Audit
The Commission's in house audit practice is the sixth largest audit practice in the UK. It aims to deliver high quality, value for money audits that comply with professional and ethical standards and the Commission's regulatory requirements and that have impact and are perceived by audited bodies as adding value to their business.
The Commission's statutory powers and duties in relation to audit are to:
In exercising its statutory powers in relation to audit the Commission aims are to secure high quality, value for money audits through a mixed economy of suppliers and to promote a consistent approach both between different auditors and across the country.
Currently some 30 per cent of audits are carried out by private sector audit firms which have demonstrated that they have the necessary skills and expertise, and resources to deliver high quality audits that meet the Commission's exacting standards. The firms are:
- Baker Tilly;
- Deloitte;
- KPMG;
- PKF;
- PricewaterhouseCoopers;
- Mazars; and
- Grant Thornton
In addition, some 70 per cent of local council audits are carried out by private sector audit firms.
This tendering process will enable us to deliver savings of £26 million of public money over five years.
Appoint auditors to local government and NHS bodies
The duty to appoint auditors to local government and NHS bodies is the Commission's core statutory function in relation to audit.
The fact that local government and NHS bodies do not appoint their own auditors helps to ensure that auditors are entirely independent and, just as importantly, are seen to be independent.
The Commission currently appoints auditors to:
- 433 local authorities;
- 350 NHS bodies;
- 38 police authorities;
- 96 other 'principal' bodies, including fire and rescue authorities, national parks authorities and probation boards; and
- 9,700 local councils (parish and town councils).
You can download the directory of audit appointments if you need to find out the details of an auditor of a local government, health or criminal justice organisation.
The Commission does not appoint auditors to central Government departments. The National Audit Office (external link) is responsible for this work.
The Commission also does not appoint auditors to NHS Foundation Trusts which, although public bodies, are not subject to a public audit regime. However, these bodies do have the power to appoint officers of the Audit Commission as their appointed auditors, if they choose.
Under the Audit Commission Act 1998 (the Act), the Commission may appoint:
- an officer of the Commission (District Auditor);
- a firm; or
- an individual who is not an officer of the Commission.
Officers of the Commission and any other individuals who are appointed must be appropriately qualified (as defined in the Act).
The Commission may also appoint individuals to assist the appointed auditor.
The Act gives the Commission great flexibility in appointing one or more auditors to audit the whole, or specified parts of, the audit. In practice, however, we appoint a single auditor to carry out the whole of the audit under the Code of Audit Practice (the Code).
Before making appointments of auditors to local government bodies, the Commission has a statutory duty to consult the body. In the spirit of openness and transparency, the Commission has extended this to health bodies too.
The Commission's appointments policy
The Commission normally appoints auditors for an initial period of five years, which can be extended. Continuity of appointment allows auditors to add significant value and insight, thus bringing obvious benefits for audited bodies. But it is also important to guard against too close a relationship between audited bodies and their external auditors. So, in accordance with the ethical standards for auditors issued by the independent Auditing Practices Board, the Commission requires a change of the engagement lead on every audit at least once every five years. The Commission also 'rotates' audits from time to time between one supplier and another to provide a fresh perspective, and to reinvigorate the audit.
In making audit appointments from 2007/08 the Commission will apply the following policies. Where the policies conflict they will apply in the order shown. The Commission will:
- always give paramount priority to the need to maintain (and avoid possible threats to) auditor independence
- seek, wherever possible, to rotate the audit supplier at any body where that supplier has been the auditor for ten years or more
- appoint only District Auditors from the Regions as auditors to Strategic Health Authorities
- appoint no more than three audit suppliers (the Regions plus two firms) to the following types of audited body:
- Police authorities
- Fire authorities
- Probation boards
- National parks authorities
- Passenger transport executives and authorities, and
- Waste disposal authorities
- appoint, wherever possible, the same appointed auditor to London borough, metropolitan, and unitary councils and their coterminous PCTs
- seek to meet audited bodies' expressed preference for a change of audit supplier or for a particular audit supplier, subject to the overriding need to maintain auditor independence and to meet its contractual commitments to individual firms
- exempt from the ten-year rotation policy any body where the engagement leader would have been in post for only two years immediately prior to when the rotation would be due to take place, unless specifically requested otherwise
- seek to provide the firms and the Regions with portfolios of appointments that are economically and practically viable, by appointing them wherever possible to a logical geographical cluster of bodies, taking into account ease of travel
- seek to make changes in appointments in such a way as to minimise the short-term disruption to business and people for both the outgoing and incoming audit supplier to allow them both sufficient time to re-plan resource allocation for the future
- seek, wherever possible, to provide the firms and the Regions with portfolios of appointments which are balanced in terms of perceived risk and performance
- seek to meet, wherever possible, the firms' and the Regions' preferences for a portfolio of appointments which gives their staff a mix of work and provides opportunities for staff development.
Prescribe how auditors should carry out their functions through a Code of Audit Practice
The Codes of Practice (the Codes) define the scope, nature and extent of local audit work.
There are separate codes of practice for local government and codes of practice for the NHS, primarily to reflect the increasingly divergent accounting, corporate governance and performance management frameworks in the two sectors.
Background
The Commission has a statutory duty to prepare, and keep under review, a code of audit practice prescribing the way in which auditors must carry out their functions under the Audit Commission Act 1998 (the Act). The code must embody what appears to the Commission to be the best professional practice with respect to the standards, procedures and techniques to be adopted by auditors. The Act allows for separate codes to be produced for the audit of local government and NHS bodies.
The code has to be approved by both Houses of Parliament at five yearly intervals and auditors have a statutory duty to comply with it. As such, it constitutes secondary legislation, and the way it is drafted and the process for reviewing and revising it has to reflect that.
Parliament approved the current Codes in March 2005, which applies to all audit work relating to financial years ending on or after 31 March 2006.
In preparing the Codes, the Commission consults widely, engaging key organisations that represent audited bodies in local government and the NHS, the accountancy profession and the public audit agencies at each stage. In particular, the value for money element of the NHS Code must be agreed with the Healthcare Commission.
The content of the Codes
In developing the current Codes, the Commission's principal aims were to bring about a more streamlined, risk based approach to audit, targeted to areas where auditors have the most to contribute to improvement, together with a stronger emphasis on value for money and clearer reporting of audit results. Specifically, it requires auditors (for the first time) to give a positive conclusion on audited bodies' arrangements to secure value for money, by reference to criteria specified by the Commission. This work focuses on the audited body's corporate performance and financial management arrangements.
The Codes are high level documents, which focus on the Audit Commission's core requirements and aspects of audit specific to its regime.
Each Code:
- sets out the general principles to be followed by auditors in delivering their objectives;
- outlines their responsibilities regarding the audit of financial statements and use of resources; and
- sets out the range of outputs through which the results of audit are reported.
Auditors are required by the Code to report their conclusion on the audited body's arrangements for securing economy, efficiency and effectiveness in its use of resources (VFM conclusion). The Commission has issued criteria to assist auditors in arriving at their VFM conclusion and the relevant criteria for 2006/07 can be viewed here:
The local government Code also outlines how auditors should fulfil statutory functions outlined in the Act. These functions are:
- To give electors the opportunity to raise questions about the accounts and consider and decide upon objections received in relation to the accounts;
- To apply to the court for a declaration that an item of account is contrary to law; and
- To consider whether to issue and, if appropriate, to issue an advisory notice or to make an application for judicial review.
The Commission has produced an advice leaflet to help members of the public understand their rights to inspect, and of local objectors to question and object to, local government bodies' accounts and to explain the powers of the auditor.
A schedule to the local government Code outlines the distinct approach to the audit of smaller bodies, such as small parish councils, to which it is inappropriate to apply the same level of audit scrutiny as principal bodies because of the relatively small amounts of public money controlled by the bodies in question.
Statement of Responsibilities
The Codes are supported by another key document that is issued by the Commission, the Statement of responsibilities of auditors and of audited bodies. This clarifies the respective responsibilities of audited bodies and auditors. In particular, it makes clear that auditors' reports are addressed to the audited body and that auditors owe no duty of care to individual members of the body or its officers.
The Statement of responsibilities of auditors and of audited bodies has been updated. The new statement is effective from 1 April 2008 and will apply to 2008/09 audits. It reflects changes in our regime and clarifies the responsibilities of auditors and audited bodies in certain areas, including pension funds, charitable funds, data quality and the electronic publication of the financial statements.
Audit reporting
The Commission has published leaflets (one for local government and one for the NHS) to inform those bodies audited under the Code of Audit Practice 2005 about the changes to audit reporting introduced by the new Code, and what reports they can expect to receive from their auditor. These leaflets are available below:
The results of audit work are communicated in a range of reports:
- the audit planning document - which sets out how auditors intend to carry out their responsibilities, in the light of their assessment of risks, and which will be kept under review and updated as necessary;
- oral and/or written reports or memoranda to officers and, where appropriate, members, on the results of, or matters arising from, specific aspects of auditors' work - which should be prepared and issued or delivered as soon as possible after completion of the work;
- a report to those charged with governance summarising the conclusions of the auditor - which should cover the full range of auditors' responsibilities under statute and the Code. In accordance with professional standards, this report has to be issued before the auditor finalises, and issues, his or her opinion on the financial statements;
- an audit report, including the auditor's opinion on the financial statements and a conclusion about whether the audited body has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources. For those local government bodies that are best value authorities this conclusion incorporates the auditor's report on the audit of the Best Value Performance Plan;
- a certificate that the audit of the accounts has been completed in accordance with statutory requirements; and
- an annual audit letter - which should communicate to the audited body and key external stakeholders, including members of the public, the key issues arising from auditors' work that they consider should be brought to the attention of the audited body. It should highlight the key issues drawn from the report to those charged with governance and auditors' conclusions on relevant aspects of the audit. It should be prepared in clear language that is concise and accessible to a wide audience. (For those bodies where the Commission carries out inspections, auditors provide information to the Commission in a specified format to enable it to prepare an annual audit and inspection letter to the audited body.)
Other reports may be issued at any point during the audit process, where appropriate:
- section 8 of the Act requires auditors to consider whether, in the public interest, they should report on any matter that comes to their attention in the course of the audit so that it may be considered by the body concerned or brought to the attention of the public;
- under Section 11(3) of the Act auditors of local government bodies may make written recommendations that need to be considered and responded to publicly. Where the auditor considers it necessary to make such recommendations, these can be included, where relevant, within other written outputs from the audit or they may be the subject of a specific report to the audited body; and
- from time to time, auditors may be required to report information to the Commission in a specified format to enable it to carry out any of its other functions, including assessments of performance at relevant bodies, or to assist bodies such as the Healthcare Commission, the Commission for Social Care Inspection and the National Audit Office in carrying out their functions.
Scales of fees for audit work
Fees from audits are the Commission's principal source of income.
The Audit Commission Act 1998 requires the Commission to prescribe scales of fees in respect of the audit of accounts which are required to be audited in accordance with the Act. Before prescribing any scale of fees it has a statutory duty to consult with associations of local authorities and organisations connected with the NHS and the accountancy profession. We provide other stakeholders and audited bodies with copies of our proposals to ensure that our consultation is genuine and as productive as possible.
Once the Commission has prescribed a fee it becomes payable by the body. The Commission sets scales on a 'fee for audit' approach, i.e. one that is outcome-focused rather than based on input costs. The scales allow auditors to agree an audit fee with each audited body on the basis of delivering an agreed range of audit outputs to an agreed timetable.
If the auditor and the audited body cannot agree a fee within the range specified in the fee scale, the Commission has the power to determine the fee, which then becomes payable.
The Commission has determined that the scales of audit fees for individual bodies will comprise:
- a fixed element, for different types of audited bodies, for example county councils, police authorities or primary care trusts;
- an element related to gross expenditure of the audited body; and
- a regional premium for audits in London and the South East.
The Commission has the power to determine the fee above the scale fee where it considers that substantially more or less work is required than envisaged by the scale fee. The Commission may therefore adjust the scale fee to reflect the actual work that needs to be carried out to meet the auditor's statutory responsibilities, on the basis of the auditor's assessment of risk and the scale and complexity of the audit of a particular body.
It is a matter for the auditor to determine the work necessary to complete the audit and, subject to approval by the Commission, to seek to agree an appropriate variation to the scale fee with the audited body. The Commission will normally approve a proposed variation to the scale fee where that is agreed by the auditor and the audited body. It expects normally to vary the scale fee by no more than 30 per cent (upwards or downwards). It will determine the fee accordingly, which then becomes payable.
Fees relating to consideration of objections (from the point at which they have been accepted as valid by the auditor) or special investigations, such as those arising from disclosures under the Public Interest Disclosure Act 1998, will be charged in addition to any variation to the scale fee for risk and complexity.
The Commission has also set a schedule of hourly rates for different levels of staff, for work relating to the certification of grant claims and returns.
Consultation on proposed 2009/10 audit and inspection fees scales
We are consulting on our proposed work programme and scale of fees for 2009/10 and our indicative fee proposals for 2010/11 and 2011/12. Copies of the consultation documents are available below:
Work programme and scales of fees
Copies of the work programme and scales fees for 2006/07, 2007/08 and 2008/09 for local government and health bodies are available below:
2008/09
2007/08
2006/07
Separate fee scales are specified for small bodies reflecting the limited assurance audit regime which was introduced specifically to minimise the costs of audit for these bodies.
Publication of audit fees
- Audit fees comparator tool
- We have developed this tool to assist audited bodies to compare their audit fees against similar bodies. The tool is intended to make the Commission's regime more transparent to audited bodies and other stakeholders.
The audit fees associated with fire and rescue services are included in those for county councils where relevant.
The fees do not include any inspection work, the certification of claims and returns and dealing with objections from local electors.
Audited bodies should, in the first instance, refer any queries regarding the published audit fee information to their appointed auditor.
Make arrangements for certifying grant claims and returns
The Commission's appointed auditors also certify audited bodies' claims for specific grants from government departments, eg Housing Benefit subsidy, which is payable to administering authorities by the Department for Work and Pensions, and other financial returns. Making arrangements for certifying grant claims and returns is a Commission, rather than an auditor, function, so in carrying out this work, auditors are acting as agents of the Commission, rather than in their own right. As such they are required to comply with specific instructions issued by the Commission, which are developed in consultation with the grant-paying bodies.
In 2005/06 the Commission's auditors certified £43 billion of grant claims and financial returns submitted by local government and NHS bodies. Certification provides assurance that claims are fairly stated and in accordance with specified grant conditions.
The Commission's approach
The key features of the current arrangements are:
- claims below a de minimis amount set by the Commission - currently £100,000 - are not certified by auditors;
- claims between the de minimis amount and a threshold set by the Commission - currently from £100,000 and £500,000 - are subject to limited certification procedures;
- claims over the threshold of £500,000 are subject to an assessment by the auditor of the control environment for the preparation of the claim or return. Where reliance cannot be placed upon the control environment, auditors will undertake all the tests set out in the Commission's certification instructions; and
- the Commission applies robust procedures as to whether it will make certification arrangements in respect of any particular scheme and will not make arrangements unless its formal agreement to do so has been secured. In addition, the Commission will decline to make arrangements where it deems it inappropriate to do so, having regard to the particular circumstances of a scheme, the sums involved, the likely auditor workload and the likely costs of certification.
The Commission's technical role
The Commission's status as a 'big player' in the UK audit profession is reflected in the fact that it is involved in the work of, and represented on, all the key professional standard-setting bodies:
- the Financial Reporting Advisory Board which advises the Treasury and the devolved governments on accounting principles and standards;
- the Auditing Practices Board's Public Sector Sub Committee (external link);
- the Accounting Standards Board's (ASB) Committee on Accounting for Public-benefit Entities (CAPE) (external link); and
- the Chartered Institute of Public Finance and Accountancy/LASAAC Joint Committee - the body formally recognised by the ASB as the preparer of Statements of Recommended Practice (SORPs) for local government in the UK.
The Commission is also involved in the key technical committees of both the Chartered Institute of Public Finance and Accountancy (CIPFA) (external link) and the Institute of Chartered Accountants in England and Wales, and the Healthcare Financial Management Association (HfMA - the representative body of finance directors in the health service).
The principal means through which the Commission articulates its views on technical accounting and financial reporting, and corporate governance issues is the annual report on Stewardship and Governance, which pulls together the key issues emerging from local audits. Aimed primarily at a professional audience, it is used as a platform to highlight perceived weaknesses in current arrangements and promote good practice.
Individual budgets and direct payments
The Audit Commission has been asked to clarify what line it expects its appointed auditors to take in relation to individual budgets and direct payments. This is in response to concerns that some have raised about how far auditors might go in following expenditure in these areas and the risk that audit arrangements would impose additional administrative burdens on service users, which could undermine the policy objective of empowering individuals. In the Commission's view these concerns are misplaced and perhaps reflect a misunderstanding of the role of external auditors.
The Commission is clear that any audit work in this area should address the accountability for public money by the audited body rather than how the individuals have spent that money. We have therefore decided to publish our guidance to auditors on this subject, to:
- dispel any concerns that onerous administrative responsibilities for service users come with individual budgets or direct payments; and
- demonstrate that our guidance is consistent with the empowering objectives of these initiatives.
Individual budgets are designed to provide individuals who currently receive services greater choice and control over their own support arrangements. The Department of Health (DH) ran 13 individual budgets pilot sites (external link) at local authorities in 2007/08. These pilots built on and extend previous more limited arrangements whereby authorities made direct payments (external link) to clients. The pilots are part of a cross-government initiative led by DH but also working with the Department for Works and Pensions (DWP) and the department for Communities and Local Government (CLG).
In December 2007, the Government announced in the Putting People First (external link) concordat that personal budgets would be rolled out nationally and become the norm for everyone eligible for help from social services in future, except in emergencies. Personal budgets are a form of individual budget that includes only social care funding. From 2008/09 all councils with social services responsibilities are actively implementing personal budgets.
The Audit Commission is publishing its guidance to auditors. This guidance is designed to help auditors to consider the authority's arrangements to assess and monitor individual budgets and ensure that payments are made in accordance with relevant statutory and professional guidance. |
