Auditor independence is vital, say MPs

07 July 2011

There are significant risks that changes to local authority audits and inspections could compromise accountability for public money unless new legal and practical arrangements are put in place to uphold the vital principle of auditor independence, the Communities and Local Government (CLG) Committee has said.

The committee noted that the government was proposing a departure from the established practice that public bodies should not appoint their own auditors. And in so doing it bore a great responsibility to create adequate legal safeguards and to help local government establish capable and independent local audit committees.

"Ministers and the NAO (National Audit Office) must move rapidly to establish a new audit framework for local government in the future that is effective, efficient and robust," said committee chair Clive Betts. "Once such new arrangements are in place, the government should also instigate a wide-ranging review of public sector audit."

He went on: "The government must help the Audit Commission's own audit practice to realise a smooth transition to becoming a stand-alone body that retains its skilled staff and remains a major player driving best practice in the public audit sector. In a crowded market already dominated by too few players, we favour the establishment of a stand-alone company, preferably a mutual, and firmly oppose one of the 'Big Four' commercial audit firms taking over the Audit Commission's audit practice."

The committee said that the Public Audit Bill scheduled for the autumn should ensure strict adherence to the principle of auditor independence, there should be a majority of independent members on any local audit committee, there should be extra safeguards to ensure the continued effectiveness of public interest reporting, and there should be a proportionate and risk based approach to the scope of local government audit – to allow local innovation and application.

Betts said: "The over-burdensome inspection regime clearly made the Audit Commission very unpopular with local government, but it did provide the public with a means to compare and assess the relative performance of their own council. Under the new regime we believe councils should focus on comprehensive local reporting against local objectives. However, the need or a broader perspective will remain so we also recommend that the need for comparative performance data be reviewed two years from now, once the new arrangements have bedded in."

David Parsons, chairman of the Local Government Association's improvement board, welcomed the committee's recommendations and said that letting local authorities appoint their own external auditor was the right move.

Agreeing that safeguards were needed to ensure the independence of the audit process, Parsons warned against imposing a statutory requirement on local authorities to install committees to oversee audits. Adding an extra layer of bureaucracy would just add cost without strengthening accountability.

He added: "It is important that the new audit regime is not simply a rebranded version of the old. Excessive prescription on the size and scope of local government audits should be avoided. We favour a system which emphasises financial propriety and the accuracy of accounts, while letting councils choose which additional auditing services they require based on local priorities."