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Issued by the Audit Commission

Comments from ACCA
October 2004

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Audit Commission's Consultation on the Draft Codes of Audit Practice (the Codes). These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector.

ACCA welcomes the development of separate Codes for local government and the NHS . We are also in agreement with the moves to reduce significantly the level of local value-for-money work that is indicated in the Codes.

ACCA is disappointed, however, with the significant changes to the Commission's model of Public Audit that are proposed. The proposed Codes omit the financial aspects of corporate governance, which are currently one of the three aspects of the responsibilities of auditors. As a result, we do not consider that the Codes provide enough emphasis on either the legality of financial transactions or the financial standing of audited bodies.

In addition, we consider that the proposed Codes provide reduced emphasis on the independence of auditors and this may result in unnecessary risks.

Detailed Points

Development of separate codes for local government and the health serv ice


1. ACCA welcomes the development of separate Codes for local government and the NHS . This is in recognition of the different accounting, corporate governance and performance management frameworks in the two sectors.
   
2. We would expect that the development of such separate Codes would enable each Code to be developed in more detail to reflect the particular approaches to be developed in each sector, so we are surprised that this move has been associated with a change of approach intended to make the Codes more high-level documents, including only key principles governing the auditors' approach.
   
   Local value-for-money work
   
3. ACCA is also in agreement with the moves to reduce significantly the level of local value-for-money work that is indicated in the Codes. We believe that this is an area where the Commission's auditors were not necessarily adding value effectively. Some local value-for-money work has been very effective at improving efficiency; however, the Commission's value-for-money work is generally more effective when linked to its national studies. These allow pertinent comparisons to be made between authorities and have identified instances where the efficiency of certain bodies in specific services has been called into question.
   
   
   The Commission's model of public audit
   
4. ACCA is disappointed with the significant changes that are proposed to the Commission's model of Public Audit. We consider that the current model, introduced in 2000, clearly sets out auditors' responsibilities in relation to each of the elements of the audit and emphasises the centrality of corporate governance and a risk-based approach to audit planning.
   
5. The proposed model omits the financial aspects of corporate governance that are currently one of the three aspects of the responsibilities of auditors. The introduction to the Codes indicates that �the financial aspects of corporate governance will in future largely be covered by their work on the accounts� with audit work in relation to financial standing carried out as part of the work in relation to the use of resources'. The draft Codes do not, however, make any direct reference to these aspects of the auditors' current responsibilities. In addition, the three features of external audit in the public sector highlighted in the preface to each Code appear to minimise the importance of regularity and probity in comparison with the principles of public audit developed by the Public Audit Forum.
   
6. As a result, we do not consider that the proposed Codes will provide enough emphasis on either:
   • the legality of financial transactions
     or
   • the financial standing of audited bodies.
   
   
   
7. Recent performance by local authorities and health bodies does not appear to support the case for the reduction in these aspects of audit coverage. For example, according to the Commission report Stewardship and Governance:
   • 18% of health bodies and 34% of local authorities incurred financial deficits in 2002�03
   • 32% of health bodies failed to produce auditable accounts by established deadlines and two thirds of local authorities failed to produce their accounts by the date by which they will have to be produced this year
     and
   • 50% of health bodies and local authorities have still to establish adequate arrangements for the management of their key business risks.
     
8. Last year the Audit Commission undertook a review of a sample of 40 local government accounts to judge the extent of compliance with accounting standards, �only one set of accounts was qualified, but for every set of accounts some audit adjustments were necessary in order to achieve compliance � and in a significant proportion of cases the adjustments made were extensive'. These results also suggest that there may be a case for increasing the resources devoted to the audit of regularity and probity.
   
   Following the Public Pound
   
9. ACCA welcomes the increased recognition in the Codes for partnerships, joint working arrangements and, where appropriate, for �following the public pound'. The Codes do not, however, provide any details of the auditors' rights and responsibilities when auditing such arrangements or indicate where such guidance is available. The implications of the additional risks that arise from partnerships and other forms of joint public/private or public/public working do not appear to have been explicitly considered in the Codes. Also, the additional audit work that may be required does not appear to be explicitly recognised.
   
10. In recent years, there has been a significant increase in the level of partnership working between health and local government bodies. In addition, many of these partnerships are not subject to a formal agreement. This suggests that the Codes should provide further specific advice on the audit of such partnerships and the issue of joint working or reliance on each other's work by auditors from these different sectors.
    
    Non-audit work restrictions
    
11. We have some concerns on the significant reduction in the amount of guidance provided in the Codes on audit objectivity and independence. This is particularly so in relation to work that may be undertaken by the auditors but that does not relate directly to their audit functions. Given the increased profile that auditor independence has gained in the private sector this is perhaps surprising. The proposed Codes do not include any examples of audit work or relationships that may require particular care, as is the case with the current Code. In addition, the Codes do not now make any mention of the requirement for auditors to gain prior permission from the Commission for any additional work above the de minimus amount that is set by the Commission.
    
    Reference to Auditing Standards and other guidance
    
12. ACCA is concerned that the reference to professional standards and guidance in the proposed Codes may apparently reduce the significance of the material that is relevant to the auditors' work. Thus the Codes refer to �auditing standards currently in force' without specifically referring to the Statements of Auditing Standards issued by the Auditing Practices Board. In addition, the proposed Codes do not refer to either the ethical standards or guidance issued by professional accountancy bodies or the guidance that is issued to auditors by the Audit Commission itself.
    
13. While we recognise that reference to specific standards and guidance may result in the Codes becoming out of date, we believe that this risk has to be balanced with the requirement to ensure that all auditors (and other interested parties) are clear about the standards and guidance that must be followed.
    
    Planning in relation to use of resources
    
14. The sections of the Codes relating to planning audit work in relation to the use of resources (including paragraphs 26�29) omit the paragraphs from the current Code on materiality and significance (paragraphs 25 and 26). This may have the effect of further reducing audit work as these paragraphs emphasise the wider scope of significance compared with materiality, particularly in relation to the financial aspects of corporate governance and aspects of performance management.
    
15. As indicated above, the consultation document indicates that audit work in relation to financial standing will in future be undertaken as part of the work that relates to the use of resources. In the current Code this work includes having regard to legal and regulatory compliance. Thus the guidance in paragraph 29 of the proposed Local Government Code (and the corresponding paragraph in the Health Service Code) is perhaps surprising as it indicates that auditors should, when considering undertaking work in relation to such risks, only �have regard to the potential for them to contribute to improvement in the delivery of the functions of the audited body'. In contrast, improved compliance with regulatory requirements may not have the effect of actually improving the services the body delivers.

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