The Rapidly Changing World of Audit and Inspection
By Clive Grace
Reproduced by permission of the Public Management and Policy Association.
The conventional story of audit and inspection of public services over the past few years is one of rapid growth leading to an increasing burden, which in turn has provoked resistance and a consequent degree of retrenchment in the scale and costs of these activities. Whilst not wholly inaccurate, this story fails to acknowledge the significant benefits which have flowed from enhanced audit and inspection. It also misses entirely the many other dimensions of change and development which are taking place in public services audit and inspection (PSAI) in the UK.
There has been change in the legislative framework and organisational structures; significant development in government policy on PSAI; an evolution and consolidation of key principles and approaches; diversification and innovation in methods; and all this against a backdrop of rapid change in the professional context of accountancy and audit which increasingly requires a global perspective in order properly to understand the purposes and possibilities of PSAI.
Alongside these changes, there is a continuing bedrock to PSAI in the fundamental assurance which public audit gives of the proper stewardship of public money, and the reliability and accuracy of how it is accounted for. We should celebrate that tradition and continuity, as well as the new methods and approaches, and the possibilities which they create.
This article is a guide to recent developments, principally as I see them as the former Director-General of the Audit Commission in Wales, and a member of the wider Audit Commission Management Team, but supplemented more recently by my role as Deputy Auditor General for Wales and as a member of both CIPFA’s Council and the Financial Reporting Council.
A Useful Part of the ‘Fourth Arm of Governance’
PSAI activities and organisations are generally shaped around the subject matter that they review – for example Ofsted around education, the Healthcare Commission around health, and so on. This helps to reinforce a perspective on PSAI which sees it as an adjunct (albeit an independent and objective one) to the services reviewed. But this obscures the fact that all PSAI activity forms a useful part of what may be seen in portmanteau terms as the emerging ‘fourth arm of governance’. This fourth arm directly provides (for example in the work of the Public Accounts Committee) or facilitates checks and balances on government. It also provides a review function to help drive improvement.
The fundamental means by which the public sector is held to account and made to improve is the democratic political process. That is how people and communities ultimately signal their needs and aspirations, and through which they pass judgement on the efforts of those entrusted to deliver services on their behalf. But modern States have developed a whole range of additional mechanisms through which government to gives account and its actions are scrutinised, both in relation to individual decisions and claims for redress, and at the wider policy level.
Within the legislative sphere in the UK there is the system of select and scrutiny committees, such as in Parliament itself, and through the Audit Committee and the Subject Committees of the National Assembly for Wales. In the legal sphere, the system of public law has developed to provide redress through judicial review and many mechanisms of appeal and challenge. The role of Ombudsmen has developed in many spheres of public life. In addition, specific processes have been developed and specialised agencies have been created with the express purpose of reviewing the way in which public money is spent – the Auditor of the Exchequer in 1314 is perhaps the earliest UK reference to a public official charged with auditing government expenditure, and by 1780 commissioners for auditing public accounts were appointed by statute.
The wider system of checks and balances and ways by which public services are held to account and helped to improve, taken together, can be regarded as almost amounting to a ‘fourth arm of governance’. Significantly, some of the components of this fourth arm are closely interlinked, and reinforce the contribution that the legislature makes to governmental accountability – most notably, of course, in the hearings of the Public Accounts Committee of the House of Commons into National Audit Office Reports.
Of all the parts of governance, this fourth arm is probably developing and changing most rapidly. And within the fourth arm itself, PSAI is evolving very quickly indeed.
Legislative and Structural Change
The legislative and structural changes in PSAI are perhaps those which are best known. The past couple of years has seen the creation of the Commission for Social Care Inspection and the Healthcare Commission, accompanied by some diminution of the Audit Commission’s role in health in England. Some other changes have accompanied the development of foundation hospitals, and the proposals to create regional assemblies and to bring together the Prison Service and the National Probation Service – in each case, adjustments have been or will be made in the PSAI regime to shape it to the new institutional arrangements.
In Wales, the changes have been more profound, and indicate the way in which devolved and diversified governance across the UK has quickly given rise also to a diversified regime of PSAI. The Healthcare Commission’s activities in Wales will co-exist with the Healthcare Inspectorate Wales, which is located within the National Assembly. More profoundly still, the Wales’ parts of the National Audit Office (NAO) and the Audit Commission (AC) have split off from their parents to form the Wales Audit Office. This creates a vertically-integrated public audit regime to mirror the position in Scotland and Northern Ireland and, like theirs, it will in consequence be potentially one of the most progressive and powerful PSAI regimes in the world. It will be able to range across the public services, deploying a variety of powers and methods, including the powers to follow the public pound proposed in Lord Sharman’s Report. In 2001 Lord Sharman reviewed audit and accountability arrangements for central government and recommended an extension of access powers to cover grant recipients and contractors, so that accountability for those expenditures did not risk faltering at the boundaries of government.
Importantly, the Public Audit (Wales) Act 2004 which established the Wales Audit Office also underpins collaboration and coordination with some of its sister bodies – in a genealogically challenging way, this even includes its former parents. This reflects a growing trend of active joining-up both through legislation and direct organisational coordination between PSAI bodies.
By completing the devolution of public audit to accompany devolved governance in the UK, the Act also paves the way for a more explicit awareness for the need for
co-ordination and collaboration between the PSAI bodies across the four nations. An extension of the work of the Public Audit Forum is probably called for, building on its achievements to date to help shape inter-nation PSAI collaboration across the UK.
Government policy in relation to PSAI also provides a strong context for change. Following the study by the Office for Public Service Reform on Inspecting for Improvement (OPSR, 2003), the Government adopted an explicit inspection policy. That policy may well lead to some institutional consolidation, accompanied by a significant scaling back of the scope and costs of public services inspection by 30% or even 50%. No doubt such themes will take time to work their way through, but the prospect looks distinctly possible. Some have even mused about the possibility of a merger between the NAO and the Audit Commission, although that would doubtless encounter significant constitutional and political barriers.
Principles and Approaches
One of the important areas of consolidation in PSAI concerns the principles which should guide it. Drawing on a number of key sources, a list combining principles and good practice has been produced and incorporated in the draft of the new Code of Audit and Inspection Practice for Wales. It draws on the principles of public audit promulgated by the Public Audit Forum, the policy work of OPSR (2003), and a Public Services Productivity Panel analysis from the Treasury (Byatt and Lyons, 2001), as well as the Audit Commission’s work on Strategic Regulation. PSAI should:
- Be, and be seen to be, independent.
- Report in public, where appropriate, without fear or favour, and inform the public about the performance of public services to enhance accountability.
- Have wide scope, covering the stewardship of public money, the conduct of public business, and financial and non-financial performance in the delivery of services.
- Focus on public services outcomes from a user perspective, while having due regard to the wider needs of society.
- Act as a catalyst to help public bodies improve their performance.
- Be based on an assessment of risk.
- Be based on a rigorous assessment of costs and benefits, with a concern for achieving value for money both by audited and inspected bodies and within the audit and inspection regimes themselves.
- Work collaboratively with other inspectors and external review agencies to achieve greater co-ordination and a more holistic approach to the assessment of the performance of public services.
- Share learning to create a common understanding of performance which encourages rigorous self-assessment and better understanding of their performance by audited and inspected bodies.
- Carry out audits and inspections objectively, with skilled and experienced people, to high standards using relevant evidence, transparent criteria and open review processes.
This consolidated list was first developed in Wales, but it has since been borrowed by the Audit Commission in England and thus it reflects a growing consensus about how PSAI should be conducted.
There has also been diversification and development in the methods being used by PSAI bodies, especially in favour of ‘whole system’, ‘cross-cutting’ or ‘holistic’ methods. These vary, but what they have in common is that the method being used is tailored to risks and issues as they are experienced in the real world by public service bodies and by service users and the public. They aim to overcome the dangers of ‘silo’ methods. These approaches include:
- Looking at the experience of the user/customer either in relation to a particular service or, for example, by looking at the ‘patient pathway’ along which a patient travels if s/he has a particular condition.
- Looking at the performance of a public service organisation ‘holistically’ so as to assess both the general features which lead to effective public services (for example good leadership and performance management, sound stewardship and financial management, good HR systems etc) and also the particular service delivery responsibilities of that body. The corporate and the services aspect of an effective delivery organisation are generally inter-dependent.
- Looking at a local community or a local area and assessing how public services are serving that community as a whole, including the way in which those services are working together in partnership for the benefit of a locality.
- Making an assessment of the effectiveness or impact of a particular policy from its creation through the various delivery bodies which may be responsible for giving effect to it on the ground, and through to the users’/customers’ experience (‘delivery chain’ or ‘policy-to-delivery’ review).
- Taking a ‘whole systems’ approach when looking at, for example, health and social care, in which social care, primary care and secondary care form part of one whole system, and where the individual elements cannot sensibly be assessed in isolation.
- Having regard to the need to provide a value for money perspective of government policies and programmes concerned with ‘big picture’ issues such as sustainable development, long term public health issues such as obesity, and fundamental questions facing society such as climate change.
We have also seen differences emerge in the methods used in England and the devolved governments, for example in the difference between the Comprehensive Performance Assessment (CPA) of local authorities carried out in England with the Wales Programme for Improvement (WPI). Both originally derived from the same statutory root in the Local Government Act 1999 and the Best Value regime, (although CPA has now been put on a separate statutory foundation through the Local Government Act 2003). CPA emphasises an externally generated judgement which assigns a local authority to a category ranging from ‘poor’ to ‘excellent’. The WPI, in contrast, emphasises self-assessment by the local authority followed by a joint risk-assessment by the local authority and its auditors and inspectors, leading to an Improvement Plan. There are some signs of convergence between the two, most notably through a greater emphasis on self-assessment in CPA and through the development of a broad judgement by the Audit Commission in Wales of the extent to each local authority has successfully travelled its own ‘improvement journey’. But significant differences remain.
Elsewhere, Ofsted has pushed forward with the concept of Joint Area Reviews in respect of services to children, where the focus is on assessing all public services in an area which are relevant to childrens’ well-being. This seems likely to stimulate the wider application of assessments of public services to particular communities or geographical areas – a parallel approach vis-à-vis older people is one likely development.
Further, the NAO and Audit Commission are collaborating in the assessment of the Efficiency Technical Notes prepared by Government Departments to demonstrate implementation of the Gershon efficiency recommendations. They are also collaborating on ‘delivery chain analysis’ of some key PSA targets, which can only be successfully achieved if the delivery chain stretching from government and through local delivery bodies to customers and users is properly connected and co-ordinated.
Finally on this dimension of PSAI is the growing emphasis on the role of public service bodies themselves in driving their own change and improvement, accompanied by methods of Peer Review and Self-assessment. The role of PSAI here is to find better ways to facilitate and support public service bodies in their own improvement programmes, for example through helping to identify and transfer good and best practice.
Given the breadth of PSAI in the modern world, the range of professional skills and disciplines which give it effect are correspondingly broad. One of the most interesting and exciting developments in recent years has been the growing specialisation and skill base that PSAI bodies have developed in key subject areas, and this not only refers to the specialist inspectorates but also to more ‘generalist’ PSAI bodies such as the Audit Commission. Nonetheless, at the core of PSAI lies the professional standards and context of accountancy and financial audit, and developments in this sphere have been rapid and profound, as in the other dimensions of PSAI.
One of these developments has been the Treasury drive on Whole of Government Accounts, and the further extension of Resource Accounting and Budgeting, accompanied by wider pressures to further improve the financial management of public services, to prepare accounts much earlier, and properly to link financial and service delivery plans.
But public audit has also been significantly affected by the forces shaping both private and public accountancy and audit in the post-Enron world. The Financial Reporting Council was created to provide a stronger and more comprehensive framework for regulating the accountancy and audit professions in the UK, and for developing accountancy and audit standards. The increasing internationalisation of accounting and auditing standards creates a global context for that. When this is coupled with the broad commitment of the UK Government that public audit and accounting should, as far as possible, converge with the private sector framework, this means that public audit is increasingly embedded in this global sphere as well.
Alongside that, the post-Enron environment has given renewed impetus to the possible merger of accountancy bodies – ICAEW, CIPFA, and CIMA, are moving positively forward together in that direction. The growing global agenda rather puts the traditional boundaries between accountancy bodies within the UK in a new perspective.
A Measure of the Change
If we want to sum up just how far PSAI has developed over the years we can perhaps best do it by contrasting the Duke of Wellington’s view of public audit in the early 19th Century with a Treasury view of the early 21st.
Wellington was at his most scathing in writing to the Foreign Office during the Napoleonic wars to confirm that he was diligently complying with their requests to enumerate “all manner of sundry items for which His Majesty’s Government holds me accountable”. Every farthing had been accounted for, “with two regrettable exceptions for which I beg your indulgence”. These were a sum of one shilling and ninepence in one battalion’s petty cash, and a “hideous confusion as to the number of jars of raspberry jam issued to a cavalry regiment during a sandstorm in Western Spain. This reprehensible carelessness may be related to pressure of circumstance, since we are at war with France, a fact which may come as a bit of surprise to you gentlemen in Whitehall.” (Letter to the Foreign Office circa 1812.) It went on to invite them to clarify whether their orders to him were to “train an army of uniformed clerks in Spain for the benefit of the accountants and copy boys in London or, perchance, to see to it that the forces of Napoleon are driven out of Spain”.
Fast forward to 2001 and we find Sir Michael Lyons and Sir Ian Byatt explaining in a Treasury publication that a key role of external review is not just to support improvement, but to “support leaders in effecting change”. Things have certainly moved on. Indeed, many of those involved in the practice of public service audit and inspection sometimes feel that their own world is changing at least as fast as the public services which they review.
Byatt, I. and Lyons, M. (2001), The Role of External Review in Improving Performance (HM Treasury, London).
Lord Sharman of Redlynch (2001) Holding to Account – The Review of Audit and Accountability for Central Government (HM Treasury, London)
OPSR (2003), Inspecting for Improvement (Cabinet Office, London)
Clive Grace is the Deputy Auditor General for Wales.