Posts Tagged ‘public audit’

Rethinking the impact of government expenditure and how it is accounted for

David Walker sets out the case for a more devolved, accountable, and reliable public audit system, and offers ambitious proposals for unifying the way services are assessed. Such reforms could go a long way in restoring public trust in government credibility when it comes to expenditure.

A century ago, a distinguished LSE political scientist railed against auditors. To William A Robson, a founder of the Greater London Group, audit was economistic, an instrument for controlling progressive Labour local authorities’ social spending. When auditors certified spending on hungry children as ‘excessive’, they were (he said in a 1925 Fabian pamphlet) ‘a menace’. Social control through accountancy remained a theme. The Audit Commission was established by the Thatcher government as an explicit check on spending by left Labour councils, including Ken Livingstone’s Greater London Council – though one of its great moments turned out to be backing an auditor’s prosecution of Tory councillors in Westminster.

Now austerity trumps all. Public audit is in the doldrums: its utility as a means of curbing spending diminishes when grants are cut and tax raising proscribed. You can only account for money if you have any. In the NHS, in local government and in the central state, the audit function has become residual. But now may, paradoxically, be a good time for the political left – at least for protagonists of higher spending – to look again.

Audit is a deficit discipline: it remedies structural absence of trust in an organisation’s managers. If company directors could be relied upon to state revenue and spending truthfully; if ministers and permanent secretaries never succumbed to the temptation of doctoring budgets and output data, auditors would not be needed to check and cross-tabulate. So audit’s principal purpose is assurance. It certifies that public money is being spent lawfully and verifies stated amounts. It could potentially become a tool in the politics of fiscal persuasion – if it enhanced confidence that money is well spent, citizens might be convinced to endorse higher levels of tax and expenditure.

The case for more hardly needs rehearsing. The state needs more revenue to end austerity let alone confront the long list of undernourished collective concerns – from ageing through climate change to equipping sectors and places to cope, let alone flourish, post Brexit. But a precondition is electoral consent and fiscal honesty – policed stringently by the Institute of Fiscal Studies – requires us to admit those on median incomes will probably have to pay more, however skewed additional taxation were towards wealth and higher incomes.

A first step is reconceptualising audit. To assess ‘value for money’ goes far beyond the traditional audit tasks of ensuring probity and the regularity of testing balance sheet sums, essential as they remain. Accountancy is notionally a social science, but has had little or no communication of exchange with other disciplines. Gauging value for money demands quantitative skill, yes, but draws on sociology and political studies as well as economics in a more rounded assessment of social and public value. Value for money may not be science, but it can lay claims to being a discipline – and one much broader than financial accounting.

In a report for the Smith Institute, John Tizard and I make some bold propositions about the institutional basis of this reconceptualization. I say bold because they affect one public body that stands tall and proud, amidst the degradation and disarray of Brexit politics and the denigration of expert knowledge and contempt for evidence. This is the National Audit Office.

Efforts have been made, notably by Patrick Dunleavy, to stimulate debate about its functionality, governance and performance. But the NAO, along with public audit at large, inhabits the shadows. Sir Amyas Morse, its head, has intervened on Brexit preparedness, Treasury power, and Whitehall capacity; but the House of Commons (of which he is an officer) has shown little interest in the principles and practice of how public money is spent and assessed for its efficiency, effectiveness and equity. The last of those is vital, but till now excluded even as a neutral exercise in plotting the spatial and social winners and losers in spending decisions. The architecture of value for money is ramshackle. In recent years the NAO has expanded the thematic studies it does, but they are ad hoc, belong to no systematic programme underwritten by MPs, and overlap untidily with the NAO’s other functions as custodian of the legality of spending: spending can simultaneously be legal, properly accounted for, and utterly ineffective and inequitable.

NAO studies do not encompass the NHS and English local government. Audit of NHS trusts and local authorities, now undertaken by private accountancy firms, has notional ‘use of resources’ categories but fails to ask central questions (what does this spending accomplish) or link with the qualitative assessment of services undertaken by the Care Quality Commission or Ofsted. No one extracts lessons by comparing the performance of different parts of the public sector – not least from the diverse value for money arrangements in England relative to Scotland, Wales and Northern Ireland, where there are unified audit offices covering the whole of those devolved administrations. But there, too, audit and value for money are blurred.

Our proposition is that value for money (in England) is unified in a new Office for the 3Es (effectiveness, efficiency and equity). Its task would be data collection, comparison, commissioning studies, asking big, provocative questions focused on effectiveness and equity. Many will be hard to answer definitively: the data does not exist or simply is not collected. But the act of asking, the active pursuit of value could have large educative and persuasive effect. The right has long deployed the language of waste, excess, misuse, fraud; it is the common currency of the press and rightwing media. Advocates of higher taxation can rebut that by making financial and service accountability their own hallmarks of progressive government.

Our rearrangement points to repurposing the NAO as its value for money work shifts to the new Office. It’s an opportune moment to re-enfranchise public audit, which would become its centre, its remit extending across the public sector to supervise and possibly part provide audit in local government and the NHS. A move in this direction is predicated by the intellectual and moral crisis in private sector auditing and its consequences for the ostensible regulator of company audit, the Financial Reporting Council.

Economic theory often relies on large assumptions about the truthfulness of market data, including company accounts. But if auditors validate balance sheets at the behest of company directors, the power of incumbent managers relative to the notional owners of companies and those who lend to them is further downgraded. The sale of audit services (i.e. corporate truth) is compromised when the same accountancy firms double up and sell to the companies being audited consultancy services, which have a contingent relationship with truth.

Part of the problem is that there is neither a market for audit services – because the Big Four accountancy firms are too powerful – nor is company audit regulated. The recent examination of the Financial Reporting Council by Sir John Kingman is scathing and ends with a recommendation to abolish it. But, an example of the mindless empiricism that characterises British public administration, the Council turns out to have oversight of the quality of audit in English local government – oversight that it has signally failed to exercise.

It is a task the NAO could easily assume as the standard setter and supervisor of public audit. The NAO’s own personnel do external audit for Whitehall departments. In the NHS and local government it might, as the Audit Commission used to, oversee a mixed economy, allowing comparison between public and private provision. Moving in this direction brings into question the status of the NAO as a parliamentary office; localists worry that the electoral autonomy of councillors would be infringed if council spending came under the jurisdiction of MPs. But the House of Commons Public Accounts Committee at present rarely concerns itself with the NAO’s audit work; it concentrates on the value for money studies (and only a handful of the total produced, at that). As a non-departmental public body the Office of the 3Es would enjoy as much if not more autonomy than existing local inspectorates.

These proposals are far from revolutionary. In various forms they have been around for some time. They gain currency from the need to make the case for more tax. A progressive government cannot avoid asking households on median incomes to pay more tax. That will have to be justified by progressive management, which embraces both fair terms for staff and stretching targets for serve delivery. A large act of persuasion is going to be needed. The public will have to be convinced that extra resources will be equitably, efficiently, and effectively spent – that safeguards are in place to guarantee that the public pound is buying services that work. Those safeguards should take the form of a radical reworking of value for money and audit.

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Note: the above draws on the author’s Smith Institute report (with John Tizard).

About the Author

David Walker is a former managing director of the Audit Commission and author (with Polly Toynbee) of Dismembered: How the attack on the state harms us all (Faber 2017).

 

 

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Pixabay (Public Domain).

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