Local Audit and Accountability Bill Second Reading Legislative Briefing, 28 October 2013 The Local Audit and Accountability Bill aims to finalise the Government’s plans for local government reform by abolishing the Audit Commission and changing the arrangements for external audit of local authorities. The range of measures outlined in this Bill, combined with recent legislative reforms under the Localism Act 2011, remove key institutional defences against corruption, replacing them with arrangements that are likely to be inadequate to protect the public interest and the public purse. Under the new standards and audit frameworks, corruption is likely to increase while policy makers, the public and police will have much less information about how and where corruption is occurring in local government. This is an unintended consequence of the cumulative changes, but a very real risk. The system of checks and balances that previously existed to limit corruption has been eroded or removed. These changes include:
the removal of independent public audit of local authorities; the withdrawal of a universal national code of conduct; the reduced capacity of the local press; and a reduced potential scope to apply for freedom of information requests.
Transparency International believes that the following four areas will be negatively impacted by the measures outlined in the Local Audit and Accountability Bill.
1. Accountability Previously, the work of the Audit Commission was covered by the Freedom of Information Act and even some information held by external auditors was regarded as being held by the Commission in certain circumstances. This information was also subject to the Freedom of Information Act, meaning that it was possible for the public to scrutinise the work of external auditors where there were suspicions of misconduct. However, no public authority has inherited those responsibilities from the Audit Commission, and hence under the new framework, information held by external auditors about the activities of local authorities will no longer be automatically covered by the Freedom of Information Act, but rather the details of what is covered by the Act will depend on the terms of contracts. Citizens retain a right to gain access to other relevant information through the courts, but this represents an unnecessary cost and ultimately a barrier to public accountability. Our report found no evidence that a system of citizen auditors would work or that a real effort has been made to encourage them to exist. Private companies, when operating services in the public interest, should be required to comply with the Freedom of Information Act with regards to those services. Specifically, audit reports from local authorities should be covered under the Freedom of Information Act or published directly as public documents. Key Recommendation: Amendment should be made to the Bill to ensure that the work conducted by auditors will be subject to the Freedom of Information Act, and that auditors will be allowed to access documents from significant private contractors that a local authority has used.
2. Understanding and awareness of fraud and corruption The Audit Commission previously collected and published data, allowing it to trace patterns and trends in corruption and fraud. If the Commission is abolished, it will be difficult to know whether councils are detecting more or less corruption and fraud, or engaging in better or weaker monitoring and prevention activities. Recommendation: Notwithstanding the localism agenda, it is critical that some element of central oversight is restored. At a minimum, this should involve data collection and consistent standards. 3. Effectiveness of external private audit We believe that both the current transitional arrangements and the new legislation will: constrain external auditors from conducting Audit professionals comprehensive investigations; interviewed for a recent undermine their independence; and Transparency International create incentive structures that introduce new risks. report saw a potential The Audit Commission used to play a role in offering protection to external auditors, which empowered them to pursue investigations without fear of being sued or losing future contracts. External auditors appointed under the new arrangements may be less able to withstand pressure when undertaking investigations or raising concerns about suspicions of fraud or corruption.
compromise of independence as a serious concern. One auditor commented, “If you come down tough on a client, and it creates ruffles, you’ve got an eye to what will happen when it goes to open competition.”
When local authorities are able to appoint their own external auditors, from 2017, the independence of auditors may be compromised by concerns about contract renewal and other non-audit services that the firm supplies the local authority with. Recommendation: Firms providing an audit function for local authorities should not be allowed to provide other commercial and consultancy services to the same local authority. 4. Low appetite and capacity for criminal investigation
Local authorities have no legal requirement to investigate or measure fraud. The Audit Commission previously provided specialist professional skills in counter-fraud and corruption to many local authorities, working with them to identify risks and encouraging good practice. With the Commission abolished, many local authorities will lack access to such capacity. Under pressure to cutback spending, and with the message from the centre that investigating fraud is not a priority, some local authorities will retain very little investigative power. In addition, private auditors will have no duty to investigate corruption. This could have serious implications for the future ability to detect and deter fraud, corruption and organised crime. Recommendation: Guidance and resources should be provided to ensure there is sufficient police investigative capacity to monitor and investigate corruption issues at a local government level. Further information: Corruption in UK Local Government: The Mounting Risks, Transparency International UK (October 2013). The full report, which contains 22 recommendations, is available at transparency.org.uk/publications Contact: Rachel Davies, Advocacy Manager 020 7922 7967, rachel.davies@transparency.org.uk