Recent changes in legislation, including the abolition of the Audit Commission, have weakened audit oversight of local government and may have inadvertently created opportunities for corruption, according to research by campaigning group Transparency International.
Its report, Corruption in Local Government: The Mounting Risks, identifies 16 areas where the ability to resist corruption has been reduced, of which half are the result of changes to auditing arrangements whereby local authorities will now outsource audits to the private sector rather than being overseen by the Audit Commission.
Transparency International states: 'A thorough and wide-ranging audit should be part of the system of checks and balances to counter corruption. We believe that the new system - in which local authorities themselves are solely responsible for awarding their audit contracts and where there is no back-stop support for auditors who are challenging the local authority - will narrow the scope and effectiveness of local audits, while increasing potential conflicts of interest.'
The report argues that this change weakens the independence of internal and external audit, and means that local authorities will have reduced internal capacity to investigate fraud and corruption, while there will be no institution to collect nationwide data on trends or to enable criminal investigations.
The global anti-corruption body also warns that audit committees in local government will be less effective and may disappear because there is no longer a statutory requirement for an audit committee to be a full committee in its own right, while external auditors appointed under the new arrangements may face incentives to avoid undertaking investigations or raising concerns about suspicions of fraud or corruption. In addition, the report says new external audit reports will not be adequately covered by the Freedom of Information Act.
Under the former regime, the Audit Commission had special powers and responsibilities to investigate financial misconduct and illegality and could produce Public Interest Reports highlighting corruption risks and issues.
Transparency International says an external auditor risks being sued if it tries to fulfil a similar role, even if the auditor had the appetite to do it, which it says is less likely given commercial priorities and the expected relative reduction in the scope of audits.
The organisation has called on the government to review the changes that are taking place in local government to ensure that they do not inadvertently create an enabling environment for corruption.
Among the changes recommended is a statutory requirement for a local authority to have an audit committee as a dedicated full committee, with a specific remit to oversee corruption risk assessments and corruption investigations.
The report also recommends setting up a forum - for private audit firms involved in local authority audit - to share macro risks in the sector, identify trends, understand good and poor practice examples and draw attention to specific corruption issues.
Auditors should be allowed to access documents from 'significant' private contractors used by the local authority. It says firms providing an audit function for local authorities should not be allowed to provide other commercial and consultancy services to the same local authority.