Conrad Hall examines the case for councils to undertake their own audit procurement instead of sticking with Public Sector Audit Appointments.
To PSAA or not to PSAA: That is, if not the question, at least a question and one that all local authorities will need to answer over the next few months. It seems, therefore, an appropriate moment to reflect on what the current model has and hasn’t achieved and to think about some of the factors treasurers might want to take into account in advising their councillors on what the answer ought to be.
At one level this might almost seem an odd question to pose. Isn’t the answer obvious? PSAA takes on the procurement of a contract for you. Since it is something you would otherwise only procure every few years, a source of expertise in doing so might be useful. Or, put more simply, if someone else can do it for you, why go through the work yourself, especially when (although it is a matter I’ll return to) they can probably do it more cheaply?
And, at a more fundamental level, there’s a key point of corporate governance here. Whatever one’s view of the Audit Commission, there was widespread support in the sector for the principle of having appointments made by someone other than the authority being audited. The PSAA guarantees this for you and since we are all in favour of good corporate governance why not go with them?
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Einstein’s dictum
Well, perhaps, but Einstein’s dictum that “when the facts change, so do my opinions” is a good one. We must acknowledge that recent changes to the regulatory environment provide more and better safeguards against auditors having conflicts between their consultancy and audit arms than was the case in the Commission’s heyday.
So, perhaps the PSAA’s claim to deliver a unique product is a little dated now as the audit sector now actually delivers it as standard. If so, what’s the benefit in using them?
Perhaps another point ostensibly in the PSAA’s favour is that, almost uniquely among public sector institutions, it can justly claim to have delivered on pretty much all of its objectives. After all, when it was being set up, all we really heard was that this was a means of saving money from the audit fees. The facts speak for themselves don’t they? Reasonable savings have indeed been delivered, at least as a percentage.
However, this starts to raise more difficult questions. In theory everyone wants everything cheaper. In practice everyone accepts that there is a trade-off between price and quality. External audit is a very small part of any local authority’s overall budget and one has to question whether targeting the cheapest possible audit opinion was really the right procurement strategy.
Furthermore, those savings have also been shown to be unsustainable. Perhaps, then, the PSAA’s raison d’etre was not fulfilled after all and, if so, then what track record can it point to that would make you confident to trust them this time around?
Appreciation
Now, it wouldn’t be fair to lay all of the issues in the local government audit market at the PSAA’s door. However, one could expect that the body charged with procuring our audits had a good appreciation of the market and its sustainability. Regulatory changes since the procurement have exacerbated the problem (and don’t seem to have been very well captured in the original contracts) but I think it is fair to say that the PSAA could have done a better job last time around of anticipating the market impact of its strategy.
That said, the past is the past and how to procure your audits in the future shouldn’t place too much emphasis on previous mistakes. Instead, you should think about whether the PSAA have a broader perspective this time around, a better strategic focus and a better understanding of the market.
You should also wonder whether they will continue to pore over every detail of each proposed fee variation or whether that’s a mature conversation you’d prefer to be able to have directly with your own auditor.
You should definitely think about how you might procure a contract outside of the PSAA regime. Let’s be blunt, though: it’s not a complex procurement. Small businesses up and down the country manage it without too much difficulty, so it’s well within your skill set and capacity. There may be some price differentials geographically, but I stress again that while price always matters it’s probably not your biggest strategic concern in this procurement.
You may think that the PSAA’s collective oversight will give you more leverage in resolving a complaint with your auditor (yes, there are some bad audits out there, just as there are examples of bad local government accounting too). If you do think they’ll give you more leverage then you should stick with them and likewise, you may feel that being plugged into the national arrangement may give you more assurance of quality.
However, there are lots of concerns in the sector that the existing PSAA contracts don’t seem to give you much in the way of contractual rights. Rightly, your contract shouldn’t give you leverage over your auditor when it comes to fundamental points about whether your accounts are correct or not. However, you are entitled to a contractual route to resolve issues around perceived poor quality or (the big issue today, at least) the timeliness of the audit opinion, and I think it is fair to say that the existing PSAA contracts are widely perceived not to have tackled these issues very well.
Remedy
So you should definitely ask yourself whether the next round of PSAA contracts will remedy this, or indeed whether you prefer to hold such a contract—and everything that goes with that—directly with your auditor.
Be honest with yourself though. If there’s a little Screwtape at the back of your mind telling you that it will might make things easier if an issue is identified in the audit then stop right now and go with the PSAA. But it is legitimate to ask whether you might have a better guarantee of quality and responsiveness by contracting directly.
To PSAA or not to PSAA? I’m not yet convinced I know the answer to that. But I do know that it’s a very important question.
Conrad Hall is corporate director of resources at the London Borough of Newham.
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