Is the Big Society too big for public audit?

by Rose Orlik

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13 Apr 2011

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THE AUDIT COMMISSION is finished, this much is certain - but how will the spoils be divided? Public audit could be a lucrative earner for firms, so stakeholders are craning their necks to see what the appointment template will look like.

There are two main schools of thought; Government, mid-tier firms and a number of academics are pushing for independently chaired audit committees to help councils engage auditors, while larger firms and local authorities are pining for the glory days of appointment oversight by a central organisation.

These traditionalists say retaining an appointment body - whether at national or regional level - will keep costs low and quality high, warning localising the function risks a double whammy of hazier audit independence and tumbling efficiency.

Meanwhile, advocates for change argue handing power to local councils will make public audit cheaper and bolster competition. Both sides have seized upon the key issues - cost, quality and competition - and each thinks it has found the answer, but where will the dice fall?

The consultation document on the future of local public audit sets out the government's position; all bodies with a turnover above £6.5m would appoint their own auditor, following the advice of an independent committee. This, one assumes, would foment the perfect balance between local agency and auditor autonomy.

Think tank the New Local Government Network backs Whitehall's localist focus, but said more checks are needed to defend the gold standard of auditor independence. Researcher Olivier Roth has called for citizen-led appointment panels and a right of appeal where there are questions over auditor independence, saying this model would reinforce local accountability and "provide a unique chance to ensure an open, competitive and inclusive audit market".

Some might question the strength of citizens' desire to be a walking, talking guarantee for the independence of public audit. In the current era of Big Society idealism, it is all too easy to grandly espouse local engagement as the solution any problem that is harrying central government. On this basis, deploying community members as an audit insurance policy might seem foolish, but there are some who insist it will work.

MacIntyre Hudson is 20th largest firm in the UK, and takes around 10% of its overall turnover from public sector work. Rakesh Shaunak, senior partner and chairman, has no doubts about the involvement of local stakeholders, saying charities and taxpayers groups will be eager to lend a hand. In addition to this, he strongly supports the independently chaired audit committee model on competition grounds, saying it is the best way to foster mid-tier firms.

Shaunak gave the example of education sector audit, previously the domain of the largest firms: "The Big Four tried to buy their way in and capitalise on providing ancillary support, but the cap on auxiliary spending put a stop to this and now second-tier firms dominate."

Roth and the government are making similar noises; that local tendering will foster competition. The NLGN argued plurality in the market sank during the Audit Commission years, saying the number of firms appointed slid from 15 in 1983 to five in 2011.

However, not everyone shares this view. Grant Thornton, one of the firms sharing the 30% of commission work that is not currently undertaken in-house, has lauded the body's success in nurturing competition and choice. Sarah Howard, head of public sector audit, warned allowing market forces to run wild could end up with unwanted results, and potentially see the Big Four bolster their position at the top.

It is conceivable that without extra-council oversight, the major firms could outbid local competitors and divvy up the spoils. But this is not the only reason Howard's preferred option is for a national or regional appointment body.

The Audit Commission's approach combined bulk-buying audit services with allocating mixed portfolios, meaning firms would be engaged on major contracts covering audits from Manchester City Council to a drainage board in deepest Wales. This kept prices down and prevented auditors from cherry-picking the best jobs, thereby levelling out costs for all, Howard said. Additionally, the certainty of securing a long-term, high-value contract allowed smaller firms to invest, making it a happy situation for all.

No one has denied that macro-purchasing by the commission was a good bargain, but critics say the savings were offset by the overheads associated with its additional functions. Councils will guard their pennies by paying only for audit, and letting other bodies swallow the cost of regulation and standard setting, localists have claimed.

Roth went one step further, saying the bulk-buying approach not only provided negligible savings on balance, but also precluded bids from smaller firms. Unbundling the process will give them a chance to get in on the action, he claimed, ramping up competition and driving down prices.

Mark Brain, chair of Bristol City Council's audit committee, is not so sure. He said the local authority was "very happy with the Audit Commission". This puts the kybosh on other stakeholders' speculations somewhat, and suggests those for whom the change is material are unenthusiastic beneficiaries.

Brain warned that the end of bulk buying could mean rising costs for some public audits, and praised the commission's guidance on value for money and benchmarking services. He also questioned the wisdom of citizen-led audit committees, saying too many non-council members - and especially independent chairs - could mean the bodies would be hampered by lack of familiarity with the workings of local government.

The consultation is ongoing, and interested parties have until 30 June to contribute. With the Communities and Local Government department's vision already laid out, it is questionable how much weight will be given to outside views - but there is no doubt that stakeholders are eager to engage on the future of public audit.

 

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