PracticeAuditProfile: Audit Commission chairman Michael O’Higgins

Profile: Audit Commission chairman Michael O'Higgins

With revenues outperforming most of the Top 50 firms, the Audit Commission plays a vital role in ensuring value for money for taxpayers. Chairman Michael O'Higgins talks about his plans to take audit up a notch

michael o'higgins

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

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

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.’

Related Articles

Is predictive analytics the end of the annual audit?

Audit Is predictive analytics the end of the annual audit?

4d Martin Herron, MHA MacIntyre Hudson
Auditors ‘in the dock’ over Carillion as report calls for Big Four break-up

Audit Auditors ‘in the dock’ over Carillion as report calls for Big Four break-up

1w Emma Smith, Managing Editor
PCAOB sanctions former Deloitte Turkey CEOs over altered documents

Audit PCAOB sanctions former Deloitte Turkey CEOs over altered documents

2w Alia Shoaib, Reporter
KPMG South Africa to review past audit work amid fresh scandal

Audit KPMG South Africa to review past audit work amid fresh scandal

1m Alia Shoaib, Reporter
FRC introduces £10m sanctions for Big Four firms

Audit FRC introduces £10m sanctions for Big Four firms

2m Alia Shoaib, Reporter
Ukraine’s PrivatBank files $3bn claim against PwC

Audit Ukraine’s PrivatBank files $3bn claim against PwC

2m Alia Shoaib, Reporter
Grant Thornton to exit FTSE 350 audit market, citing Big Four dominance

Audit Grant Thornton to exit FTSE 350 audit market, citing Big Four dominance

2m Alia Shoaib, Reporter
Big Four dominate FTSE 250 audit market in Q1 rankings

Audit Big Four dominate FTSE 250 audit market in Q1 rankings

3m Alia Shoaib, Reporter