Audit Commission replies to Pickles's plan.

David Walker, journalist and former communication director of the Audit Commission tweeted today (@exauditor77): "Polite language, but Audit Comm is now saying Pickles' plan will ADD expense, leave public finances unguarded http://t.co/Bpk6fVs". I'm sure it will, too, in the longer term. Let's face it, it would be a remarkable fluke if an off the cuff policy decision was actually a good decision.

I paid my taxes, what do I get in return?

For the last year Eric Pickles has been talking about the citizen's inalienable right to have their domestic waste collected each and every week. I don't want to comment on the stories about whether or not there has been an increase in the rat population since many councils moved to fortnightly bin collection (although I cannot resist mentioning that this kind of increase in efficiency in any other local government service would be celebrated rather than chastened). What I do want to comment on is the following statement from the Telegraph:

Yet for many people, a bin collection is the only service they receive from the council – and one for which they have to pay on average £120 a month.

Statements like this annoy me. Of course there are some council taxpayers who do not have children of school age or elderly relatives receiving social care but even so they receive more services than refuse collection. They breathe clean air, drink clean water, perhaps buy food from restaurants and take-aways, walk or drive along illuminated roads at night, enjoy the view across greenbelt fields. All of these activities are provided, regulated or monitored by local councils. And they cost money. 

So, is paying £120 a month for council services too expensive? For some people, it is a terrific bargain. Their children (or grandchildren) are receiving an education for much less than a private school would cost. Not only that, the use of the average cost disguises the fact that people living in lower value houses (who one would expect are relatively poor) pay much less than the average. In fact, the poorest would pay no council tax at all because they are in receipt of welfare benefits. Of course, some people pay a lot more than £120 a month, and they might very well decide to opt out of the local council-run school and pay for private education. That's their choice. What all this illustrates is that the amount paid in tax has nothing to do with the services received.

This is because taxation is the classic example of a “non-exchange transaction”. In a free market the buyer and seller exchange goods and an amount of money that they regard as equivalent (or they exchange goods for goods in a barter system). If they did not regard the exchanged items as being equivalent they would not go through with the transaction. Taxes don't work like that. Government assesses the amount of tax due and collects it quite separately from the government's spending activity. In the UK, Her Majesty's Revenues and Customs brings the money in, lots of other departments spend it. 

One of the issues facing a government as a result of the disconnect between taxes paid and benefits received is to impose taxes that are regarded by taxpayers as fair. By way of example, I think the principle of an income tax regime where the wealthier pay more in tax than the poorer is accepted by most people as fair, albeit that they might have different views about the actual tax rates that apply. But if a government fails to maintain a tax system that is seen as fair then they risk non-payment, or worse. Look at what happened with the community charge in the early 1990s where public antipathy to what was effectively a poll tax led to civil disturbances and the end of Margaret Thatcher's prime ministership.

All of this means that on the whole local people have to feel that what they get from their local council is value for money. Because central government has reduced its funding of local government what we are seeing now is a reduction in the service received by local people but no corresponding reduction in the council tax they pay. That will surely mean that more and more people begin to feel that they are not receiving enough in return for their taxes. I think something similar will happen with other public services, such as healthcare.  People are paying more now in taxes because income tax rates and VAT went up and are getting less service. Sooner or later this will lead to a problem for central government and they'll be stuck. Do they cut taxes or increase spending on public services? Whichever way they go they would increase the budget deficit (in the short term at least).

I'll end with a quotation from Franklin D. Roosevelt that I think is a reminder of why taxation is important: 

taxes are the price we pay for the privilege of living in a civilized society.

Competing for public audits

What does the OFT’s announcement that the audit market should be investigated by the Competition Commission mean for the audit of public organisations? When Eric Pickles announced in August 2010 that the Audit Commission would be abolished he stated that public organisations should be free to choose their auditors. One possibility is that the Audit Commission's own audit arm (formerly known as District Audit) could be floated off in some form to compete with the existing audit firms. I believe that Pickles's department has hired some management consultants to advise on how that might happen.

The abolition of the Audit Commission is, in its way, a classic piece of Conservative market deregulation. My personal view is that, generally speaking, market regulations were imposed by governments for good reason and deregulation makes things worse for most people, whilst allowing a few to make a lot of money. There are too many cases of deregulation resulting in a bad deal for consumers (eg price rises) if not worse (Enron-type frauds and scandals). Once local authorities and NHS trusts are in a position to choose their own auditor I am sure that the larger ones—the county councils, London boroughs, metropolitan boroughs, major acute hospitals—will receive suits from the 'Big Four' as well as some of the smaller firms. The process will be a beauty parade. The codes of practice that set out what comprises the audit of a major organisations means all the firms will provide the same service so the client organisation will pick the one they fancy. In the first year or two they might also get a good discount on the fee.

What the practice of the FTSE 350 companies shows is that once an audit firm is hired they very rarely are replaced. I suspect that's because there's little incentive. All the firms do more or less the same thing and charge more or less the same fee so why would a client organisation spend the time and trouble to have a new beauty parade every five or seven years? And if a new firm were selected as a result there would then be an element of disruption as the new auditors found out all they needed to know about the client's business and accounting system and so on. It's rather like changing your bank. Even if you could get a cheaper deal from a different bank, it would have to be a very significant improvement on your current deal for it to be worth the trouble of moving all your direct debits and all the rest of it.

Whilst the larger public organisations can look forward to being enticed by the Big Four audit firms I doubt that the smaller district councils, the ones whose budgets are still £10–20million and so are substantial organisations in their own right, will. They might see much the same effect, though, from the small and medium-sized audit firms who would be happy to have a regular income from organisations that will pay their bills and never go bust.

If the Audit Commission's audit division is floated off as a stand-alone organisation (New District Audit, perhaps?)then I expect it would compete for all shapes and sizes of audit. Its unique selling point would be its specialism in public sector audits and I expect that it would win some of the business. Prior to the Audit Commission's creation, local councils could choose between being audited by the District Audit or by a 'professional auditor'. (Back then hospitals were not part of trusts and the whole of the NHS was audited by the Exchequer and Audit Department, which was renamed the National Audit Office in 1983).  When local government was reorganised in 1974 202 boroughs had moved over to the professional audit, while 119 use the District Audit (Coombs and Edwards, 2004: 82). (There were 21 others who used the antiquated system of electing local people as auditors, a practice which I don’t think the secretary of state, or anyone else, is proposing to reinstate.) So back then the private sector held about 2/3 of the local government audit market. During its tenure the Audit Commission has favoured its own auditors with about 70% of the market. Would a stand-alone ‘New District Audit’ be able to hang on to 70% of the market. I doubt it. At least, I doubt it in terms of fees. There are about a thousand principal councils and NHS bodies currently audited by the Audit Commission (and many thousands more parish councils). The New District Audit might be able to win 70% of them as clients but the professional firms will focus on the bigger, more valuable clients and I can well imagine that they might secure 70% of the fees. And once they are in they’ll be very difficult to replace.

Reference: Coombs and Edwards, (2004) The audit of municipal corporations—a quest for professional dominance. Managerial Auditing Journal, 19(1), 68-83.

Choose your auditor wisely

About a week ago Eric Pickles announced his proposals for the audit regime for public bodies that would replace the current regime once the Audit Commission has been abolished. Public organizations with a turnover of at least £6.5million would be free to select their own external auditor in the same way that private companies do. As with all the local freedom announced by this government I don't doubt that there will be constraints but the proposals, so far, do not go into the details of the codes of practice or guidelines that would accompany this new freedom. Nevertheless, I have a couple of general observations to make.

Firstly, last week I read a newspaper snippet about a House of Lords report which claimed that the complacency of auditors contributed to the current financial crisis. The newspaper report mentioned that on average the FTSE100 companies change their auditors every 48 years. Given that some of the companies change of auditor would have been because Arthur Anderson collapsed after the Enron scandal one begins to wonder how often a large company changes its auditor when it does not have to. This kind of thing would be good news for the audit firms pitching for business from councils and hospitals because once they are appointed they might expect to receive fees for generations. I appreciate the government might include a requirement in the code of practice, or whatever, that means an audit firm has to be changed every 5 or 7 years but it seems to me unlikely since no such requirement is included in company legislation.

My second comment is to point out that the European Commission is heading in the opposite direction. Last year it published a consultation paper Audit Policy: Lessons from the Crisis where it said it was ‘considering the feasibility of a scenario where the audit role is one of statutory inspection wherein the appointment, remuneration and duration of the engagement would be the responsibility of a third party, perhaps a regulator, rather than the company itself.’

Are there too many middle managers?

Eric Pickles's latest move to improve transparency about the cost of local government is to publish a code of practice encouraging councils to provide the names and job descriptions for anyone being paid £58,000 a year. There are lots of problems and issues with this (sufficient to mean that the Civil Service has already backed away from a similar proposal). Clearly it is founded in the notion that  there are too many middle managers and exposing their "non-jobs" will result in the posts being abolished. Also, as an aside, I suspect that when county and metropolitan councils publish data about staff being paid over £58,000 a significant number will be not be middle managers but school headteachers and deputies and senior police officers, all of whom, technically, are employed by local authorities. Indeed, it is not unheard of for the highest paid employee of a council to be a headteacher rather than the chief executive.

How can anyone know how many middle managers is too many? Each council has its own way of operating and, therefore, its own requirements for senior and middle managers. Robert Winnett's conclusion in this article in the Daily Telegraph, that, "Over the past decade, the number of council middle managers has risen eleven-fold" is not sound. What has changed since 1997 is the number of people earning above £50,000 . As pay has increased annually, middle managers earning less than £50,000 in 1997 would now be paid more and thus be included in the figures. It is conceivable (though perhaps it is unlikely) that there are fewer middle managers now than there were in 1997. No-one can deduce what the true picture is from the data disclosed in council annual reports.

If councils do accede to Pickles's code of practice (I would like to see some councils stand up against his bullying and inconsistent messages) then I expect that every individual who is to be named for earning £58,000 or more, will demand that their job description is fully up-to-date before it is  published. It will be just like the process of job evaluation where the manager will have the incentive to expand every bullet point and to emphasise the strategic importance of the decisions that they make. All of this will, of course, be dull, boring and practically unreadable. So, whilst the average resident might be interested to know how much so-and-so who lives down the road was paid they are unlikely to look at the justification. Similarly, journalists on local newspapers might publish the data (one hopes without the kinds of flawed logic displayed by Robert Winnett) they are unlikely to undertake any analysis of job descriptions.

Finally, if transparency about public money is so important, why is only Eric Pickles pushing for it? As mentioned above, the Civil Service has decided that the appropriate threshold for publication is £150,000 a year. And I am not aware of NHS organizations being "encouraged" to provide details of the payments to doctors and other health professionals as well as middle managers but, then, I imagine Andrew Lansley has enough on his plate convincing GPs to take on £80 billion of commissioning work (the sort of thing done by middle managers) that insisting on full disclosure of their pay would be a tactical mistake. 

In praise of accountants

The following is the 27 January 2011 posting on the We Love Local Government blog. What more can I add?

"In one of my previous local government incarnations we were going through a restructure and the powers that be had made it clear that, as so often, they would do everything in their powers to ‘protect the frontline’. One of my colleagues, only half in jest I believe, suggested that he was going to print some T-shirts for my team with the slogan: ‘back office staff are people too.’

"I’m reminded of this frequently in recent times as politicians, managers, tweeters, bloggers and commentators all talk of implementing cuts that won’t affect the ‘frontline’. The hidden message in this language is that the back-office staff don’t really matter and cutting them won’t really make any difference.

"Local Government workers, and hopefully blog readers, don’t need me to tell you that this is baloney. For example, there is not a member of staff who is not 100% reliant on the work of their IT department.

"Despite this I recently found myself saying something similar about our finance department. I think my words consisted of something like: ‘there are quite a lot of them down there; what do they do exactly?’ I guess in times of cuts everyone looks for a scapegoat.

"I was wrong of course. Good local government accountants are indispensible.

"In a time of budget cuts it is the accountants who can tell us exactly how much money we have and what effect all the many cuts have on our overall budgets. It is the accountants who ensure that every team and service area is spending within its means and ensure that we don’t overspend the public’s money.

"More than this though; it is the accountants in the council who are crucial when looking at new forms of business or service model. If anything, this year will be the year of the accountant.

"Individual budgets for adult social care will mean that council adult services don’t have guaranteed budgets for the year. In order to properly plan for these services quite detailed projections are going to be needed. Who’s going to produce those projections? Yes, it’s the accountants.

"Eric Pickles is particularly keen on shared services. But a shared service requires two authorities to share costs and often one council to make a charge to another for a service provided. Working out which costs are appropriate to share between the authorities and how the cost of the service will be allocated (based on usage?) is a question for which we are entirely reliant on, yes, our accountants.

"Finally, outsourcing services is not as simple as simply comparing one price with another (I used to think it was). The cost and the risk models rely on projections and a deep understanding of the actual costs of services, including costs that maybe we don’t always take into account.

"In the past few weeks I have had lots of dealing with accountants and every time they have shown imagination, skill, mental dexterity and a deep understanding of how our council’s budget works. Without them I, and I dare say the rest of my council, would be lost.

"All hail to the accountants."

Source: http://welovelocalgovernment.wordpress.com/2011/01/27/in-praise-of-accountants/#