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Phil Swann: Concerns over external audit must extend to councils

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There is currently what some Financial Times writers have described as a “crisis of confidence” in the way in which big businesses are audited. 

This follows the part played – or not – by the “big four” in the Petrobras scandal in Brazil, the Gupta saga in South Africa and the collapse of Carillion closer to home.

Should we have similar concerns about the external audit of councils in the wake of developments at Northamptonshire?

There are some striking parallels. One of the issues in the business world is the dominance of the audit market by four companies: PwC, Deloitte, KPMG and EY.

In local government, Public Sector Audits Appointment (PSAA) Ltd – which appoints council auditors – have awarded audit contracts to six firms: EY and Deloitte (sound familiar?), plus Grant Thornton, BDO, Mazars and Moore Stephens.

One of the debates raging in the pages of the FT is whether, despite rules to prevent conflict of interests, it is right that audit firms should also have consultancy and advisory arms. All the companies on the PSAA local council slate also offer consultancy services.

What is absolutely clear, however, is that external audit repeatedly raised serious concerns about the financial management of Northamptonshire CC. The council’s auditors were KPMG, who no longer operate in the local government audit market. They issued adverse value for money judgements in relation to the council’s accounts for 2015-16 and 2016-17.

In their annual audit letter for 2016-17, the auditors said that they were “not satisfied” the council “had proper arrangements in place to take informed decisions and deploy its resources to … effectively support the sustainable delivery of strategic priorities and maintain the statutory functions”.

A key theme of the debate about audit in the private sector has been the importance of auditors working for a company’s shareholders rather than its management. To translate this to the world of local government, I’d replace “shareholders” with “residents” or “taxpayers”.

Northamptonshire’s audit committee considered KPMG’s letter at its 16 November meeting. The committee comprises four councillors and an independent chair.

The minutes report they were outnumbered by eight council officers plus two people from KPMG and the incoming chair. The record shows there was a lengthy discussion, at the end of which the report was noted. That’s it. The committee “resolved to note” the damning letter.

Two months later secretary of state Sajid Javid sent Max Caller to Northamptonshire as a government inspector.

That action was undoubtedly taken in the interests of the council’s “shareholders”. But I would argue the external audit process as a whole failed to secure action to protect their interests at a local level – which is where it matters.

So maybe it is time for the debate about external audit to encompass the public sector.

Phil Swann, executive chair, Shared Intelligence

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