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Private sector auditors lobbied for the abolition of the public watchdog that monitored waste and potential corruption in local government – with some now benefiting from it.
The finding comes as a new report highlights a collapse in the timeliness and quality of scrutiny of council’s accounts. A raft of local authorities also face bankruptcy following risky investments that often went unnoticed for years, until it was too late. While it cannot all be pinned on the door of the privatisation of council audits, a new report finds that it may have been a key factor.
Since 2020, Slough, Croydon, Thurrock and Woking councils have declared bankruptcy. “The is intervening in at-risk local authorities at growing frequency and that trend shows no sign of abating,” the New Statesman recently reported.
And in July, Southampton, Kent and Guildford all issued separate warnings that they’re near bankruptcy, while both Hastings and the Birmingham mega-authority appear to be in similar positions. In a move hitting over a million residents, Birmingham has stopped all “non-essential spending”, while Cheshire council is turning off its streetlights to save cash.
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Local audit: Why Public Interest Needs to Count, a report from the non-profit group Research for Action, finds “significant problems” with the current set-up, delivery, and underlying principles of local audit after the independent watchdog the Audit Commission was abolished in 2015 under the Tory-Lib Dem coalition’s “bonfire of the quangos”.
Council audits were then handed over to private companies including some of the ‘Big Four’ accounting and consultancy firms, in particular KPMG and EY, along with other smaller outfits like BDO, Mazars and Grant Thornton.
So-called “armchair auditors” of ordinary citizens were meant to replace the lost capacity from the abolition of the watchdog. This hasn’t materialised.
The report, shown exclusively to Byline Times, finds that: “Often the ‘armchair auditors’ or even just people asking questions and organising together over specific issues are too few in the face of massive problems. This is not mere cynicism with regard to the activities of local government, but is doubtless linked to the massive burden of basic service provision and crisis support placed on grassroots and civil society groups in the face of austerity.”
As Transparency International has noted: “The last defence against corruption…has become individual citizens and groups of concerned residents – who are often unfunded and under-resourced to take on the task.”
The audit system in the UK, particularly in England, is fragmented, contributing to a growing accountability deficit, Research for Action’s report finds, as they point to the dire impact of privatisation and the decline in audit quality over the past decade.
Collapse in Quality
The non-profit group found that the privatisation of local audits over the past decade has “widened the accountability gap” – making it difficult to hold local government accountable for spending decisions. Moreover, local councils and privatised auditors frequently hide behind the cloak of “commercial confidentiality” for not revealing details about how taxpayers’ money is spent.
And they identify a marked decline in the quality of audits since privatisation. The lack of standardisation, competition, and focus on profit motives has weakened the robustness of local government accounting.
Since the abolition of the Audit Commission in 2015, the number of local audits completed on time has reduced from 97% in 2015-16, to just 12% in 2021-22.
Over the past decade, audit services have gone from being managed by a public sector body to a handful of large accounting firms, which may have reduced transparency in the auditing process.
The Big Four accounting firms’ involvement in both providing consultancy services for councils and their private contractors at the same time has led to conflicts of interest, further undermining the integrity of the local audit system.
RFA researchers also highlight concerns regarding the cost-effectiveness of relying on large private firms for local audits – with major biases towards profit rather than public interest.
String of Failures
The report calls for a fundamental shift in the approach to local audits to address the identified failures.
Audit reform is theoretically on the agenda of the current Conservative Government, but despite some moves towards the formation of a new body to replace the Audit Commission, no draft legislation has been proposed to form the new oversight body – the Audit Reporting and Governance Authority, or ARGA. “Despite calls from a wide range of stakeholders, there seems to be no urgency on the Government’s part,” RFA found.
Meanwhile, private audit firms have continued to lobby for an increase in the fees they are able to charge, as the Government’s response to the 2020 Redmond Review on local authority financing and external audit makes clear.
In RFA’s 2021 Democracy Denied report, they pointed out that local authorities said auditors frequently demanded additional fees for increased work without providing any evidence of what that work had involved. Councils have few options for who else to turn to.
Moreover, the official review found that “many [financial] investigations carried out by auditors remain concealed from the public and in some cases from the local authorities themselves.” The risk for cover-ups and cronyism is clear, the authors of the latest report argue.
The report also highlights auditors’ reluctance to pursue issues of public interest – claiming that it goes beyond their remit.
Yet by contrast, the most recent Public Interest Report – a form of local government investigation into accounts that can be requested by voters – conducted by Grant Thornton this January regarding Cheshire East council, saw auditors commenting “far beyond their remit”.
The report encouraged central Government to make changes “away from a purely localism-based approach” which would make it easier for elected councillors and even council leaders to be removed by Whitehall.
Mazars was of the audit firms that lobbied for the abolition of the Audit Commission and now dominate the privatised local government audit sector. The firm was contacted for comment.
A spokesperson for major council auditor Grant Thornton UK LLP: “The decision to abolish the Audit Commission was taken by the Government at the time and is a matter for the Government to respond to. We note that we did not lobby for the Audit Commission’s abolition.”
They added: “Local Audit has been impacted by a number of issues that have delayed the timeliness of audits. We comment on these in [a] recent report…We continue to work constructively with the Government and the Financial Reporting Council to resolve the backlog and remain committed to the sector.”
They claimed that the cost of local audit has been significantly less under the current regime than under that of the Audit Commission. However, around an eighth of Audit Commission funding came from central Government, whereas councils must fully-fund all of their current audits.
“Local Audit is regulated by the Financial Reporting Council. Our work is undertaken to a higher standard than required by the Audit Commission,” the Grant Thornton spokesperson added.
The Research for Action report concludes: “Private interests overshadow public interests, the capacity for scrutiny and challenge at all levels has been reduced, and there is less openness and transparency in local government and audit…The resulting accountability deficit leads to increased forms of risk in local governance, including the risk of corruption.
“There is a need to revisit and strengthen principles of public interest and to put them at the centre of debates on local audit reform.”
The authors add: “If an audit reveals a problem with a business, the shareholders can take their money away. Those affected by local government and services are not shareholders. Therefore in public sector auditing, the ‘accountability imperative’ is strong — the stakes are higher and the public cannot opt out of being governed.”
Cllr Pete Marland, Chair of the Local Government Association’s Resources Board, said the external audit of local authorities faces a “range of serious problems”.
“Tackling the local audit backlog and a return to a timely delivery of published audited accounts is a priority for councils. We have long argued that the only way to deal with the backlog is by a range of stakeholders, including councils, the Government, the audit firms, the regulators and CIPFA, working together and we share this commitment and resolve,” he said.
The LGA finance chief added: “We will work with the Department for Levelling Up over the summer, including to engage our members on recently announced Government proposals and support them to understand their role.”
Some of the organisations that lobbied for the abolition of the Audit Commission
Study: Abolishing the Audit Commission: Framing, Discourse Coalitions and
Administrative Reform. Note: Grant Thornton disputes that it lobbied for the Audit Commission’s abolition.
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