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Audit Commission

Volume 489: debated on Tuesday 10 March 2009

This is the first time that I have had the honour to serve under your chairmanship, Mr. Amess, and I am delighted to do so. The Minister is attending back-to-back debates, which is the latest sport. Perhaps we could have a whole week of debates with the Minister simply staying where he is.

Much of what the Minister said in the previous debate is pertinent to this one. However, I am grateful to be discussing the Audit Commission, and I would like to offer a brief history lesson. In 1846—the Minister may remember it well—the first sewing machine was developed in America, the Irish potato famine began and, believe it or not, official audits were introduced in English local government. We should have come a long way in the intervening 162 years, but progress does not always follow an upward path—certainly not when it comes to auditing local councils.

In 1983, the Conservative Government established the independent Audit Commission. It seemed like a good idea at the time, but unfortunately the work load has snowballed. The commission was given more councils, authorities and trusts to keep a watchful eye on, and today it is responsible for checking the books of 11,000 complex public bodies that spend £200 billion of our money, including everything from town halls to health trusts, fire authorities and the police, which is a pig of a lot of paperwork to handle in anyone’s book.

However, delightfully, the commission is not exactly overstaffed. It employs 2,500 people, which is slim government. I have no problem with that, but it works out at one harassed human being for every four public authorities. In other words, the work is a superhuman challenge. I have not come here to decry what the commission tries to do—I have absolutely no doubt that those people give it their best shot given their resources—but I am seriously worried about some of its operations.

I shall go into detail about the local authority that I have the terrible misfortune to know best: Somerset county council. We are all painfully familiar with the tales of mismanagement and greed from the world of banking and it is widely acknowledged even by senior Cabinet Ministers that light-touch regulation was a dangerous error. There are growing calls for the Financial Services Authority to be beefed up or got rid of so that we can tackle tomorrow’s Fred the Shreds. I am concerned that the bad practice that almost wrecked the reputation of British banking is now creeping into the public sector.

The Minister will be delighted that we have our own Fred the Shred in Somerset. His name is Alan Jones, the chief executive of the county council. He was taken on in 2003 for £90,000 a year, which makes MPs look cheap, and now takes home £160,000, which is more than the Prime Minister. That scale of inflation is enough to make any grown man groan. Actually, Jones the Groan is in charge of a so-called four-star authority. Listening to him, one could be mistaken for thinking that every element under the county’s control is pure heaven, but that is highly deceptive, to say the least.

The star awards are a denigrated currency. So many councils have collected them that the commission is scrapping the prizes. Like green shield stamps, the awards have become tacky and worthless. Star ratings do not even register at my favourite Somerset local, “The Dog and Duck”. People care only about the quality of service and how much it costs, not about stars. Unfortunately, the commission’s stars have also bred a greedy race for high salaries. Today, we see the ludicrous spectacle of many chief executives earning far more than the Prime Minister. That cannot be right.

The executives behave like premier league football managers, shifting from council to council on still richer packages, simply because they are on some silly star rating system. Research by the commission recently found that council chief executives’ pay has risen by more than a third in the past four years. We are envious of that. It is a shameful legacy of the commission that it has created a market for local government fat cats and bloated egos, few of whom have larger egos than Jones the Groan.

Jones the Groan had a big, expensive business idea. Like all great schemes, it was destined to be paid for by the likes of us. I was deeply suspicious from the word go and brought it to the Government’s attention. Last year, I secured a debate in the Chamber about the formation of a new joint venture company, which is now called Southwest One. A joint venture implies partnership, but that partnership is far from equal. Three public bodies, which are all meant to be answerable to the commission, are involved: Somerset county council, Taunton Deane borough council, and the Avon and Somerset police. They did a deal with IBM, a multi-billion pound company, and took over hundreds of staff, mostly in information technology. Together, they intended to trade throughout Britain as Southwest One.

Before the company even started, it was heralded as a great success story that was guaranteed to save £200 million for the hard-pressed taxpayers of Somerset. The Government will not be surprised that so far it has not saved a brass farthing. Unfortunately, IBM continues to own 75 per cent. of the company, which means that every time it provides a service to its joint venture clients, three quarters of the returns go into IBM’s pockets. IBM did not get where it is today through charity. Last year, it turned over $98 billion and made $10 billion profit.

The Somerset deal means that IBM always gets its rake-off and other partners cannot be encouraged to join. Jones the Groan and his team have not persuaded any other council to get involved. Through the commission, Devon and Cornwall looked at the arrangements. Because they did not join, Jones the Groan called them “institutional chauvinists”—it seems we do not do charm in Somerset. The initial contract was signed in September 2007 with the commission’s knowledge and amended in March last year when Avon and Somerset police joined. The contract, which runs to 3,000 pages, is still secret. I asked the commission to look at it, but that is not in its remit. Councillors are allowed to inspect the paperwork only if they sign a gagging order to prevent them from revealing anything about any aspect of the deal. That is bizarre and, I suspect, highly undemocratic. The odour of rotting fish is quite normal in county hall these days.

I shall go through some of the history. Unfortunately, the commission knew all about it. Alan Jones, the chief executive, hired a special brain to take the project through—a lady called Sue Barnes. She got the job and a lucrative contract with no interview. Sue Barnes uses her maiden name. Her married name is Mrs. Port, and she is the wife of the chief constable of Avon and Somerset police. That may be a coincidence, but Mr. Port’s force is now a member of Southwest One, and he has put himself on the company’s board. Board directors of Southwest One have a direct responsibility to protect not only the commercial interests of the company, but Somerset’s taxpayers. Inevitably, that produces conflict with his role as head of the Avon and Somerset police.

Did anyone in the Home Office, the Association of Chief Police Officers or the commission raise a murmur about that? No, they did not. Silence is golden. Anyone who did anything about it, including the BBC, got a letter from Carter-Ruck, with whom many of us will be familiar. It cost us £90,000 to defend Mr. Port. Again, the commission did nothing. What is the matter with the commission? On every occasion that I have asked about the arrangements, I have been told that they are outside the commission’s remit and that it cannot look at them. The commission was set up to uphold the best principles, and should be working to do so, but in practice its powers are at best severely limited and in some cases negligible.

Last year, I received an anonymous brown envelope containing a load of documents—no doubt I will be arrested for that after the debate—including the transcript of an interview with a very senior officer at the county council, the corporate director of resources, Mr. Roger Kershaw. It showed how Mr. Kershaw’s original evidence to the Standards Board had been altered. Large sections were deleted, probably by Mr. Kershaw himself or Jones the Groan, his boss. The bits that went missing implicated Sue Barnes, the chief constable’s wife, for holding a secret meeting with IBM at a crucial stage in the bidding process. It even described how Sue Barnes had been, in effect, dismissed straight afterwards, but mysteriously was still around when the contract for Southwest One was signed. At the time, that looked like a deliberate attempt to suppress evidence concerning a contract that involved £400 million of taxpayers’ money.

Last year, in the House, I called that corruption. I hope the Minister understands that I do not use the word lightly. I was advised in writing by the Secretary of State for Communities and Local Government to take my concerns to the district auditor, and I did so. The district auditor even came to see me, but I was not encouraged by his response, which was that such things were outside his remit. I wrote to him and got the same reply, so I ask the Minister: whose remit is it? When such evidence comes to light, we want to know, in a democratic nation, where it has come from.

The district auditor was equally dismissive when I told him about Roger Kershaw’s professional conflict of interest. Mr. Kershaw just happens to be Somerset county council’s line manager for Southwest One. He is also the section 151 officer, whose duty is to ensure that everything is done by the book. He runs with the fox and the hounds, but guess what? According to the district auditor, that is not within his remit either.

Do not get me wrong. I do not think that this is the Audit Commission’s fault; it is the system’s. We—I say that collectively—have failed to provide enough legal muscle, people and money to do the job. We may, unfortunately, trust too much in the process of democratic accountability. We ought to give far greater support and training to local councillors who must scrutinise complex—in this case, bad—deals such as Southwest One. In Somerset, the public are forced to rely on a “Dad’s Army” Captain Mainwaring-style figure of fun, a one-time small-town banker—there is an old cockney rhyme for that—called Mr. Crabb. That individual, God help us, is Somerset’s equivalent of the Chancellor of the Exchequer, without the eyebrows. He is a part-time councillor who runs a French property business and spends most of his time in Edinburgh. He has been shown to be at best incompetent and at worst stupid. His political opposite number is a well-meaning councillor who sells golf balls.

Those councillors are well-meaning people who want to do the best that they can, but they are totally out of their depth. There are two other potential defenders of the public interest on the board of Southwest One, but they too are woefully inexperienced elected members. To put it crudely, IBM can afford the best financial and legal brains on the market. We cannot compete, either as councillors or as Members. The councillors are forced to take advice from a small group of highly paid officers whose careers are entwined in the matter. They are treated like mushrooms—I am sure that the Minister can guess what is coming; they are kept in the dark, and every now and again the door opens and in comes the manure.

The crude fact is that there is no effective accountability. That should change. I believe strongly—as I know the Minister does, because of where he comes from—that electors deserve councillors who are properly taught to do their job and know where to get impartial advice. I hope that he will side with me. That is the only way for tyrannical chief executives to be challenged before they do lasting harm to this country’s democratic process. I am totally with the Government in seeking more openness and honesty in council chiefs. I applaud the Minister’s pledge to force chief executives to come clean about their salaries, bonuses and pension perks. We have to do that, so why should they not do it too? They get a lot more than we do. I do not want my county run by unelected fat cats, and I do not want Jones the Groan rewarded for his obvious and utter failures.

The current politicians are not exercising control, and nor is the Audit Commission. The commission lacks the time, people and power to get to the bottom of any problem. I note that it is trying to recruit a new principal auditor for the south-west. The pay scale is £33,000 a year. By contrast, Roger Kershaw, the equivalent in Somerset county council, takes home £110,000, not counting all the other bits. Money talks. How can the commission hire the best staff if it cannot compete on pay?

When the auditors turn up to inspect a local authority, how do they work? They are not like a murder squad. They cannot turn over a council, searching every nook and cranny. A finance man from a big county described the Audit Commission’s task to me:

“They listen to what councils say. They look at internal audit work and things they raised last year. They do some sampling to see if there is anything that challenges what they have been told. They listen to objections raised by interested parties. But unless they are pointed in the right direction, it is sometimes like looking for a needle in a haystack. And their first priority is to reassure themselves that the accounts present the transactions in the year in a fair and transparent way.”

Imagine taking in a car for an MOT and being cross-examined, “Is it running well? How are the tyres? Any other problems? Oh well, we’ll sign you off, great.”

Auditors who lean so heavily on client input can hardly be described as independent, let alone thorough, and there are not enough of them. Last year, there was so much adverse publicity about the formation of Southwest One that the Audit Commission finally took a look at the matter. I suspect that ministerial push was behind it. That particular exercise cost £8,900. The district auditor charged £345 an hour. He skimmed through one of the most detailed and complex contracts in recent history, which was probably three and half days’ work. It was not a proper audit; it was a snapshot. It was light-touch regulation all over again.

A complete council audit is far from cheap. A lot of councils have complained about Audit Commission charges. Somerset had to cough up £257,300 last year. That raises another important issue of doubt. How can the independent Audit Commission’s word be trusted when the client pays all the bills? Will the Minister consider reducing grants to local government by the amount required to create a central audit fund? That way auditors could be fully independent and free from the accusation that whoever pays the piper calls the tune.

Have the Government considered a merger between the National Audit Office, the Audit Commission, the government consultants 4ps and the Office of Government Commerce? On large, risky ventures such as Southwest One, local government auditors should be able to call on additional resources to ensure that the highest standards are applied in the public interest. On another point, key milestones called gateway reviews are mandatory in large national projects. Why are they not also mandatory for large local government projects such as ISiS and Southwest One? I ask in a spirit of constructive debate, because I do not know the answer.

I consulted many experts before this debate—I have been going on about the issue for two years—and have reached the sorry conclusion that the Audit Commission is no longer fit for task. This year, to everyone’s derision, Somerset county council received from the auditors the highest value for money rating possible. They might as well have given an Oscar to a tub of lard for all the good that has done. Somerset borrowed £35 million to buy an unproven computer system from IBM that is already drastically late. That is not value for money. The council also ignored all professional advice and invested £25 million in Icelandic banks. That is not value for money either, but what would the Audit Commission know? Some £10 million of its reserves also went to Iceland. We have all been caught up.

We pay for such costly mistakes. We deserve better: better audits, better scrutiny, and a much tighter rein on the likes of Jones the Groan and all the useless people around him. If we do not get that, we will all end up paying in the long run.

I congratulate the hon. Member for Bridgwater (Mr. Liddell- Grainger) on securing this debate. He knows where I come from. In a former life, I was an auditor with responsibility for auditing local authorities and other organisations on risk management, corporate governance and internal performance. When I was a councillor on Hartlepool borough council, I was also the portfolio holder for performance management, so the subject is dear to my heart.

I congratulate the hon. Gentleman on the manner in which he has raised the subject. It is serious, but he has discussed it in an entertaining manner. I have an awful lot to cover in the time available. If I do not cover all the matters involving audits, corporate governance and corporate performance, I will be more than happy not only to write to him but to meet him to discuss them further.

The hon. Gentleman is a distinguished member of the Select Committee on Public Administration. Last night I was reading the transcripts of the Committee’s current inquiry into good government. He raised many of the same issues there. I am also aware that part of the inquiry involves consideration of mechanisms for assessing and improving Government performance. That is an important role.

As the hon. Gentleman has said, the Audit Commission celebrated its 25th anniversary last year. From the very beginning, it has had a responsibility to assess, evaluate and promote economy, efficiency and effectiveness in the delivery of public services. That is what I want to cover in my response to him, the major theme of which, notwithstanding my invitation to meet him, is that this is not an abstract exercise, or something that can be put into the journals of some public sector magazine. This issue directly affects millions of people every day, and involves billions of pounds of taxpayers’ money.

I have been reading Duncan Campbell-Smith’s excellent book “Follow the money—the Audit Commission, public money and the management of public services, 1983-2008”, and I was struck by an extract from Andrew Marr’s foreword that encapsulates what the hon. Gentleman and I both want from performance management. Andrew Marr states:

“How do you actually make a council, or a health authority improve in the hundred small ways which, to the rest of us, may make the difference between a successful minor operation and a life-threatening infection, or living in a clean housing estate as opposed to a dangerous, damp-infested modern slum? After the crisp-sounding headlines and the rousing political prose, where are the levers, inducements, measurements and encouragement that translate aspiration into achievement, in offices, streets, police stations and so on? In short, after you’ve spoken, how do you do?”

I agree with the hon. Gentleman. The assessment of those questions, in a nutshell, is the role of the Audit Commission in local government. One of the commission’s strengths, over its quarter-century, has been the way it has evolved to take changing circumstances into account in assessing how councils are doing. The debate is extremely timely, because the Audit Commission is on the verge of moving from one performance evaluation system to another. I would like to talk about those two systems.

Comprehensive performance assessment was introduced in 2002 to provide a rounded and simplified picture of local council performance. For the first time, local residents, councils, the Government and the media could easily gauge a council’s service delivery and compare it with those of its peers. The corporate assessment asked questions about councils’ capacity for improvement, looking at ambition as well as current and past performance. I strongly believe that the CPA regime has been an important driver for improving services for local people, and has helped poorly performing councils to put in place building blocks for improvement.

A strength of the CPA regime has been the simplification of its assessment, so that explicit comparisons can be made between the performances of whole authorities, and not just between individual services. The fact that an authority could be classed as excellent and given four stars was an easy message and rating system to convey. Councils that received no stars, or one star, were often shocked and shamed into improving. Performance has certainly improved during the CPA’s seven years. Excellence has increased, with 42 per cent. of councils in the highest category of performance by 2008—an increase from 15 per cent. in the CPA’s first year. Conversely, weak performance became rare: in 2008, no council received no stars, and only four councils received one star, compared with 34 councils having been rated as weak or poor in 2002. Those rating improvements understate the improvement in real performance within local government following the introduction of the harder test for CPA in 2005.

The hon. Gentleman has made the telling point that despite improvements in corporate performance, public satisfaction with councils has fallen at the same time. Across England, the overall proportion of people who were satisfied with their council fell from 64 per cent. in 2000-01 to 55 per cent. in 2003-04, and fell still further to 53 per cent. in 2006-07. That is of concern, because there is an obvious divergence between objective assessments of councils’ performance and the public’s satisfaction with local authorities. That hints that the CPA regime had probably run its course, and that a new challenge, which asks challenging questions about performance from the point of view of the individual citizen or community, is required.

The hon. Gentleman lives in the real, modern world, so he knows that local authorities do not provide all services on their own. Indeed, he has discussed IBM in that regard. Local authorities form partnerships with a wide range of agencies and companies. The police form partnerships to tackle criminal and antisocial behaviour, the primary care trusts form partnerships to tackle health inequalities, and other bodies such as Jobcentre Plus and colleges form partnerships to raise skills levels and employment. In addition, the voluntary sector has increased massively in recent years. The local area agreements that we provided a few years ago demonstrate a more mature and less abrasive relationship between central Government and local government, ensuring that local targets, based on genuine local priorities are in place. Increasingly, local authorities should be seen as strong local leaders that co-ordinate the efforts of the public, private and voluntary sectors. That strong, local leadership role is more pressing than ever in this time of global recession.

As a result of that changing landscape, comprehensive area assessments will replace CPA next month. So that the commission can provide rounded judgments about the challenges, performance and prospects for particular areas, the arrangements have been strengthened for information sharing at both national and local level. There is now a network of 41 CAA leads, who are covering local area agreement, or LAA, areas to help to co-ordinate the assessments and teams on the ground. The Audit Commission will play the leading role within the seven inspectorates that will jointly carry out CAAs, which include the Commission for Social Care Inspection, the Healthcare Commission, Her Majesty’s inspectorate of prisons and Ofsted. They will work together to implement the commitments in the local government White Paper “Strong and Prosperous Communities”.

That sounds all well and good, but, as I have said, I am very conscious of the diverging trends between performance and public satisfaction. The experience of the citizen in accessing council services should be central to assessing authorities’ performance. The services that councils provide should be based on what local people want and need. The Government believe that everyone is entitled to quality public services and that local people deserve to know how well their council is serving them and providing those services. I fully agree with the hon. Gentleman that accountability for local services and strategies is important, and local authorities and their partners should be accountable not only to the Government, but to each other and to local people.

CAA will be a robust assessment that is based around the risks to outcomes and the management of those risks. Risk management has been in the news an awful lot in the past 12 months, because of what has happened in the financial sector, and I absolutely agree with the hon. Gentleman that it should play a leading role in setting targets and assessing and monitoring performance at local authority level. CAA will focus not on structures, nor on abstract theories that mean nothing to people’s day-to-day experiences of local public services, but more on outcomes, citizens’ experiences and perspectives, and areas rather than just individual institutions.

CAA will put local residents first and focus on results that will make a real difference to people’s lives. It will also relate people’s experience of living in an area to how local partners work together and how local public services can be improved. For example, normal people are unconcerned that the police should have formal and legal responsibility for tackling crime and that local authorities should have a statutory responsibility for tackling antisocial behaviour. Normal people simply want their area to be safe, and want the police, councils and others to work strongly together to achieve that. CAA will therefore take more account of the priorities and perspectives of local people, and will report in a way that makes sense to them. It should provide local people with better, more focused information to help to hold local bodies to account.

The inspectorates have made it clear that the views and experiences of local people will be key sources of evidence for CAA. They will draw on the findings of the new biennial place survey, as well as the national survey of third-sector organisations and the annual business survey. They will also take account of the area’s own evidence through users’ views of local services. Local partners will engage with residents to find out their views about the priorities for their area, and whether those priorities are then delivered. The level and quality of public engagement and empowerment will then be evaluated as part of the CAA process, including how well vulnerable and marginalised groups have been involved.

In conclusion, this topic is incredibly important, as it concerns the accountability, corporate performance and audit of £200 billion of taxpayers’ money. It is right and proper that appropriate risk management and corporate governance policies are in place and that they are evaluated in an independent manner. I think that the Audit Commission does that, but I am happy to talk to the hon. Gentleman, at length, about how we can improve that process.

Question put and agreed to.

Sitting adjourned.