Future of Local Audit: Arrangements for smaller bodies SLCC Larger Councils Conference 20 April 2012

2 Introduction On 13 August 2010, the Secretary of State for Communities and Local Government announced plans to disband the Audit Commission, transfer the work of the Audit Commission’s in-house practice into the private sector and put in place a new local audit framework. Local authorities would be free to appoint their own independent external auditors. A new decentralised audit regime would be established and local public bodies would still be subject to robust auditing. Following this, from March to June 2011, the Government consulted interested parties on its proposals for the new audit framework.

3 Consultation: proposals for smaller bodies Procurement and appointment Option 1: County or unitary authority responsible for making the appointment. Option 2: Smaller body would make the appointment themselves with the use of an audit committee. Could have their own audit committee, share a committee with other smaller bodies, or use the committee of a larger authority. Threshold for external scrutiny Bodies with a turnover below £1,000 would not be subject to external scrutiny of the accounts.

4 Responses to the Consultation Responses were mixed Procurement and Appointment Respondents showed a slight preference for appointment by the County/Unitary authority, but felt that neither option was particularly desirable The Consultation did not specifically ask about the threshold for external scrutiny or independent examination. However we received responses suggesting: the threshold for external audit had been set too low and could be raised to £5,000 or £10,000 preference for maintaining the limited assurance framework

5 Options for Procurement and Appointment County or Unitary Authority Smaller bodies themselves District or Unitary Authority Sector-led body

6 Appointment by County/Unitary Authority Appointment would be made by the County Council or Unitary Authority on behalf of the smaller bodies in its area. County Council/Unitary Authority would have a duty to consult these bodies on their appointment Bodies who wanted to procure and appoint their own auditors could opt to do so as long as the County Council/Unitary Authority was satisfied that the body would be able to do this

7 Appointment by smaller bodies themselves Smaller bodies would procure and appoint their auditors themselves. The body would be required to make arrangements for the appointment of an auditor themselves, including the involvement of an independent audit committee. This committee could be the body’s own, one shared with other bodies, or that of a larger public body.

8 Appointment by District/Unitary Authority Appointment would be made by the District Council or Unitary Authority on behalf of the smaller bodies in its area. District Council/Unitary Authority would have a duty to consult these bodies on their appointment Bodies who wanted to procure and appoint their own auditors could opt to do so as long as the District Council/Unitary Authority was satisfied that the body would be able to do this.

9 Sector-led proposal This option would see a sector-led body established which would procure and appoint audit services on behalf of smaller bodies, in a similar fashion to the current system. The new body would appoint auditors to smaller local public bodies, based on consultation with them. This option would enable audit services to be procured in bulk, which would act as a downward pressure on fees. Bodies with a turnover above £1million could opt out of using the body and instead procure and appoint their own auditor in the same way as principle public bodies. Steve Parkinson (SLCC) will talk about this in more detail

10 Indicative timeline April 2012April 2013April 2014April 2015 Draft Audit Bill April 2016April 2017 Outsourced contracts – 5 years Draft Bill will set out key elements of new framework for principal bodies, and powers to make regulations on detailed issues. Local Appointment begins Wind-down of the Audit Commission Primary legislation, including transferring the contracts; Secondary legislation. Proposals for Smaller bodies Government will publish proposals for smaller bodies alongside the draft Bill. These will cover: --Method of procurement and appointment --Threshold for external scrutiny --Scope of audit

11 Questions?

12 Steve Parkinson – Sector-led proposal

13 Threshold for External Scrutiny Consultation proposed that bodies with an income or expenditure below £1,000 would not be subject to external audit or examination. However, some responses suggested that this was too low, and £5,000 or £10,000 might be a better level. The threshold in the charities sector is £25,000. Currently examining this issue, looking at balancing the benefits and risks of raising the threshold.

14 Threshold for external scrutiny Benefits - Cost burden on smallest bodies would be reduced as they would avoid paying fees. - Possibly more proportionate for smallest bodies, who pay an average of c % of their income on audit fees (with some bodies paying nearly 5%). - Assurance could still be provided by increasing transparency requirements, and by selecting a percentage of bodies below the threshold for a basic audit each year. Risks - Auditing the Accounts 2010/11: Parish Councils raises concerns about the risk to public money at these bodies. Last year 6% bodies below £10,000 had a qualified audit, the year before this was 11%. Around 6% of councils fail to publish their accounts on time. - money is small amount, but of large value to the small communities it supports - In times of increasing responsibility for local councils the public may want continued assurance over any new funds. - Risks to money around financial controls, lack of accountability and in exceptional cases fraud Raising the threshold

15 Measures to address the risks Increase publication requirements: notices displayed for longer, annual return to be published online. Increase the checks in the annual return by including more specific questions for smaller bodies designed to check if they follow proper practices. Include a box on the annual statement for bodies to enter their turnover. Require all bodies have an auditor in place, regardless of size, in case problems are identified and need investigating. Publish a notice in the local press if a body fails to comply with publication requirements.

16 Scope of Audit The Consultation proposed that bodies with a turnover between £1,000 and £6.5million would be subject to an independent examination. But representations were made suggesting that the preference was for keeping limited assurance. Currently examining the issue, looking at the advantages and disadvantages of both independent examination and limited assurance.

17 Questions ?

18 Threshold for External Scrutiny Threshold no. bodies % of bodies top of band total expenditureestimated expenditure as % total below £6.5m under £1,0001, %£1,170, % under £5,0002, %£10,135, % under £10,000 4, %£24,785, % under £25,000 6, %£73,810, % under £50,000 7, %£128,160, % under £100,000 8, %£216,360, %

Thank you Future of Local Audit Team Eland House Bressenden Place London SW1E 5DU