Below par: public sector audit in crisis

Have downward cost pressures hit the quality of local government auditing? Mike Allen looks for clues in a recent report by the National Audit Office.

The public sector auditing landscape has changed materially since the days when I worked for the Audit Commission.

It is a landscape where public bodies suffer intense public scrutiny, growing pressure to deliver services as well as almost intolerable financial pressures.

These pressures, for example, have led many local councils to start delving unsustainably into reserves, just to make ends meet.

At a time like this, public bodies need to get the most from all of their relationships, and a key relationship, certainly in the past, would have been with their external auditor as a source of information, guidance and challenge.

Yet the feedback that I hear is that their auditors, far from being their professional ally in an uncertain world, are often seen as inexperienced, overworked and struggling.

How did this come about?

Well the path from the abolition of the Audit Commission to where we are today is well trodden and not one I intend to retrace here, but I think it is true to say that auditors are currently operating in a very different environment both professionally and politically.

The National Audit Office report highlights areas where current arrangements might be less than optimal, and some of the reasons public bodies might not be getting best value for their audit fees.

VFM incentives lacking

The report makes the point that over three years, only three public interest reports (PIRs) have been issued.

This is in contrast to the three years to 2009/10 when auditors issued seven alongside a multitude of s11 recommendations, a period of much less financial pressure.

A low number of PIRs in a period of increasing financial pressure and increasingly complex commercial deals might indicate an unwillingness to issue PIRs, but the key question for me, if that is the case, is why?

The use of adverse audit opinions for value for money (VFM) issues is on the up.

That in itself ought to be a warning sign that arrangements for spending is under pressure and action is needed.

However, the report also suggests that VFM is not enhanced by current reporting arrangements.

This may be for a number of reasons, but firstly, in local government, where there are no real consequences from an adverse opinion means there is little incentive to improve or indeed even get VFM arrangements on the agenda.

And secondly, reviews of arrangements for VFM are of limited use if there are no data sets for bodies to compare themselves to.

Many criticisms of the data sets gathered in the past could be made, but as a starting point for a conversation they did allow for self reflection by public bodies and a point of reference for improvement.

It was a conversation on improvement that often involved their auditor or specialists the auditor could call upon.

The state of local audit

The report made little reference to the financial audit itself, certainly it would have been interesting to know what material changes were requested by auditors.

In the recent past (2009/10) auditors for non-health audited bodies requested over £7bn of material changes to draft accounts, which was indicative to me, at least, of a healthy relationship between auditor and audited body.

But as interesting as the report is, I am as interested in what it doesn’t say and what that suggests about the state of local audit.

One of the perceived strengths of arrangements pre-2010 was the relationship between the auditor, the chief financial officer (CFO) and the senior leadership of the audited body.

That relationship not only strengthened the position of the CFO, but helped address issues as they arose, if not before, when the CFO was easily able to call on the auditor for advice, support or technical challenge.

It now seems that the auditor is less likely to be in regular contact with audited bodies.

As an early 90s trainee with what was still known as District Audit, I was usually based within the offices of larger councils.

Even a medium-sized district council would usually allow the use of a small room for keeping records and as somewhere where the “audit presence” could be extended.

The position in health was different, reflecting their overall governance model and the extent of powers that health bodies had.

Audits were done “on a visit” but the auditor was still available for the director of finance all year round.

Without that regular presence, there is less opportunity for exchange of views or clarification of new technical issues or discussions about other risk factors.

So at a time when more complex arrangements are a tempting option, to improve VFM, lower costs or increase income, many CFOs could find themselves operating in an environment which lacks easy access to external challenge and support.

And it’s certainly a reasonable question to ask, even if auditors were able to spend more time with audited bodies, are they currently equipped or supported to provide the level of challenge that was taken for granted in the past?

Cost squeeze

I asked the question, above, why are less PIRs and other statutory reports being issued in what appear to be more challenging times.

And also, why are VFM reporting arrangements not having the intended impact on improving public services.

Well, the changes in the external auditing landscape since 2010 are a likely contributory factor.

Certainly, one of the publicly stated aims of abolishing the Audit Commission was to reduce fees, and with pressure on budgets, there are incentives to keep fees low.

This will make it increasingly difficult to achieve a surplus on public sector auditing.

With local authorities already noticing the squeeze on availability, skills and experience of audit teams, this will only be exacerbated as auditors look to deliver audits at even lower cost to meet the latest fee expectations.

Also, in the past, auditors who were tempted to issue a PIR or other statutory notice / recommendation knew that they could call on assistance from an experienced team of people which made tackling such issues easier, effective and crucially, efficient.

No auditor needed to start from scratch with the risk of spending time and money fruitlessly.

The same could be said for reviewing innovative or novel arrangements, the auditor could call on subject experts to ensure a consistent and informed approach.

As for VFM, the lack of data and lack of consequence of an adverse audit opinion in local government means that the work done by auditors, however well intended or directed by those responsible for external auditing arrangements, is potentially done in vain.

When audited bodies say that VFM reports offer little new information and that little has been done in response, you have to wonder if the work is worthwhile doing at all, in the current form?

So, what to do?

Well in respect of local government at least, the MLCLG alongside the NAO probably needs to decide what it actually wants to achieve from external audit.

The past really is another country, recreating the Audit Commission is both practically and politically a non-starter.

But if auditors are not to be seen as inexperienced, overworked and struggling, then some sort of support framework is probably needed, alongside a realistic appraisal of fee levels to make doing public sector audit work attractive.

Otherwise, as the phrase doesn’t go, less is definitely not more, when it comes to the audit of public funds.

Mike Allen is an associate at financial consultancy LPFG