I find the Government's expectation to save 25% of the £200 million a year spent by the Audit Commission hard to believe. In the mid-90s I worked for Ernst & Young carrying out audits on public bodies under the auspices of the Audit Commission. At the time the firm couldn't charge its usual fees for the work because it was obliged to charge the rates set by the Audit Commission but the fees would have covered more than the direct costs of carrying out the work and it meant that there was extra audit work in the summer, a time when there are fewer private sector accounting year ends. The firm were not able, however, to carry out the non-audit consulting work that they often do for private sector clients because of Audit Commission rules.
Some years after I left the firm, Ernst & Young gave up their Audit Commission work but there are a handful of firms that continue to deliver about 30% of audits. Will these and others bid for an increased share of the audit work?
The cost of the Commission is charged to its clients, of which there are about 1,000 principal local authorities and health bodies. There are some xxxx parish councils, too. Let's assume that all the principal bodies can in future select their own auditors but the current arrangements are retained for parish councils (that district or metropolitan district council's auditors will undertake the audit of all the parishes within the district). The 80:20 law suggests that £160m in fees is earned from 200 organisations, at an average of £800,000. These organisations could expect competition from first and second tier audit firms and perhaps they might make savings. That all depends on whether the firms are willing to carry out the audit work at rates that are lower than the Audit Commission has maintained them. I suppose it is possible given the squeeze in the economy. I suppose, too, that audit firms might take a more aggressive view about audit fees if they believe they can earn extra income from non-audit work but the government and public sector organisations are supposed to be squeezing out their use of consultants.
And what about the smaller organisations, the 800 with an average fee of £50,000? Will they see the same level of competition? Or will they see their fees rise because £50,000 to audit a district council and 10-15 parishes isn't going to leave a lot of scope for profit. It may not be provable but I suspect that smaller council audits are subsidised by the larger audits. Large councils will often allow the audit team to have office space rent-free all-year-round, offices from which smaller council's audits can be managed.
There are a number of issues here that the NAO (one presumes it will be the NAO) will have to consider before the Audit Commission is abolished in 2012/13.