NLGN have a new report out today on the Audit Commission. It makes two key points.
First, that the removal of the Audit Commission will lead to a collapse in auditing rigour as the Big Four (PWC, KPMG, Deloitte and E&Y) engage in a race to the bottom as they bid to woo local government clients. There’s probably some truth in this. Only last week, a House of Lords committee claimed that lack of auditing rigour helped contribute to the collapse of British banks. To circumvent the risk of slipping standards, NLGN suggests “independent, citizen-led auditor appointment panels” to vet auditors for rigour. It’s a worthy-sounding proposal, although readers will be forgiven if their racing heart doesn’t pop through their chest at the prospect of sitting on one of these bodies. Calling for tougher regulation of auditors may be a better bet, although you can’t knock the good folks at NLGN for their faith in the human capacity for self-sacrifice.
Second, the report suggests that that the removal of the Audit Commission could result in higher costs to councils. It argues that the Audit Commission should be mutualised to provide a “public option” that could compete with existing providers and avert the dangers of an uncompetitive audit market and higher costs to councils. Again, there’s probably some truth in this. At the moment, the Office of Fair Trading is conducting a probe into the market dominance of the Big Four which has distorted the audit business. Again, however, it seems that sloppy regulation rather than sharp practices by auditors is the problem. The focus of the OFT enquiry is a restrictive clause employed by most banks that leaves customers with no other option to tap the services of Big Four audit firms alone.
Overall, then, hats off to the NLGN for a solid contribution to an important debate. I can’t help but think, however, that more competition and tighter regulation has a better hope of strengthening audit practice than worthy innovations like “citizen-led” committees. As we’ve argued previously, there’s no reason that councils shouldn’t appoint their own auditor so long as effective safeguards are in place to maintain the quality and probity of local government audits.