Public audit and the great independence debate

THE COMMUNITIES and Local Government department has called time on the Audit Commission, and the sharks are scenting blood in the water. Public audit makes up 10% of the total audit market in the UK, and whoever mops up the commission’s leftovers will need to loosen their belt a few notches.

How contracts will be awarded is the question du jour, with some stakeholders calling for an external appointment board to be maintained – whether at national or regional level – while others insist local authority audit committees with independent directors are the way to ensure independence.

On one point they are all agreed – local councils must not be left to their own devices when it comes to picking an auditor. This, observers cry, could lead to flagrant breaches of independence, and risks stoking public perception of a lack of independence even when no such collusion exists.

To the uninitiated observer, there seems to be an elementary contradiction in this assumption – if companies are free to appoint their own auditors, why not local government?

Businesses defend to their last breath their right to choose firms as they see fit, and have done so emphatically since the financial crisis threw doubt on established client-auditor relationships. Some experts have called for an autonomous body to make all appointments and so end auditor-in-the-pocket syndrome, but few stakeholders think this is a realistic prospect.

Onto this backdrop comes the debate over the future of public audit, yet complete freedom for councils to choose their auditor – as private companies do – has never been on the menu.

One firm said ensuring independent appointments is even more important for public audit than for businesses, as its scope is so much wider. From health spending to biscuit allowances, the auditor must be completely free of association with any interested party, be they head of social services or local dinner lady.

Granted, local authorities have a lot on their plate, but surely their remit is no wider than the average global super-company, with operations in every continent and staff scattered around the world? Insisting that local councils take direction on auditor appointment seems patronising by comparison, suggesting functionaries are less able to resist sticking their oar in than the average CEO. However, if the problem of auditor independence is one that affects all mere mortals, does this mean external appointment on behalf of businesses is sensible after all?

Private companies try to protect auditor independence through the double safeguard of audit committees making appointments, which are then ratified by shareholders. Even so, debate is fierce as to whether this system upholds autonomy. This means in theory that local authorities should be required to maintain at least as much distance from the appointment process, if not more. Ultimately, councils should look to the private sector – where companies are being closely questioned over auditor independence – before blindly aping their well-worn pattern of auditor appointment.

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