Stephen Sheen: The thumb twiddling risks in auditor appointments
0Local authorities have big decisions to make about their auditors and auditor panels need to start the work of finding audit candidates in their areas.
Stephen Sheen
Local audit has taken a step closer with the news that authorities will have the promised freedom to choose their own auditors from the 2018/19 financial year. This means auditors will need to be appointed by 31 December 2017.
One might expect that this news will kick off a short golden period where the audit firms will be primping, preening and parading round, in order to demonstrate their unimpeachable suitability as a partner.
For authorities, the time has come to think about starting work on appointing an auditor panel. Auditor panels are the element of local audit designed to provide assurance about the independence of the auditor from the authority. They will not appoint the auditor, but will advise on such things as how the auditor is chosen and maintaining an independent relationship after appointment.
CIPFA has published a Guide to Auditor Panels, with the stamp of DCLG. The guide is freely available from the CIPFA website and has plenty of good detail about the arrangements that can be made (including sharing a panel with other authorities), appointing members and the functions of the panel.
Appointed persons
An auditor panel will not be required if an authority opts in to arrangements for having their auditor appointed for them. However, such arrangements will depend on the specification of an appointing person by the Secretary of State, and there is no immediate prospect of this happening.
Public Sector Audit Appointments (PSAA, the LGA-owned company managing the current audit contracts) have said that they are exploring the feasibility and viability of becoming an appointing person, but with no guarantee that this will happen.
A decision will need to be made whether to wait expectantly for news that PSAA have charted the waters successfully or to set sail in your own boat on the prospect that they can’t or won’t.
If you are planning a voyage, solo or with like-minded shipmates, you will soon need a strategy. Compared to some of the procurement exercises that authorities have to manage, appointing auditors should in theory be straightforward.
The duties of the auditor are specified in the Local Audit and Accountability Act 2014 and auditors are required to comply with the Code of Practice in carrying out these duties, so the scope of the task is set.
Auditors wishing to be appointed will need to be registered, which will have required them to satisfy specified minimum quality criteria.
Bidders will therefore only largely be distinguishable on the basis of price and the extent to which they propose to work cooperatively (eg, by complementing internal audit or committing experienced staff) without compromising their independence.
But there remain serious doubts that procurement will be straightforward in practice. The outsourcing of Audit Commission work in 2012 and the re-tendering of appointments held by firms in 2014 led to two of the Big Four firms being priced out of the market and the remaining auditors being awarded monopolies for the work in particular regions.
For the majority of authorities, there will currently be only one firm active in their area, and at fees so low that they are effectively unchallengeable by anyone without access to the same economies of scale.
Risky limits
The uncertain future impact of expenditure cuts will also have raised the perceived riskiness of local authorities as auditees. Potential auditors may not be so excited about the possibilities for advisory notices, public interest reports, etc, where an authority might run into difficulties balancing their budget.
There is therefore a substantial risk that the freedom to choose your own auditors may be severely limited. It might be advisable to search the electoral register for Hobsons when preparing invitations for the auditor panel.
Some evidence of the state of the potential market will be available this year, as NHS bodies will be appointing local auditors by 31 December 2016. However, these appointments could also complicate matters. With the audit deadline for local government due to move forward to 31 July in 2017/18, firms will be selling capacity to the NHS that might otherwise have been available for meeting the accelerated deadline.
The key message to those hoping to appoint their own auditors is to find out as best you can, and as early as you can, which firms might be interested in bidding (either singly for your own appointment or as part of a group procurement). Otherwise your auditor panel’s main occupation could be thumb twiddling.
Stephen Sheen is the managing director Ichabod’s Industries, a consultancy providing technical accounting support to local government.
