Foreword

The February 1997 White Paper "The Governance of Public Bodies: a Progress Report" suggested to the four national audit agencies (the National Audit Office, the Northern Ireland Audit Office, the Audit Commission for Local Authorities and the National Health Service in England and Wales and the Accounts Commission for Scotland) that they set up a Public Audit Forum to provide a focus for developmental thinking in relation to public audit. The White Paper suggested that the Forum might also involve representatives of audited bodies, accountancy bodies and others with interests in the area, together with the national audit agencies themselves. As the heads of the national audit agencies we have now established the Public Audit Forum, supported by a Consultative Forum with a wide representation drawn from key stakeholders in the audit process. The membership of the Consultative Forum is listed below.

As the first output of the Public Audit Forum, we are pleased to endorse the attached statement prepared by the Consultative Forum, which sets out for the first time the fundamental principles which we believe underpin public audit in the United Kingdom. These highlight the essential role that public audit plays in maintaining confidence in the effective stewardship of public funds and those to whom this responsibility is entrusted. The Forum recognise that public auditors are accountable for their performance and duty bound to undertake their work in a professional, objective and cost-effective manner and with due regard to the needs of the auditee. The Forum therefore intend to produce a further paper which sets out the service which auditees can expect from the public auditor.

Sir John Bourn, Comptroller and Auditor General

Andrew Foster, Controller of Audit, The Audit Commission for Local Authorities and the National Health Service in England and Wales

Robert Black, Controller of Audit, Accounts Commission for Scotland

John Dowdall, Northern Ireland Comptroller and Auditor General

The Importance of Public Audit

The public expect that those responsible for handling public money are held fully accountable for the use of that money. The prime responsibility for ensuring that public money is handled with absolute integrity and spent wisely, rests with Ministers, elected members, governing bodies, managers and officials. Public audit is an important link in that chain of accountability. It strengthens accountability, both upwards to the elected or appointed members who provide resources, and outwards to the consumers and beneficiaries, taxpayers and the wider community at large. As the Committee on Standards in Public Life recognised in their First Report:

"regular audit is an important way of uncovering irregularities in financial matters - whether they are due to outright fraud and corruption or result from laxity in following proper procedures - and of establishing public confidence that public money is being properly spent."

Public audit adds value not merely by analysing and reporting what has happened after the event but also by being forward looking, by identifying lessons to be learnt and by disseminating good practice. External public auditors thereby have a direct and positive influence on the way organisations and people in the public service discharge their responsibilities. With internal auditors working within public bodies they help to promote better management and decision-taking, and thus a more effective use of taxpayers resources, and play an important role in the corporate governance arrangements of public bodies.

The Principles of Public Audit

The Public Audit Forum believe that there are three fundamental principles which underpin public audit:

the independence of public sector auditors from the organisations being audited;
the wide scope of public audit, that is covering the audit of financial statements, regularity (or legality), propriety (or probity) and value for money; and
the ability of public auditors to make the results of their audits available to the public, and to democratically elected representatives.

Independence

Public audit must be independent of the organisations being audited so that the auditors cannot be improperly influenced by those whose work they audit and so that they can carry out their role freely. Whether in the private or public sectors, confidence in auditing rests to a great degree on the independence and objectivity of the auditor. The methods of appointment of the auditors of public services should ensure that the appointed auditor is, and is seen to be, independent of the audited body and can report without fear or favour. The financial relationship between auditors and auditees should be such that it does not compromise the independence of the auditor.

Public auditors must have discretion in deciding upon the minimum amount of work necessary to meet their obligations and to follow up the implementation of their recommendations. They must also have access to information in the custody or under the control of the audited body necessary to undertake the audit.

The independence of the national audit agencies from the bodies being audited is guaranteed by statute. They can ensure that there is independent audit by undertaking the audits themselves, appointing the auditors or through a right of access to the audited bodies and their auditors. In any event the national audit agencies have complete discretion in the way they exercise their functions, whilst paying due regard to statutory requirements, Parliamentary and public expectations and professional standards (such as for competency, behaviour and due diligence).

The wide scope of public audit

Public audit not only involves providing an opinion on the financial statements (including statements of internal financial control where appropriate) prepared by public bodies, but also covers such issues as regularity, propriety and value for money. In doing so it can contribute positively to the corporate governance arrangements of public bodies; that is, the high level management systems which enable public bodies to operate effectively with due regard to regularity, propriety and good value for money.

Regularity

Public audit must ensure that financial transactions comply, where appropriate, with: the legislation that authorises them; regulations issued by a body with the power to do so; Parliamentary authority; and Treasury authority.

Propriety

The concept of propriety is closely connected with public and Parliamentary expectations as to the way in which public business is conducted, for example in relation to standards of conduct and behaviour. Public audit helps ensure that public bodies meet their statutory and ethical duties to the public and other stakeholders in an open and even-handed manner.

Value for money

Those who use or pay for public services, either through taxation or charges, have a reasonable expectation that public bodies make the best use of the resources at their disposal. Public audit must therefore include examinations of the economy, efficiency and effectiveness (which can be defined in the ways shown below) in the use of public resources, including the evaluation of service quality and the measurement of performance.

Economy means minimising the cost of resources acquired or used, bearing in mind the quality
Efficiency covers the relationship between the output of good or services and the resources used to produce them
Effectiveness covers the relationship between the intended and actual results of projects and programmes

Source: National Audit Office Annual Report

Source: Audit Commission

External reporting

For public audit to be effective, appropriate reporting arrangements are required. Public auditors report the results of their audits to the representatives of the public responsible for funding the activities concerned or directly to the public themselves where it is in the public interest to do so. This completes the cycle of accountability.

Membership of the Consultative Forum

Chairman - Robert Le Marechal (Deputy Comptroller and Auditor General, National Audit Office)

Secretary - John Ashcroft (National Audit Office)

The National Audit Agencies

Accounts Commission for Scotland (Robert Black)

Audit Commission (Peter Wilkinson)

National Audit Office (Caroline Mawhood)

Northern Ireland Audit Office (John Dowdall)

Central Government

HM Treasury (Jamie Mortimer)

Cabinet Office (John Oughton - until August 1998)

Departments of State

Department for the Environment, Transport and the Regions (John Ballard)

Department of Health (Richard Douglas)

Department for Education and Employment (Peter Shaw)

Northern Ireland Department of Finance and Personnel (Stephen Quinn)

Scottish Office (Dr Peter Collings)

Welsh Office (David Richards)

Local Authorities and National Health Service

Local Government Association (Carole Hudson)

Confederation of Scottish Local Authorities (Albert Tait)

NHS Confederation (Stephen Thornton)

Accountancy and Audit Profession

Auditing Practices Board (Lew Hughes)

Chartered Institute of Public Finance and Accountancy (Martin Evans - until August 1998)

The Accountancy Firms (Tony Bingham of Coopers & Lybrand, Gilbert Lloyd of KPMG, Eugene Sullivan of Robson Rhodes)

Miscellaneous

Consumers Association (Paul Flatters)