Name the fifth biggest audit business by revenue in the UK. And no, it’s not BDO Stoy Hayward or Grant Thornton.

With revenues of £180m from its audit work, the Audit Commission dwarfs its nearest private sector rivals ­ though it has a way to go to catch the Big Four.

Conversely the commission is also one of the biggest users of big firms’ audit services, to the tune of £40m a year.

But when you think of ‘public sector’ and ‘audit’, National Audit Office comptroller and auditor general Sir John Bourn dishing out a withering statement on a set of government department accounts springs to mind.

So what does the commission do then? Essentially any public sector auditing outside of the NAO’s remit. So instead of central government think local authorities, the police and health service.

It employs 2,000 staff, four times the amount of the NAO, and keeps plenty of auditors off the streets. Nearly 450 CIPFA-qualified auditors, plus 146 ACCA-qualifieds and 125 from the ICAEW work at the commission.

For Michael O’Higgins, chairman of the Audit Commission and an economist and consultant by trade, the lure of the commission’s important role in auditing local public services was too much to resist.

‘It immediately struck me as a great opportunity to help people have an impact on improving public services,’ O’Higgins says.

But the deal clincher is the extent of operational change the commission is undergoing over the next few years, which O’Higgins describes as ‘path-breaking work’.

The commission wants to push assessments to the next level where it is satisfied that local authorities are providing the basic services to their constituents at a competent level, and the commission can collate reliable data to prove so.

A new regime
In 2009 the comprehensive area assessment will replace the comprehensive performance assessment. The new regime, currently in consultation phase, will test local areas on the quality of life of their inhabitants, and whether they receive value for money from their local services (see below).

Under this new approach, the commission’s aim to deliver a joined-up approach to assessing public services, ensuring that local councils, primary care trusts and other health organisations, police, fire and rescue authorities, housing associations, schools and other partners are working together to solve issues facing their communities.

‘The idea is to look at a practical level about services ­ there’s no point saying they’re good at collecting dustbins if the rest of the area is run-down. We’re confident most public authorities are good at the core services, so now what’s the place like? How can we improve that?’ says O’Higgins.

The more rounded audit work will no doubt have the audit firms’ cash registers ringing ­ but O’Higgins doesn’t expect some of the lower level audit work to be required. If, as he says, core services are provided competently then why put them through rigorous audits all the time? Is it a case of the audit work changing, rather than increasing in content?

‘The [new audit] will have to be evidence based, but we won’t try to teach our people to do environmental audits, instead ask organisations how they are performing ­ so the audit firms will learn how to ask those questions for us.’

In fact, firms are already ‘anxious’ to know how the CAA will work for them.
O’Higgins describes the new work as ‘expanding the definition’ of how a region performs, moving away from just measuring how its financial resources are spent. ‘It will have three elements ­ managing money, managing business, and its natural resources such as the area’s carbon footprint,’ he explains. ‘For example it’s not about Birmingham City Council, but Birmingham.’

While the audit firms will have some new tricks to learn from the commission’s accounting personnel, the flow of best practice from them to the commission is also vital, even though O’Higgins believes the skill sets are not that different. ‘There’s a good degree of mutual respect and learning that works both ways.

‘Our staff have a public service focus, but the large audit firms have public service divisions. We want them to bring “value-add” from their international base and to give examples to us of what they’ve learned.’

With the transition to international financial reporting standards looming for the public sector, O’Higgins foresees a steep learning curve for the commission. But when it comes to the crunch, the commission is the firms’ client, and it is strict on how they operate for local government. Enlisting firms to carry out audit work keeps the audits fresh, and ensures rotation of audit, O’Higgins says.

The commission is striving to make sure audit partners are rotated every five years at the maximum, while the audit firms swap every 10. While not 100% at that target, it will be ‘there or thereabouts’ for the next audit rotation at the end of the decade, O’Higgins says.

Transparency all round
So who scrutinises the commission? It answers to the secretary of state for communities and local government, a position currently held by Hazel Blears. That, it appears, is not enough for the commission. Keen to show transparency and accountability, it has put itself forward to be audited by the Financial Reporting Council’s audit inspection unit ­ a report is due in the new year.

‘Part of our mission to ensure more transparency in local authorities, so it seemed right we have the same transparency about our own performance and activities,’ O’Higgins says.

A measure of its success is whether the commission is called back to do additional work, other than the obligatory audits, for its customers. The Department of Health took on recommendations made by the commission to overhaul the NHS’s accounting regime.

‘We accept the Audit Commission’s analysis and the rationale of its review. Overall, its application provides a strong disincentive for overspending, but it is becoming clear it is increasingly unsustainable for NHS trusts,’ Health minister Andy Burnham said at the time.
But as the NHS situation showed, not all is rosy in local government.

With his consulting background coming in useful for such huge change projects, O’Higgins wants local authorities to move towards real-time reporting, to provide management with up-to-date information, and help them make better business decisions.

‘There’s still a gap in terms of using real-time information. In the best parts of the private sector you know day-by-day and week-by-week your performance ­ not just in what you’ve spent but your performance.

‘Take a Tesco-type organisation - they’ll know overnight what’s happening in their business,’ says O’Higgins.

But he admits that understanding whether customers are shifting toward buying more apples than oranges is a lot more simple to gauge than measuring the behaviour of people.

‘Trying to measure the composition of an area is difficult. Changes in family size or an ageing population have to be responded to, not overnight but you have to look at your housing stock, the number of bedrooms and distribution of those units. You don’t need an immediate response but changes in an area are more complicated to measure.’

With such fundamental changes occurring in the audit of local authorities and commission choosing to face its own audit from the AIU, don’t be too surprised if you start hearing it referred to as a ‘Big Five’ auditor.

Measuring change

The Audit Commission is looking to overhaul its regime for measuring and auditing how local authorities perform. It may sound simple enough, but the government body is looking at not just whether a council empties bins on time, but whether people get value for money from their area as a whole.

Although still under consultation, the plan is to implement the new regime in 2009 and intends to give people an ‘annual snapshot of life ’in their local area and help local services to improve their quality of life. It will also provide an independent View of whether people are getting value for money from their local services, challenge local services to deliver more with the resources they have, highlight where improvements could be made and point to possible solutions.

Local authority FDs will have to be on the ball, says audit Commission chairman Michael O’Higgins, to make sure authorities can keep track of their performance, and achieve buy-in from the rest of their board.

‘The FD’s is the first port of call on this, but we are hoping that as these assessments apply to the authority as a whole, the chief would take a significant stance on this as well. Reputation in local public services can be affected by an assessment.’