Stephen Sheen: The auditor’s dreaded knock on the door
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Auditors might appear to be upping their action against struggling local authorities, but Stephen Sheen argues there’s little incentive to do anything beyond writing to suggest a council puts its financial house in order.
Local authorities have worked industriously to set balanced budgets for 2017/18 but, after reading about recent auditor interventions, may be dreading a knock on the door from the auditors. But, is a knock likely to come and, if so, how hard could it be?
The most noted historical intervention in the budget-setting process, regarding the Great Rate-Capping Rebellion of 1985, made use of powers that are no longer available to the auditor — surcharging persons for losses incurred or deficiencies caused by wilful misconduct. In those cases, members from Liverpool and Lambeth were issued with certificates to pay the deemed loss of interest on income that arose through their failure to set a rate for the year.
The two options for auditors to head for the courts are now restricted to actions against an authority rather than its individual members or officers:
- Application to the courts for declaration that an item of account is unlawful (section 28 of the Local Audit and Accountability Act 2014)
- Application for judicial review of a decision of an authority or of a failure to act which it is reasonable to believe would have an effect on the accounts (section 31 of the 2014 Act)
These are both last resorts and would almost certainly only be taken after auditors had exhausted other options. We therefore don’t need to discuss them any further in this article.
Powers
Working through the list of powers in reverse order of severity, next is the public interest report (PIR). Schedule 7 of the 2014 Act gives auditors a duty to consider whether it would be in the public interest to make a report on any matter coming to their notice during an audit.
The power basically gives the auditors the ability to tell the world what an authority has been up to (or, alternatively, what you have not been up to). Receipt of a PIR brings a requirement for the authority to meet within the month to consider its contents and to give it publicity. Otherwise an authority has the discretion to react as it (reasonably) chooses to the report, which could include putting on a brave face until the blushes fade.
As the scope for a PIRs is so wide, covering anything interesting that comes to the auditor’s attention, you would imagine that they would be as regular and elevating as Nigel Farage’s rides in the Trump Tower lift. But in fact, according to Public Sector Audit Appointments’ website, there have only been four PIRs in the last two years. Perhaps local government audit really is as dull as you always imagined.
The reality is that it is very easy to avoid issuing a PIR, especially in relation to the adequacy of budgets. The NAO’s guidance on auditor reporting discourages a report where the public is already adequately aware of the issue, or where confidence in the authority would be unnecessarily undermined. In most cases, public interest will have waned and considerable costs incurred by the time a report could be compiled.
Unlawful expenditure
Far more effective would be an advisory notice (section 29 of the 2014 Act). These provide the most direct intervention available to an auditor. They can be issued where the auditor considers that the authority has taken or is about to take a decision that involves incurring unlawful expenditure or is beginning a course of action that could be unlawful and likely to cause a loss or deficiency.
An advisory notice specifies a period of notice up to 21 days that an authority must give the auditor before it makes or implements a decision or takes a course of action covered by the notice. After the notice has been given and the period expired, the authority can only proceed if it has met to consider the consequences of intentions, as informed by a statement of reasons provided by the auditor.
The effect of an advisory notice is therefore to bring the business of an authority to a halt and give the auditor time to consider their position whilst the authority reacts to the auditor’s advice. It doesn’t stop a course of action, but could buy time for an auditor to prepare an application to the courts.
The issue of an advisory notice is at the discretion of the auditor. They are not required to act once a particular set of circumstances arises. But if they do, then there could be a substantial impact on the effective running of an authority, especially if the issue relates to something fundamental like the setting of the budget. Which probably explains why (as far as I am aware) no notices have ever been issued since the power was introduced in 2000.
Beef
Finally, the gentlest of interventions – the written recommendation. This power was given to auditors to add a bit of beef to anything that they might wish to recommend to an authority. Under Schedule 7 of the 2014 Act, auditors are able to tag recommendations to be considered by full council, rather than be tucked away in a report that might never come to the attention of members.
This might only be a particular imposition if there is no meeting of full council scheduled in the month following the issue of the recommendation, as a special meeting will then need to be convened to consider it. Once the meeting takes place, members have the ability to turn down the recommendation if they can do so with good reason.
The sting in the tail of the written recommendation is that they have to be copied to the secretary of state. However, this seems to have been taken as an indication that only recommendations that are worthy of reference to the Secretary of State should be made. And, as a reference has the potential to fan the flames of any controversy, written recommendations are rarely made.
In summary, there are actually no circumstances in relation to budget-setting and monitoring where the auditor’s duties and powers coincide to require them to take action. Where they do act, this will be an individual decision to use a discretion in relation to particular local circumstances, removing any predictability. But if they intervene, there is little incentive for the auditor to do anything beyond suggesting in a written recommendation that the authority sorts out its own problems.
Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government.
