolish the Audit Commission, it argued that a new local government audit system would be cheaper, more localist and just as accountable. Competition, choice and freedom were to be the driving forces of this new regime, replacing a centralised, top-down system. So far, the debate has been dominated on the one hand by allegations of commission extravagance and on the other by accusations of political decisions. However, this was a bold move for very different reasons. While the commission was criticised for its Comprehensive Area Assessments (with the Use of Resources being especially unpopular), the audit function has not witnessed the same level of disapproval.
Furthermore, the recent fi nancial crisis has highlighted to policy-makers the dangers that can arise when the relationships between auditors and auditees become too cosy. The clear lesson from the demise of Arthur Andersen following the 2002 collapse of Enron is that auditing must be regulated and scrutinised, lest the whole system collapse. Audit provides confi dence and legitimacy, whether we are talking about the fi nancial market, the retail sector, or governing a country. It creates certainty that the foundations are solid and trust in the organisations being audited and in the whole system.
At a time when public confi dence in political institutions is low, audit is arguably more important than ever. And, if the government strips out a proper level of scrutiny and assurance, localism itself might suffer. Citizens need to know that their money is being spent legitimately and effi ciently so that they can hold their elected representatives to account. Therefore, audit must be cost- effective, independent and adhere to strict guidelines.
14 PublicFinance APRIL 2011
But what is the best way to provide all this? On the surface, the most effective way to ensure independence might be to bundle the audits together and let a centralised body or commission auction them to private fi rms. This commission could even undertake audit itself, since it would be funded by the state and be independent. A Commission for Audit, if you will. This, however, runs counter to moves to increase the fi nancial self- suffi ciency of local authorities and their accountability to their residents. Budget cuts, transformation of service provision, shared services, the Big Society and a general drive towards localism will also affect audit as there will be far fewer resources but greater complexity and divergence of local approaches. Perhaps the starting place should be the object of the audit itself: local government accounts and how to make these accessible to citizens. Second, we could also be more inventive about regulation. How can a system be both local and independent? How can we ensure a competitive, open and inclusive audit market, while ensuring rigour in the system? And can we fi nd a way to engage ‘armchair’ auditors, wherever they may be, in this process?
Marrying these aims requires a new series of solutions. NLGN’s research to be published this month will set out how a new system of regulation could provide these safeguards in a decentralised state.
Olivier Roth is a researcher at the New Local Government Network. The Future of Audit is published on April 4 –
www.nlgn.org.uk
■ Martin Evans On target for IFRS?
Local government fi nance teams still have time to resolve any outstanding issues with
International Financial Reporting Standards – if they act now
In the 2007 Budget, the government announced that all public bodies would have to prepare their accounts in accordance with International Financial Reporting Standards.
NHS, probation and central government bodies achieved this in 2009/10 but the decision was taken to delay local government’s move to IFRS by a year to ensure the accounting changes did not affect council tax. Publishing audited statutory accounts is the principal way that local government bodies discharge their accountability for their stewardship of public money. Successful implementation of IFRS for 2010/11 is important to the reputation of individual councils and to the sector as a whole.
The Audit Commission has been following the progress of local authorities through auditor surveys since November 2009. We have also published briefi ngs and technical papers to help authorities. Our third auditor survey was completed in January 2011 and our fi nal briefi ng paper in the Countdown to IFRS series, The Final Countdown, was published on our website on March 17.
Seat of learning: how do we engage armchair auditors?
Overall, auditors assessed one in ten authorities as ‘not on track’ to prepare IFRS-compliant accounts or as facing major issues that needed resolving. Over 50% had minor issues to deal with. The situation is not irretrievable, but authorities need to recognise the scale of the work needed now, and the risks they run if they don’t focus immediately on it. Of course, local authority fi nance capacity has been under pressure as a result of the October Comprehensive Spending Review and the Local Government Finance Settlement. Authorities have had to focus on other priorities, such as revising their budgets and medium-term fi nancial plans. Perhaps unsurprisingly, the timetable for implementing major IFRS tasks has slipped at many authorities.
Illustrator: Kevin O’Keefe
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