A public sector model

Auditing of private organisations has room for improvement. By Paul Gosling

Auditing of public and private bodies could be transformed as a result of a debate that has taken hold of the public audit profession. The significance is heightened because the discussion is led by Sir Peter Kemp, chartered accountant, member of the Audit Commission, and former permanent secretary to the Cabinet Office in charge of establishing the executive agencies that broke up the Civil Service.

A single public audit body would be created to be responsible for auditing all organisations in receipt of public money, if Sir Peter's proposals were accepted. Sir Peter goes on to advocate replacing the current system of private sector auditing, which can encourage cosy relationships between directors and auditors, with the public sector model.

"In my view the public audit system goes further than the private audit system, which doesn't mean private auditors can't do it - 30 per cent of our audits for the Audit Commission are done by private sector auditors. The difference between public and private sector audits is how far the examination goes into the motivations, looking at good behaviour in a wider sense than just legalities.

"The interesting question is whether in the end the private sector is going to have to move towards the public sector approach, with somebody else - a regulatory body which might be the Institute of Chartered Accountants - appointing or approving the auditor, and setting the fee. It is a fiction that auditors report to shareholders."

Good quality auditing, says Sir Peter, is faintly adversarial, which is why public sector auditing, with an externally appointed auditor, is more effective than that of the private sector. The customer for an audit should be recognised as the wider society. While this is particularly true of the public sector, it is also the case with big plcs, which have become so large they should be regarded as social organisations, he says.

The work of the Audit Commission, and district auditors on its behalf, is giving a lead on how auditing in all sectors should develop, Sir Peter believes. Far more attention should be placed on value for money, whether the people in charge have been good citizens, and on environmental impact.

"I have sympathy for those firms of accountants who want limited liability, because it is very unreasonable to ask people to report on environmental matters, with Greenpeace out there suing you at the drop of a hat," says Sir Peter. He believes that the auditing profession should agree with government that in return for limited liability it accepts a wider audit responsibility, with government stipulating the remit. "In the public sector, examinations are done much more profoundly - public interest reports are quite frightening things to local authority people. A public interest report on the behaviour of Shell with Brent Spar might have been an interesting, if very difficult, document," Sir Peter says. But public auditing "still needs to get its act together," believes Sir Peter. He says that, although speaking personally, the Audit Commission believes it is unfortunate that privatisation and the development of quangos have meant that more bodies in receipt of public money are now subject to less rigorous private sector audit standards.

The Government has responded weakly to sensible proposals from the Nolan Committee to strengthen public auditing, Sir Peter adds. The appropriate response would be to amalgamate the National Audit Office - which, Sir Peter says, "I don't think much of" - with the Audit Commission.

A General Audit Office would be responsible for commissioning audits - some in-house, some from the private sector - and reports submitted to an audit committee. Audit committees have been established in NHS trusts, are common in local government, and the Public Accounts Committee could be seen as their equivalent for government departments.

Sir Peter believes that this new national body should have the same powers as those of district auditors, with access to people and files, and could report not only on maladministration, but on policy disasters such as the poll tax and the exchange rate mechanism. This should have the effect of making governments think harder about policy, and ensure that bad advice from permanent secretaries was made public, making the Civil Service more accountable.

"All this ought to happen, and it could happen. I think that eventually if we are going to have public management, and indeed private management, the way it should be - letting chaps get on with the job - the quid pro quo for the state is some kind of idea of how people are appointed, and some kind of audit after the event."