The Removal of a Specialist Oversight Body for Local Public Audit: Insights from the Health Service in England

• DOI: http://doi.org/10.1111/faam.12054
• Date: 01 May 2015
• Published date: 01 May 2015

Financial Accountability & Management, 31(2), May 2015, 0267-4424

The Removal of a Specialist

Oversight Body for Local Public

Audit: Insights from the Health

Service in England

SHEILA ELLWOOD AND JAVIER GARCIA-LACALLE∗

Abstract: The abolition of the Audit Commission in England and Wales removes

the ‘protector of the public purse’. The oversight body and its audit practice are

largely replaced by the private sector regime and audit firms. We analyse the audit

market for health service foundation trusts, an area of local public audit that operates

without oversight from the Commission. We find evidence of premiums paid to some

Big4 firms and that the presence of specialist public service auditors results in fee

discounts. The firms limit their liability and assurance of audit quality is reduced

under new audit regimes and governance structures.

Keywords: audit oversight bodies, specialist auditors, premium audit fees, audit

quality, audit independence, governance, foundation trusts

INTRODUCTION

We explore the implications of the removal of the Audit Commission in England

and Wales. For decades, the Audit Commission (website logo – ‘protecting the

public purse’) was responsible for appointing auditors from its own specialist

audit service and those of approved audit firms for local government and

National Health Service (NHS) bodies. In 2012, the Commission was responsible

for the audit appointments to 353 local authorities, 263 health bodies, 76 police

authorities, 82 other bodies and 10,000 small bodies such as parish councils

∗The authors are respectively from the Department of Accounting and Finance, University of

Bristol; and the Department of Accounting and Finance, Universidad Zaragoza, Spain. This

paper has benefited from comments at BAFA, Brighton 2012, EIASM Public Sector Reforms,

Milan 2012, and Manchester Business School (Chris Humphrey and Stuart Turley) and two

anonymous reviewers.

Address for correspondence: Sheila Ellwood, Department of Accounting and Finance,

University of Bristol, 15-19 Tyndall’s Park Road, Bristol BS8 1TU, UK.

e-mail: Sheila.ellwood@bristol.ac.uk

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220 ELLWOOD AND GARCIA-LACALLE

(Audit Commission, 2013). The Commission set fee scales; determined the audit

work (the Audit Code) including performance audits, and monitored the quality

of the audit work.

In 2010, the government announced the abolition of the Audit Commission.

The Secretary of State for Communities and Local Government claimed:

The Audit Commission has lost its way. Rather than being a watchdog that champions

taxpayers’ interests, it has become the creature of the Whitehall state.

We need to redress this balance. Audit should remain to ensure taxpayers’ money

is properly spent, but this can be done in a competitive environment, drawing on

professional audit expertise across the country.

These proposed changes go hand in hand with plans to create an army of armchair

auditors –local people able to hold local bodies to account for the way their tax pounds

are spent and what that money is delivering (BBC, August 2010).

The dismantling of the Audit Commission commenced. In 2010 the Commission

ceased to assess the performance of local public bodies. In 2012 the Commission’s

audit practice work transferred to private sector firms and it was proposed

that all local public bodies in England appoint their own auditors and the

regulation of local public audit transfer to the Financial Reporting Council

(DCLG, 2012). Alongside the dismantling of the Commission, an army of

armchair auditors would hold local organisations to account by examining their

detailed transactions that would be made available through websites1(DCLG,

2011).

We investigate the likely impact of the dismantling of the Commission. The

introduction of NHS Foundation Trusts from 2004 had provided an area of local

public audit that was outside the oversight of the Audit Commission. Foundation

Trusts (FTs), unlike NHS trusts, had the ability from their inception, to appoint

their own auditors, they were not subject to audit fee scales, definition of their

work or monitoring by the Commission. An analysis of the audit arrangements

and fees in FTs in recent years therefore provides some insights into how local

public audit in other parts of the public sector may fare in terms of price and

quality after the abolition of the Audit Commission.

In the next section we consider audit quality and oversight bodies as applied

in a public sector context. We then present the audit arrangements for both

NHS trusts (with Audit Commission oversight) and Foundation Trusts (without

Audit Commission oversight) and develop our hypotheses on audit pricing. Based

on private sector literature of audit fees and earlier studies in NHS trusts we

produce a departure model for FT audit fees related to size, complexity, location

and risk. We derive hypotheses on audit fees in relation to different types of

auditor for testing to explore whether the removal of the Audit Commission

changes prior findings in the NHS trust audit market. This design is outlined

in the fifth section and our results are set out in the sixth section, followed by

discussion and conclusions.

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