top stories

Share

A "think piece" issued by the Audit Commission

Comments from the Association of Chartered Certified Accountants
September 2000

Copies of the think piece can be obtained from the Audit Commission’s website:
www.audit-commission.gov.uk

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have been invited by the Audit Commission to put forward proposals for improving the audit regime for local councils (i.e. parish, town and community councils). Our response to the Commission's discussion paper revolves around two main issues:

(a) whether local councils need to be subjected to a full audit or any form of review at all

and

(b) how the supply of external audit services to local councils can be broadened.

ACCA believes that, for reasons of public accountability, the accounts of all local councils should be audited. If it were decided, however, to exempt from audit those councils which spend relatively insignificant sums of taxpayers' money, we believe that those councils should be subjected to independent probity examinations. We do not believe that it is necessary for the Commission to establish an independent body to conduct such examinations or to regulate the examiners. Practising accountants can provide the necessary expertise. ACCA practitioners, for example, undertake a wide range of accountancy services including statutory audit, maintaining control systems and regulatory work.

ACCA believes that the Commission should open up the market for engagements of the sort discussed in the paper. The Audit Commission Act 1998 provides that members of ACCA, the Chartered Institute of Public Finance and Accountancy (CIPFA) and the three Institutes of Chartered Accountants (ICA) (England and Wales, Ireland, and Scotland) are qualified to undertake local authority audit. The Commission has, however, restricted its audit appointments up until now to six large practising firms, regardless of whether auditees are small community councils spending insignificant sums of money or principal authorities spending millions of pounds. We note that the Commission has acknowledged that the current practice of assigning the same audit firm to both a principal authority and its corresponding local council is no longer sustainable.

ACCA considers that the Commission should now review its policy on council audit; the present system does not reflect the legislative position, nor does it ensure value for money for the provision of audit services. Since large firms appear to find small council audit unprofitable, we suggest that smaller audit firms may be better placed to assume this type of work.

The local council audit market should be open to all registered auditors subject to their satisfying the Commission that they have the necessary skills. Local councils should also be allowed to appoint their auditors direct. We believe that, by widening the scope for choice, the Commission will enable communities to have a cost effective level of assurance which is commensurate with the scale of their local council operations.

1 General Comments

1.1 ACCA welcomes the opportunity provided by the "think piece" for stimulating debate on the relationship between local government and the auditing profession. ACCA has considered the Commission's options for change to the local council audit regime in the context of the legislative framework and public sector environment in which local councils operate.

1.2 Part II of the Companies Act 1989, which incorporated the EU Eighth Directive into UK law, created the benchmark status of 'registered auditor'. Most UK statutes which impose external audit requirements on entities falling within their jurisdiction cross-reference their audit eligibility criteria to Part II of the Act. This approach is based on the premise that auditors who have fulfilled the statutory eligibility criteria with respect to limited companies will have the skills and professional integrity to carry out audit work in respect of other types of entities. There are currently around 12,400 registered audit firms throughout the UK, all of which are qualified via consequential amendments to other statutes to undertake, for example, the audit of charities, occupational pension schemes and local authorities.

1.3 The Audit Commission Act 1998 allows the Commission to choose local authority auditors, subject to the proviso that the auditor is a member of one of five designated bodies (i.e. the four principal Recognised Supervisory Bodies (RSBs) under the Companies Act: ACCA, ICAEW, ICAI and ICAS) and also CIPFA.

1.4 As we understand it, the District Audit currently undertakes 70% of local authority audits with the remaining 30% being carried out by approved private accountancy firms. Even though the Commission operates a regular programme of market testing for the selection of audit appointments, it uses only six ICA firms from its approved list. ACCA sees no reason why the Commission should not open up its approved list to all those firms and individuals which are registered auditors, subject to their meeting the Commission's auditing requirements for public sector entities.

1.5 In common with the other RSBs, ACCA has stringent rules in place to test the skills and experience of its members who wish to carry out audit work. Under its current rules, no individual member may accept an audit appointment unless that member has met the conditions for the issue of a Practising Certificate (Audit) as set out in ACCA's Practising Regulations. These conditions require a practising member to:

• have three years experience in an approved training practice, of which two must be acquired post-qualification
  
  
• undertake a formal programme of continuous professional development (CPD)
  
  
• be a fit and proper person
  
  
• hold professional indemnity insurance
  
  and
  
  
• have arranged for continuity of service through another registered auditor in case the practitioner (if operating as a sole practitioner) becomes unable to deal with clients at any point in time.

1.6 All firms which wish to acquire 'registered auditor' status are required by ACCA to obtain Auditing Certificates. The issue of the certificate is dependent on the firm being controlled by qualified individuals.

1.7 ACCA is currently introducing its new quality assurance programme. The ACCA Quality Checked Seal will be awarded, in the form of a kitemark, to practising firms in the UK and Ireland which can show that they adhere to best auditing practice. A firm will be invited to apply for the Seal after it has been visited by ACCA's Monitoring Unit and it has demonstrated that it has the appropriate quality controls in place relative to the nature and size of the practice. This new initiative illustrates ACCA's commitment to professional excellence and the lead it takes in setting high standards for its members in the interests of the public.

2 Specific Comments

2.1 We present our specific comments in response to the Commission's twelve key questions listed under the headline "questions for stakeholders" on page 26 of the discussion paper.

Does local council audit provide a level of assurance that is proportionate to its cost?

2.2 It is difficult to put a price on public accountability and, without an objective cost benefit analysis, it is not possible to determine whether local council audit, on the whole, provides a level of assurance which is proportionate to its cost. The true cost of local audit services is not transparent for the following reasons:

• the Commission passes on to principal authorities that share of central support services which should be attributable to local councils
  
  
• audit suppliers claim that they subsidise the cost of local council audit from other activities
  
  
• the Commission sets local council audit fees (£25.80 per hour) well below the minimum rate expected of a trainee or someone unqualified who may not always provide best value for money in carrying out the audit
  
  
• auditors claim that they spend a disproportionate amount of time on non-audit work due to the lack of accounting expertise of parish/town clerks
  
  and
  
  
• auditors tend to spread the time they spend on such work as is mentioned above across authorities within a wide geographical area, to ensure that the fee charged to any one local council is kept to a minimum.

2.3 The Commission acknowledges that many local councils feel that they are not receiving an acceptable standard of customer service from their current auditors in terms of access, quality of staff and promptness of reporting. Auditors believe that the comprehensive accountancy support required by some parishes is outside their remit and could compromise their independence. The Commission's document implies that, as currently administered, local council audit does not provide a level of assurance which is proportionate to its cost.

2.4 The credibility and integrity of the public sector at large comes into question if public funds are mismanaged or misappropriated, regardless of the amounts of money involved or the size of the organisations in question. The Commission has a duty to provide assurance that public money is being safeguarded and that audit services are provided at best value to the public.

Would local communities be willing to pay more for a more effective (and sustainable) local audit regime?

2.5 There appears to be a direct correlation between the 'true cost' of the audit and the efficiency of the auditee. Existing practice however (see paragraphs 2.2 and 2.3 above) only hides the inefficiencies of some authorities and does not enhance public accountability. Auditors cannot realistically be expected to subsidise local council audit from their own earnings, nor should the inefficiencies of one organisation be paid for by another. Although ACCA cannot comment on whether local communities would be willing to pay more for a more effective (and sustainable) local council audit regime, we believe that communities would expect to receive value for money from such a regime.

2.6 The 1998 White Paper Modern Local Government - In Touch with the People explains the importance of local councils within a democratic society. The Rural White Paper, which is due to be published by November 2000, is likely to propose that the role of local councils should be strengthened to enable them to tackle poverty, housing needs and public transport issues in remote areas, all of which will require more public money. As local councils levy taxation by a precept on a principal authority, the tax burden falls on a much wider community than that of the local council area: local councils should be held accountable for their actions to that wider community.

2.7 External audit plays a crucial role in the public accountability process. Any proposal to reduce local council independence or public accountability on cost grounds alone is not acceptable. ACCA believes that the Commission needs to introduce a number of measures aimed at securing audit services at best value to the stakeholder, including:

• in the light of the Government's rural White Paper, presenting a case for a specific government grant to be paid to local councils for external audit
  
  
• widening the audit supply chain to let market forces dictate the audit rate
  
  and
  
  
• enabling local councils to operate within best financial management practice by allowing them access to a low cost source of professional advice and guidance.

2.8 There appears to be a trade-off between the amount of money expended by local councils on audit services and the amount spent on employing suitably qualified financial managers. It may be more cost effective for small entities to use small practitioners to prepare and hence audit their accounts from incomplete records once a year than to employ competent staff on an ongoing basis throughout the year to administer their financial affairs.

Should the accounting requirements be simplified? If so, above what threshold should accruals accounting be mandatory?

2.9 ACCA sees no reason why the accounting requirements of small local councils should not be simplified, along the lines of the Financial Reporting Standard for Small Enterprises (FRSSE) in the private sector. We do not see any benefits, however, of exempting small local councils from accruals accounting, as this is not conducive to good accounting practice and public accountability. ACCA does not believe that cash accounting is less onerous than accrual accounting for small entities, which typically do not hold many assets. In the absence of accrual accounting it is still necessary, for good financial management, to identify commitments for cash flow projections and internal control purposes.

Should some local councils be exempt from audit altogether (and if so, which)?

2.10 ACCA believes in principle that all councils, regardless of size, should be subjected to an independent audit. Given that many of the sums involved in local council audit are relatively insignificant there may be scope, however, for the deletion of the audit requirement for councils which spend less than £5,000 per annum, subject to a limited form of probity review being carried out periodically.

Is independent examination (similar to that which is applied to small charities) a viable alternative to audit for some local councils?

2.11 We have considered the Commission's findings that "the audit regime imposed on local councils is more extensive and hence more costly than that imposed on other groups of small organisations, such as charities", which are subject to an independent examination. ACCA does not believe that it is appropriate to base a reporting regime for local councils on that which applies to charities. Subscribers to charities do so on a voluntary basis whereas local councils are authorised by law to demand payment of taxes.

2.12 ACCA believes that a strict audit regime for local councils (subject to the £5,000 threshold mentioned in paragraph 2.10) is justifiable on the basis that local councils are accountable for levies imposed on taxpayers. It is our view that an effective independent examination framework would not be less costly to administer than opening the small council audit market to all registered auditors. Independent examination would still entail the Commission having to ensure that examinations were carried out by competent examiners, who would have to be paid accordingly. The Commission already sets the local council audit hourly rate well below the minimum that it recommends for audit work carried out by a competent unqualified individual. Small charities which opt to have an independent examination tend to rely on the voluntary services of a bank or building society manager, a local authority treasurer or retired accountant for verifying their accounts. It is unlikely that local councils could sustain such support as do charities from the community on a voluntary basis.

Is it justifiable to restrict electors' rights to raise questions and objections in relation to small amounts of expenditure?

2.13 The Commission has a duty to ensure that public bodies are accountable for the use of public resources regardless of the magnitude of the amount involved. The public is entitled to receive the necessary level of assurance that public funds are safeguarded, accounted for and expended as voted for by the electorate. ACCA does not believe that it is justifiable to restrict the right of electors to raise questions and objections. We believe that such action would detract from public accountability. We do query, however, whether it should be the role of the auditor to respond to such questions and objections or whether it should be the role of the local council. The auditor has a duty to report on questions or objections raised if s/he considers these to be in the public interest.

Should the Commission consider relaxing the conditions under which smaller local councils can have several years' accounts considered at one audit?

2.14 ACCA believes that the Commission's triennial scheme, whereby the accounts of local councils with income of less than £5,000 p.a. are audited three years at a time, is acceptable provided that the existing requirements continue to be upheld:

• the arrangement meets with the auditor's approval
  
  
• annual financial summaries are submitted to the auditor
  
  and
  
  
• there has not been a change of circumstances, such as a change of a clerk or an increase in annual income above £5,000.

2.15 If an extensive regime of local council audit is still required, where should the Commission look to find the necessary audit skills at an affordable price?

2.16 ACCA believes that all registered auditors should be entitled to undertake local council audits. ACCA practitioners, for example, undertake a wide range of work including the audit of limited companies, charities and pension schemes. Many of the small organisations audited by ACCA practitioners have similar problems to those associated with small local councils, which typically operate with high levels of risk, such as incomplete records, non-compliance with accounting requirements, poor internal control and the lack of professional finance staff.

2.17 Under the present statutory framework, the Commission could adopt a less restrictive policy as to which auditors it is prepared to appoint to local councils. The main advantage in expanding the range of approved firms beyond the current range is that small audit firms are likely to be more familiar with the circumstances of smaller entities, which tend to need a more personalised service than large accountancy firms can afford to provide.

2.18 ACCA suggests that, by matching audit firms to local councils based on circumstances and expertise, the Commission would not only realise cost benefits but would also help to foster more constructive relationships. Improved working relationships should help to change the perception of disinterest that, according to the document, is sometimes held by councils about their auditors.

2.19 We believe that, if the Commission were to extend its pilot initiative, to market test local audit appointments with individual local councils proposing their own auditors, it is most likely that it would see a reduction in audit fees and an improvement in the quality of service.

Is there scope to 'disaggregate' the audit, with the Commission taking direct responsibility for some more complex aspects?

2.20 ACCA believes that the Commission already provides sufficient guidance on local authority audit and hence it should not be necessary for it to disaggregate the audit, with the Commission taking direct responsibility for some of the more complex aspects of the work. Any registered auditor should be able to undertake local authority audit. Should the Commission decide, however, to disaggregate the audit, we believe that it would be appropriate to split the audit opinion from the challenge work (see paragraph 2.20 below).

2.21 Is it likely to be practical and cost-effective to split the opinion audit and challenge work?

2.22 ACCA does not believe that it would be practical and cost effective to split the audit opinion and challenge work in all cases. There may be a case for splitting the two where a local council's annual operating income reaches £500,000, as this is the threshold at which local councils come within the Commission's best value inspectorate regime.

Is there a case for a local council regulator and, if so, which body or bodies could best perform this role?

2.23 ACCA does not believe that there is a particular need for a local council regulator.

What further support might be given to local councils to help them to account for their use of public funds?

2.24 ACCA puts forward the following suggestions for improving the support given to local councils.

• Local councils could be given access to centrally developed internet based accounting and performance reporting systems, which would allow accounting entries to be made remotely. The transaction data would be incorporated into software-generated financial and performance statements and published on the internet. Local councils would then have access to best practice financial reporting in a manner consistent with similar entities, disclosures would be open to immediate public scrutiny and auditors would be able to use software tools to monitor and investigate as necessary.
  
  
• Parish clerks could receive some training in financial management and governance issues.
  
  
• Local councils could enter into 'shared service' arrangements with other councils for financial administration for example to overcome resource shortages and achieve value for money.
  
  
• Better use could be made of trainee accountants/technicians on educational placement schemes or secondments from other public sector bodies.
  
  
• The Commission could issue a comprehensive set of instructions setting out the minimum standards required for the financial administration of a small authority in relation to cash handling, paying invoices, chasing debt, identifying commitments and declaring members' interests. The parish clerk could be required to sign a declaration stating the extent to which these instructions have been followed.

Back to top