The Reluctant Armchair Auditor

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NHS reform and the armchair auditor

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The Health and Social Care Bill provides only a few clues on the detail of audit arrangements for the new GP consortia. Ensuring the scope of the audit of these new organisations includes value for money is welcome news for armchair auditors. The mechanism for appointing auditors after the abolition of the Audit Commission is yet to be announced. It should include an independent appointment process to prevent threats to auditor independence. The reforms will demand more of auditors during their implementation and this is likely to increase costs at least until the new organisations find their feet. That’s likely to be unwelcome news to everyone.

The publication of the gargantuan Health and Social Care Bill (360 odd pages, 12 Parts, 281 clauses and 20 schedules) will spark all sorts of debates about NHS privatisation, costs of reform and alleged broken election promises. What it almost certainly will not do is to generate heated debate about audit arrangements.

Luckily I see that as part of the remit of the Reluctant Armchair Auditor.

It is only right to pen a gargantuan post in response to such a large document.

I am going to focus though on the audit arrangements for the GP commissioning consortia. Around £80 billion of public money will be spent by these organisations so audit is an important issue for every English taxpayer – the devolved governments are of course considering their own reforms.

So what does the Bill say about how these new bodies will be audited? Well you need to rummage through to page 230 (that’s part 2 of schedule 2) to find the following –

Accounts and audits

12 (1) A commissioning consortium must keep proper accounts and proper records in relation to the accounts.

(2) A commissioning consortium must prepare annual accounts in respect of each financial year.

(3) The Board may, with the approval of the Secretary of State, direct a commissioning consortium to prepare accounts in respect of such period or periods as may be specified in the direction.

(4) The Board may, with the approval of the Secretary of State, give directions to a commissioning consortium as to—

(a) the methods and principles according to which its annual or other accounts must be prepared, and

(b) the form and content of such accounts.

(5) The annual accounts and, if the Board so directs, accounts prepared by virtue of sub-paragraph (3) must be audited in accordance with the Audit Commission Act 1998 by an auditor or auditors appointed in accordance with arrangements made by the Board for the purposes of this paragraph.

(6) The Comptroller and Auditor General may examine—

(a) the annual accounts and any records relating to them, and

(b) any report on them by the auditor or auditors.

(7) A commissioning consortium must send its audited annual accounts, and any audited accounts prepared by it by virtue of sub-paragraph (3), to the Board by no later than the date specified in a direction by the Board.

(8) The Board may direct a commissioning consortium to send its unaudited annual accounts, and any unaudited accounts prepared by it by virtue of sub-paragraph (3), to the Board by no later than the date specified in a direction by the Board.

(9) Nothing in this paragraph requires a commissioning consortium to keep accounts or records, or to prepare annual accounts, in respect of anything done by it as trustee.

(10) For the purposes of this paragraph “financial year” includes the period which begins on the day the consortium is established and ends on the following 31 March.

There’s much to interest armchair auditors here particularly the appointment of auditors.

Currently the Audit Commission appoints auditors to PCTs. The words,

‘ … auditor or auditors appointed in accordance with arrangements made by the Board …’

do not clarify whether the Board will arrange to have this done centrally or if consortia will get the freedom to appoint auditors themselves. As I have written before having audit appointments managed at arm’s length from the organisation being audited has been an important principle of the public audit framework here for some time. It’s also a direction being explored by the EU for business in the wake of the crisis in the financial system.

The National Audit Office has published what it calls a Landscape Review of the NHS which clarifies slightly what is planned. This is what its says about audit arrangements for local NHS organisations.

2.37  On 13 August 2010, the Secretary of State for Communities and Local Government announced plans to disband the Audit Commission. This is significant for NHS bodies as many have auditors appointed by the Audit Commission or, in the case of Foundation Trusts who appoint their own auditors, choose to use the Audit Commission’s audit practice. The intention is to have new arrangements in place for auditing England’s local public bodies by 2012-13.

2.38  The Audit Commission’s responsibilities for overseeing and delivering local audit and inspections will stop, as will their research activities. The audit work will move to the private sector. The Audit Commission is responsible for the 2011-12 audit of local public bodies and is expected to close in December 2012. This timetable has yet to be confirmed and depends on the necessary legislation being passed. To help the National Audit Office provide assurance to Parliament on NHS bodies’ use of public money, the Department of Health and the Department for Communities and Local Government are working together with the National Audit Office to develop effective arrangements for independent external audit. These arrangements will need to address both financial and value for money audit within the planned new health structures. (My emphasis)

So the invocation of the Audit Commission Act 1998 in the Bill really does signal that the scope of the audit of GP consortia is to be wider than simply sticking an opinion on the financial statements.

There has been a long-standing convention in policy making around public audit that the taxpayers’ interest requires a wider focus for audit of the spending of taxpayers’ money. Not just that the books are right but that public money has been well spent. That’s a more burdensome form of audit but it’s one familiar to the UK’s public sector. Armchair auditors should welcome the retention of this principle amongst the change.

A wider scope of audit requires auditors to consider the effectiveness of arrangements in key areas such as procurement and commissioning. Private sector organisations working on behalf of consortia may well be subject to scrutiny by auditors at a level they may not have experienced before.

Independent appointment of auditors given all the other change in the system would provide an additional safeguard to taxpayer interests. Those of us who remember GP Fundholding though will recall the tensions created when independent business men and women (GPs) found themselves the object of attention from auditors. This is bound to happen again. Some clinicians may find the burden of public audit unwelcome. Their smart new private sector partners may find it even harder to bear.

The final issue here is around numbers. Any audit requires a minimum amount of time to complete the tasks needed in accordance with professional standards. It’s true there are variations in audit fees and there always will be but there is an irreducible minimum amount of work that needs to be done. Clearly the number of audits will depend on the number of consortia. There is still no news on that front.

The amount of audit work in an engagement is also a function of the auditor’s understanding of the entity being audited and the risks he or she identifies. New organisations working in a new operating environment will almost certainly be viewed as inherently high risk and will need more audit work. That should reduce when the consortia have a track record of good governance and internal control.

So just making the changes raises audit costs that are then compounded by any increase in the number of organisations being audited.

Providing assurance to taxpayers will require significant audit work and that is not work that we armchair pundits can undertake. We simply are not equipped to or resourced to make sound judgements about the value for money of healthcare services. We need suitably qualified and independently minded people to do that on our behalf.

In case you doubt that have a look at this Public Interest Report from an independently appointed auditor about the financial failings of an NHS Trust in the current regime. Would an auditor solely reliant on his or her appointment by the Trust Board and management have written such a report?

Jury’s out on that one I think.

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Written by reluctantarmchairauditor

January 21, 2011 at 4:19 pm

Coalition roasted on Quango bonfire

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Many public sector professionals will, like me, have sighed and shrugged a resigned shoulder this morning in reading today’s report of the Public Administration Select Committee Shrinking the Quango State.

Those unfamiliar with the formulation of public policy and its implementation probably still find the flaws PASC found in the government’s review of Quangos shocking. Sadly. I don’t. Here’s a sample of what the committee found.

This review was poorly managed.

There was no meaningful consultation.

The tests the review used were not clearly defined.

The Cabinet Office failed to establish a proper procedure for departments to follow.

The Bill giving the Government the power to bring about these changes was … badly drafted.

The Government has failed to recognise the realities of the modern world.

Much will be written about the report today. What is striking to me is the no-holds-barred language used by PASC. The Committee was deeply unimpressed by what it found. The findings themselves leave me, as an armchair auditor, deeply pessimistic about the government’s stewardship of public funds.

Let’s start at the beginning. Any change process in any business usually has some rationale for being started: the business case. PASC found the business case for the changes proposed by government had shifted around. It was about saving money. Then it was about improving accountability. No, wait a minute it’s about both. With such a muddled start no wonder MPs found such a mess when they looked at the decisions the review had given rise to.

The early confusion led to a set of criteria used in the review that were unclear and a dearth of guidance to individual government departments. So Quangos with broadly similar terms of reference, albeit in different fields, have ended up being treated entirely differently. It’s a dogs’ breakfast and contrasts hugely with the diligence applied by local public sector organisations to their own decision-making. What is also striking is the lack of meaningful consultation and engagement between the reviewers and the reviewed (and their stakeholders).

What is deeply troubling is that all the flaws PASC identify could have been addressed if anyone had paid any attention to the findings of one of the many reviews of governmental lash-ups over the years produced either by the NAO or, indeed, the Audit Commission. Institutional memory seems to be in short supply now the government has declared Year Zero.

For us armchair auditors the PASC report raises ominous question marks over the quality of decision-making in other key areas such as the NHS reforms where similar rumblings about decision-making are already growing. The government has embarked on a radical reform agenda which it has often clothed in the threads of spending reduction. As PASC says,

… the Government faces the much larger challenge of successfully implementing these reforms; any organisation would struggle with changes on this scale.

It’s not at all clear that the machinery of government is up to the task particularly as ministers chop capacity out of their ‘back offices’ i.e exactly the people you need to deliver change if you want the frontline to really focus on the frontline. It’s a recipe for confusion that management consultants everywhere will be looking on and smacking their lips with anticipation.

We risk ending up where other reform programmes have found themselves: vast amounts of money spent with no noticeable improvement in public services or their accountability. Bad enough in economic good times surely indefensible given the problems we face right now.

Written by reluctantarmchairauditor

January 7, 2011 at 9:46 am

Localism: the reality ‘pothole’

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I spent Christmas on retreat with a large parcel of reading to catch up with. Anyone who thought coalition government would strangle the volume of paper flowing from the initiative engine room down by the Thames was clearly barking up the wrong tree. Each department seems to have decided it’s Year Zero.

In my experience there’s an absolute correlation between the quality and quantum of the capacity available to deliver change and its success. Public sector careers are littered with experiences of sweeping up after disastrous change programmes whose benefits were sketchy to start with and never got close to being realised.

For the first time in the experience of almost anyone but the hardiest veterans of public service we face rapidly reducing public expenditure coupled with enormous and complex reform of public services. Less money and fewer people to do more work. All the ingredients of a perfect public policy storm.

A certain amount of change is inevitable with any new government but my clients have now suffered a severe sense of humour failure. But, although the lights are on in Whitehall, there’s no evidence that there’s anyone home listening.

Instead what local public service organisations get for raising queries about the direction and pace of change is the chance to get publicly rubbished by an administration which seems fixated on rubbish collections.

I listened to a minister from CLG yesterday on my way home, interviewed alongside the Leader of Exeter. The minister had written to all councils to admonish them for failing to collect household rubbish over the Christmas holidays. The Leader at Exeter – a council in the ministerial sights – made two not unreasonable points: it had been a tad snowy; and, even if his troops had worked throughout Christmas the Council would have had nowhere to stick the waste collected because it’s not the waste disposal authority (WDA). The WDA’s dumps were, of course, closed on the public holidays over the break.

Few things seem to galvanise the CLG ministerial team more than the question of rubbish collection. Yesterday the minister repeated the old canard on the radio that the move by councils to alternative weekly collections of waste and recyclables was forced on them by a government/Audit Commission plot. Local politicians will tell you this isn’t true. The Audit Commission has also made it plain that this simply is not true. Perhaps if it gets repeated often enough it might become true in some magical and unexpected way. (Sorry, I happened to see Peter Pan over the holidays and yes, I believe in fairies.) You can read the Audit Commission correspondence here.

Changing these arrangements made economic sense and was good for the environment too. In many cases local elections have been fought and won with the issue of changes to local refuse collection arrangements as a hot topic. In any event surely this is a prime example of a local issue where local politicians should be held accountable through the ballot box rather than to ministers’ letters? Perhaps I have misunderstood what this localism malarkey is all about.

I had just about recovered some sort of mental equilibrium when up popped a transport minister to talk about potholes. He said it was up to local councils to sort it out and the government shouldn’t get involved in prescribing what happens locally. But surely, I thought to myself, that’s just what CLG have just been doing over its fixation over bin emptying. The minister boasted that councils had got £3 billions in the spending review to spend on roads and said poorer performing councils should learn from the good practice of the good ones. Quite how that is going to happen was left unexplained.

However, a whacking thump from the suspension as I hit yet another pothole brought me back to the issue at hand. On the final miles home I mused about the £3 billion figure. Here’s the fruit of that musing.

There was a Ministerial statement in the Commons on 13 December. This did indeed announce the £3 billion mentioned. But it’s £3 billion over 4 years. I had a look then at the length of the road network maintained by councils in England. You can have a look at the details here on the Department for Transport website.

Highways experts may correct me but it looks like councils have to look after around 182,000 miles of road. So councils have just over £4,100 a mile to work with each year. That does not seem like an awful lot of money to me. Just think how much it costs to get a drive skimmed with a new layer of blacktop. Of course it looks even less generous when you realise that this money will not be evenly distributed across the road network. Some roads will clearly see not a penny of this £3 billion.

In the interview the minister made the point again that some councils have ‘lots’ of money in reserves. If they do then, as I have said before, this is for genuine un-budgeted for emergencies. If money is needed for planned highways schemes then it is almost certainly already earmarked.

My overall point is that while the government may be intellectually committed to localism it seems pathologically unable to deal with its consequences. This makes for poor relations between Whitehall and local decision-makers who I know are becoming fed up with the constant second guessing that flows from this aggressive authoritarian localism. The ever excellent Local Government Chronicle is reporting today on the local government response to all this noise from the Whitehall machine.

As I pick up the traces from December and clamber back into harness I sense this growing disconnect will increasingly dominate the debate over public service ‘reform’. I haven’t even mentioned what my NHS contacts are saying about what’s going on in that service. That is a whole new post.

There’s certain to be a lot of work for us armchair auditors in the year ahead.

By the way, Happy New Year.

The council reserves we should be worried about

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Public sector finance professionals were treated to some ‘encouragement’ from the Secretary of State over at the Department of Communities and Local Government last week.

The object of ministerial ire this time was the amount of money councils and other local public sector organisations were keeping locked up in reserves. The full news release is here but it’s worth repeating the quote from the minister.

Good financial planning is about putting a little extra away when the sun is shining so you have some cover during the rainy days.

But building up reserves isn’t simply about turning town hall vaults into Fort Knox. These untapped funds exist to ensure councils can respond to unexpected situations like the pressing need to tackle the nation’s unprecedented level of debt.

Just like any household facing challenging times, all good councils should be considering the merits of temporarily dipping into the money they have set aside as part of their plans to address immediate financial challenges, with a view to building up their reserves again in the sunnier days to come.

Of course, the jaded among us will be wondering whether the spat between the department and the Local Government Association would have had anything to do the issue of balances being raised. Surely not.

My colleagues have been rolling their eyes though at yet another example of governmental selective localism. Council chief financial officers are under a legal duty to annually report on the adequacy of reserves when budgets are set. Criticism of reserve levels from Whitehall looks strongly like second guessing of local judgements made by finance professionals and the councillors for whom they work.

Some of the levels of balances identified in the data release from government do look pretty generous though. But there are no hard and fast rules on what minimum or maximum levels of balances should be and it is impossible to tell at a global level whether individual council holdings make sense. That can only happen locally. The annual wrangle with the auditor is something council CFOs and auditors generally look forward to. Higher? Lower? Just right?

General reserves are there to meet events like the costs of unexpectedly harsh winter weather. I am sure I am not the only one who is sceptical that a government policy decision over the speed of deficit reduction quite falls within that definition. Besides which if lower government spending is to be a permanent feature in the lives of finance professionals using reserves to prop up spending creates a ‘double-whammy’.

You spend the money now that you will need later to make the cuts you should have made anyway. The delays in the announcement of the local government settlement create practical problems too for making considered spending reductions that will have a full year effect in 2011/12.

Attention in the ruckus over the Fort Knox Reserves affair focused on councils with loadsamoney. Of more concern to me after looking through the spreadsheet were the councils that fall into the buggerallmoney category. (Please accept my apologies for using technical accountancy terms there.)

There’s Waveney District Council in Suffolk for example where the Council’s General Fund is in deficit (see page 22 of the Auditor’s Annual Governance Report) or Trafford MBC which has £5 million of reserves while spending £350 million each year. There are eighteen or so organisations with reserves of 3% or less of their annual spend. How resilient will they be in the face of the local government finance settlement that will be with us shortly?

Now that is a question worth armchair auditors thinking about instead of the minutiae of the monthly payments over £500.

Written by reluctantarmchairauditor

December 9, 2010 at 12:58 pm

Hutton debunks a myth

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A slew of cancelled client meetings because of the weather leaves me free to catch up with the news. My eye has been particularly taken by what he has to say about using the Prime Minister’s pay as a benchmark.

You will probably be familiar with the figure of £142,500. It’s been used as a useful cricket bat to thwack evil public servants. Here’s a typical example from Daily Mail. Ministers have enjoyed themselves with this too.

Those of us with a passing understanding of how to work out the total value of a remuneration package have treated the benchmark with the derision, sorry professional scepticism, it deserves.  About the only thing it had going for it was simplicity. But in my experience simplicity is often simply an excuse for crass reductionism.

Senior public sector managers with whom I come into contact have been grinding their teeth over the PM salary benchmark for ages. For perfectly sensible reasons none of them broke cover. Trying to defend yourself risks getting the treatment that John Ransford got on BBC’s Newsnight. A week later and Mr Ransford got a haircut of over £140,000 on his base salary.

For people like me who like numbers to be materially accurate Hutton has done us all a profound service. Have a look at Box 2E on page 56 of the Interim Report for the detail of the debunking. Suffice it to say he identifies the two flaws with the benchmark.

First, it nowhere near reflects the total value of the PM’s remuneration package. If you add in the salary the PM has chosen – and been able to forego – with the value of his pension, accommodation and so on by any calculation the package is worth more than £500,000. That’s probably right but it’s a rather different benchmark isn’t it?

The second flaw is, of course, that the PM’s remuneration package is not determined in a labour market but rather in a political stock exchange. PMs take a punt on low income yields during their time in office correctly calculating that simply by holding the office they hugely increase their worth. Capital growth of a sort. If you doubt that look at the before and after shots of Mr Blair’s London homes.

Thank you then Mr Hutton but I do not think we should hold our breath for the thundering headline that says, ‘Almost all public sector workers paid less than the PM.’

Reluctantly back to the armchair I must go.

Written by reluctantarmchairauditor

December 1, 2010 at 10:09 am

The EU piles into the audit debate too

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In October the EU launched a little heralded consultation. Inside the audit profession it grabbed a lot of attention. If anything like the proposals it contains is implemented I would be staggered. It is a sign of the times though that some of them are even being mentioned by our friends in Brussels and Strasbourg.

Headlines from the paper dealing with the governance of audit firms include:

  • taking audit appointments out of the hands of the directors and shareholders giving it instead to an independent body;
  • requiring audit appointments to be time limited;
  • restricting the amount of non-audit work audit firms can undertake;
  • capping the amount of fees that an audit firm can earn from a single client;
  • asking national public sector audit organisations to audit the accounts of audit firms;
  • changing the ownership structures of audit firms; and,
  • beefing up the role of auditors of group accounts.

The EU is concerned that audit arrangements are not robust enough to help ensure we avoid future financial meltdowns like the one brought to us by the banking crisis.

These are ‘courageous’ proposals. That’s shorthand for ‘you must be joking’. I imagine that the accountancy big guns have lengthy submissions in the system that boil down to, ‘don’t do it’.

All of this is interesting to us armchair auditors because of the changes to the English audit arrangements for local public bodies. The abolition of the Audit Commission – which does the independent appointment of auditors envisaged by the EU – is meant to herald an era of councils appointing their own auditors.

So as EU policy heads in one direction England’s heads in another. Not something that worries our government too much I suspect. However, I can’t help but think that the sorts of issues that worry the EU are no different in character to ones that will come over the horizon if the changes in English audit arrangements are not properly thought through. Strangely enough some of the accountancy profession may agree with me on that.

Fingers crossed then.

Written by reluctantarmchairauditor

November 28, 2010 at 10:42 am

Going concern or concerned about going?

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Big wigs from the big accountancy firms appeared on 23 November before the House of Lords Economic Affairs Committee. It was not a meeting of minds.

Their Lordships wanted to know about how accountancy firms had dealt with the issue of ‘going concern’  in forming their opinions on the banks’  financial statements ahead of the recent crisis. This may seem like an esoteric accountancy issue but it isn’t. The banks’  business models gave rise to what were in their accounts and landed each of us taxpayers with a hefty bill.

For us pro- and semi-pro auditors their Lordships’ inquiry into the performance of auditors in the run up to the crisis and the concentration of power in the UK audit market is spectacularly interesting.

The auditing profession is regulated by the Financial Reporting Council (FRC) which had some interesting things to say in its submission to the House of Lords’ Inquiry. In essence it said too few auditors were involved in the audit of the UK’s largest companies and this was unhealthy for all sorts of reasons. It also said this,

 2.8 In considering behaviour and culture within the firms, the AIU [the FRC’s unit that audits the auditors on quality] has identified a number of instances of firms failing to apply sufficient professional scepticism in relation to key audit judgements. This lack of scepticism may manifest itself in a number of ways: over-reliance on management representations; failure to investigate conflicting explanations; failure to obtain appropriate third party confirmations; or seeking to obtain evidence that corroborates, rather than challenges, judgements made by client management.

Scepticism was at the heart of the questioning about ‘going concern’ by the Noble Lords. ‘Going concern’ is a cornerstone of financial reporting but all it means is that the business will continue trading for the forseeable future.  Directors should regularly assess if their business is a going concern and financial statements should be prepared on that basis. Unless of course the answer to the assessment is that the business isn’t a going concern.

 Accountancy Age reported what went on in the Lords’ Committee and it makes fascinating reading. Essentially any worries that auditors may have had about banks’  liquidity – a vital component of the idea of going concern – were allayed by conversations with government about the likelihood of support being available. The exchanges took me straight back to the FRC submission to the inquiry.

Why does any of this matter for us armchair auditors? I wrote before about the problems of reliable systems providing good data to support our work. I would also say that reliable robust audit opinions based on healthy scepticism – like I was taught as an audit nipper – on financial statements are a sine qua non.

Whether or not the changes in the shape of the audit market for the public sector in England will hep or hinder my profession in doing that work remains to be seen. What is clear is that armchair auditors, however good they may be, cannot do this work.

Written by reluctantarmchairauditor

November 26, 2010 at 5:56 pm