Ban private firms from auditing Scotland’s public spending, urges report 4

Ban private firms from auditing Scotland’s public spending, urges report

The Scottish Government should ban private firms from auditing local authorities’ accounts as their involvement is an obstacle to transparency and democracy, claims a new report.

Democracy Denied – by worker’s cooperative Research for Action – argues the use of private-sector accountancy firms is thwarting the public’s legal right to scrutinise local government finance and potentially deepening council funding challenges, which are set to intensify due to Covid-19.

The report found the current system means frauds go undetected and the fall-out of past policy failures, which have cost billions of pounds to Scotland’s public purse, goes unscrutinised.

Audit firms and councils “are largely a law unto themselves, with a near total impunity from the law,” according to the report’s co-author, Joel Benjamin. “They have shielded themselves from media scrutiny, public scrutiny and parliamentary scrutiny.” 

Twelve of Scotland’s 32 councils are audited by accountancy firms such as Deloitte, EY, KPMG, Grant Thornton and Mazars, while the remaining 20 are audited by the independent statutory body Audit Scotland.

Local Authority AuditorPension FundAuditor
Aberdeen City CouncilKPMG LLPNorth East Scotland Pension FundAudit Scotland
Aberdeenshire CouncilAudit ScotlandNorth East Scotland Pension FundAudit Scotland
Angus CouncilAudit ScotlandTayside Pension FundAudit Scotland
Argyll and Bute CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
Clackmannanshire CouncilAzets Audit ServicesFalkirk Council Pension FundEY
Dumfries and Galloway CouncilAudit ScotlandDumfries and Galloway Council Pension FundGrant Thornton UK LLP
Dundee City CouncilAudit ScotlandTayside Pension FundAudit Scotland
East Ayrshire CouncilDeloitte LLPStrathclyde Pension FundsAudit Scotland
East Dunbartonshire CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
East Lothian CouncilDeloitte LLPLothian Pension FundAzets Audit Services
East Renfrewshire CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
Edinburgh City CouncilAudit ScotlandLothian Pension FundAzets Audit Services
Fife CouncilAudit ScotlandFife Council Pension FundAudit Scotland
Falkirk CouncilEYFalkirk Council Pension FundEY
Glasgow City CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
Highland CouncilAudit ScotlandHighland Council Pension FundGrant Thornton UK LLP
Inverclyde CouncilGrant Thornton UK LLPStrathclyde Pension FundsAudit Scotland
Midlothian CouncilAudit ScotlandLothian Pension FundAudit Scotland
Moray CouncilEYNorth East Scotland Pension FundAudit Scotland
North Ayrshire CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
North Lanarkshire CouncilDeloitte LLPStrathclyde Pension FundsAudit Scotland
Orkney Islands CouncilAudit ScotlandOrkney Islands Council Pension FundAudit Scotland
Perth and Kinross CouncilAudit ScotlandTayside Pension FundAudit Scotland
Renfrewshire CouncilKPMG LLPStrathclyde Pension FundsAudit Scotland
Scottish Borders CouncilAudit ScotlandScottish Borders Pension FundAudit Scotland
Shetland CouncilAudit ScotlandShetland Islands Council Pension FundDeloitte LLP
South Ayrshire CouncilDeloitte LLPStrathclyde Pension FundsAudit Scotland
South Lanarkshire CouncilDeloitte LLPStrathclyde Pension FundsAudit Scotland
Stirling CouncilAudit ScotlandFalkirk Council Pension FundEY
West Dunbartonshire CouncilAudit ScotlandStrathclyde Pension FundsAudit Scotland
West Lothian CouncilAudit ScotlandLothian Pension FundAzets Audit Services
Western Isles CouncilEYHighland Council Pension FundGrant Thornton UK LLP

Scottish councils regulate their own activities via committees which examine “the performance and management of risk”, according to the Scottish Government’s website. Independent organisations like Audit Scotland were set up to “monitor” councils “in certain areas”.

However, “the culture in both Audit Scotland and the audit firms they use appears to be relatively chummy,” claimed Benjamin. “They share information amongst themselves but there’s a strict firewall when it comes to dealing with the public, so there’s no room for different schools of thought or external challenge. I think this plays out in the reluctance of Audit Scotland to accept objections to Edinburgh or Glasgow council’s adoption of PFI/PPP and Lobo loans”.

Lender Option, Borrower Option (Lobo) loans, are controversial loans taken out by councils where banks are able to periodically raise the interest rates. Councils must then either agree to the new rate or pay off the entire loan. In 2019, we reported that Scottish local authorities had accumulated £2.3bn of Lobo debt and repayments, costing £119m per year over 50-60 years.

Private Finance Initiatives (PFI) allowed central and local governments to build new prisons, schools and hospitals without increasing government debt. But projects funded by PFI and similar Public-Private Partnerships (PPP) cost taxpayers far more than public sector alternatives. In 2020, Audit Scotland said PFIs had left Scottish taxpayers with a £40bn bill for public projects worth £9bn.

Benjamin said there now was a need to “level the playing-field between the public and the public institutions which are supposed to be acting on our behalf.”

David Whyte, professor of socio-legal studies at the University of Liverpool, said Research for Action’s report, which studied audit activities on both sides of the border, “raises fundamental questions about local democracy”.

“Local government auditors need to be accountable, but at the moment they seem to operate with impunity,” he claimed.

Research for Action found private-sector auditors tended to be slow to respond or not respond at all when investigating citizen objections to council spending decisions. By taking an average of two years to respond, and in the worst cases taking almost four years, auditors are “undermining any meaningful and timely scrutiny,” Benjamin said.

In cases where councils’ audit firms and auditors did respond, the report said their investigations were “of a consistently poor standard and showing no professional scepticism, failing to address issues raised and simply taking councils at their word.” The current system is “giving rise to a scrutiny and accountability vacuum,” argued Benjamin.

Research for Action is calling for fundamental reform, with private-sector audit firms removed from auditing any public-sector body. It is also calling for improvements to the audit process, complaints-handling, and for information requests to be handled in a more timely and transparent way. The group recommends the establishment of a public audit oversight body, accountable to the public.

Audit Scotland recently said no council auditors were conflicted. But Research for Action warns conflicts of interest are not always obvious. The consultancy arms of private audit firms often work for councils, related bodies such as council pension funds, and for private-sector clients including consortia running PFI projects on councils’ behalf.

For example, both Falkirk Council and its pension fund are audited by EY (formerly Ernst and Young). As the trustees of the pension fund have divergent strategic priorities to the council as a whole, this creates scope for conflict of interest. The Pensions Regulator says “an adviser may have a conflict of interest if he or she (or the same firm) is also advising the employer.”

Falkirk Council said EY was not used for any consultancy work and stressed that auditors are appointed and periodically rotated by Audit Scotland.

Other conflict of interest barriers include using separate teams to conduct audits, and having different partners provide audit opinions on the council’s accounts, they added. EY did not respond to our request to comment.

The Coalition of Scottish Local Authorities (Cosla) stressed that Audit Scotland appoints all council auditors, and that they operate within “strict financial reporting regulations”

Councils also had to advertise their available accounts publicly, allowing queries and comments to be raised, a spokesperson for Cosla said.

An Audit Scotland spokesperson said: “There are strong arrangements in place to avoid a firm auditing a body that is also paying it for consultancy work.”

If a Scottish council wants to appoint an audit firm to do non-audit work, the council must first gain approval from Audit Scotland’s Audit Quality and Appointments. During 2019-20, non-audit fees were capped at 0.1 per cent of total fees, down from 0.5 per cent in 2018-19, to further deter conflicts of interest.

The Audit Scotland spokesperson argued that Democracy Denied “focuses almost entirely on local government auditing in England and does not recognise the independence and rigour of Scotland’s model of public audit.” They added: “Around two-thirds of our annual work is carried out in-house, with the rest undertaken by six private firms.

“Those firms are appointed by the Accounts Commission, rather than by the public body being audited. This flexibility ensures that no public body being reported on can influence audit appointments.”

The ‘Big Four‘ and auditing

Research for Action’s Joel Benjamin says the “Big Four” audit firms – Deloitte, EY, KPMG and PwC – are inherently conflicted since their consultancy arms were pivotal to the development and implementation of PFI/PPP under the New Labour government. From 2000, the funding mechanism was pushed through for public infrastructure projects by Partnerships UK, itself a public-private-partnership staffed by Big Four employees whose firms stood to benefit from PFI.

PFI-funded projects were brought into the spotlight in January 2016 when part of a wall at the PFI-built Oxgangs Primary School in Edinburgh collapsed during a storm. Some 80 PFI-funded schools in Scotland had similar defects, while 80 per cent of the estimated 350 PFI-built Scottish schools are at least partially owned offshore.

Members of the public who objected to PFI contracts “raised questions about the ability of auditors to act impartially when being asked to investigate issues relating to contracts where they had been involved as consultants,” said Benjamin. 

“These questions were routinely ignored or dismissed. There’s a culture of obfuscation and lack of transparency, with the commercial arrangements underpinning these contracts hidden from public view. Interested parties are having to fight councils through the Information Commissioner, or even the courts, just to have sight of the underlying contracts.”

The Big Four have been dogged by numerous scandals in recent years. These include the deeply flawed auditing of banks which fuelled the banking crisis in 2008, and failure to raise red flags ahead of the collapse of the PFI-focused construction giant, Carillion, in 2018. The firm’s downfall, among other things, brought pain for Aberdeen commuters by causing a year-long delay to the completion of the city’s bypass, and added £255m to the project’s cost. 

An inquiry by MPs accused Carillion’s auditors, KPMG, of being “complicit” in Carillion directors’ “increasingly fantastical figures” which the audit firm had “complacently signed off” over its 19-year tenure. The Big Four were paid £72m by Carillion as it faced collapse.

Two parliamentary committees accused KPMG of “feasting on what was soon to become a carcass”. The audits were “a colossal waste of time and money” and the UK audit market had become a “cosy club incapable of providing the degree of independent challenge needed,” they found.

KPMG chairman Bill Michael said the accusation “does not reflect the hard work and commitment of the Carillion audit team”. In a letter to the MPs, he said he “respectfully disagreed” with the joint committee’s criticisms of KPMG’s auditing, adding “while a company might fail following issuance of an unqualified audit opinion, this does not automatically mean the auditor did a bad job.”

Atul Shah, professor of accounting and finance at City University, said: “Public auditing requires a culture which respects and protects public interest. The ‘Big Four’ firms have shown time and again that they are ‘culturally deficient’ when their role is to protect public interest – they are just not able to be sceptical and are highly conflicted. This lack of professional scepticism has also been exposed by the Financial Reporting Council as a major weakness when it comes to private sector audits.”

Emeritus professor of accounting at the University of Essex and Labour peer Lord Prem Sikka, said that allowing “profit-seeking accounting firms” to audit in both the public and private sector is “always a problem, as their focus is to make more and more money”. He welcomed the call for them to be banned from auditing local authorities. 

“As large, global multi-disciplinary professional services firms, their desire to grow fee-income through consultancy and other work tends to diminish their appetite for being rigorous or hard hitting with their auditing,” Sikka said.

ICAS, which represents the Big Four accountancy firms, declined our request to comment.

Header image © Ian Capper (cc-by-sa/2.0)

Leave a Reply

Your email address will not be published. Required fields are marked *

Hi! You can login using the form below.
Not registered yet?
Having trouble logging in? Try here.
Back our next investigation
Can you help us find out who really runs Scotland?