Audit Committees in Scottish Local Authorities 1998—2005
| Author | William Henry,Brenda Porter,Margaret Crawford,James McKendrick,Melina Manochin,William Stein |
| DOI | 10.1177/0952076707075897 |
| Published date | 01 July 2007 |
| Date | 01 July 2007 |
| Subject Matter | Articles |
© Public Policy and Administration
SAGE Publications Ltd
Los Angeles, London, New Delhi
and Singapore
0952-0767
200707 22(3) 303–318
Audit Committees in Scottish
Local Authorities
1998–2005
William Henry
Glasgow Caledonian University, UK
Margaret Crawford
Glasgow Caledonian University, UK
Melina Manochin
Aston University, UK
James McKendrick
Glasgow Caledonian University, UK
Brenda Porter
Victoria University of Wellington, New Zealand
William Stein
Glasgow Caledonian University, UK
DOI: 10.1177/0952076707075897
William Henry, Cullen Centre for Risk and Governance, Glasgow Caledonian University,
70 Cowcaddens Road, Glasgow G4 0BA, UK. [email: W.Henry@gcal.ac.uk]
Margaret Crawford, Cullen Centre for Risk and Governance, Glasgow Caledonian University, 70
Cowcaddens Road, Glasgow G4 0BA, UK. [email: M.Crawford2@gcal.ac.uk ]
Melina Manochin, Finance, Accounting and Law Group, Aston Business School, Aston University,
Aston Triangle, Birmingham B4 7ET, UK. [email: M.M.Manochin@aston.ac.uk]
James McKendrick, Cullen Centre for Risk and Governance, Glasgow Caledonian University, 70
Cowcaddens Road, Glasgow G4 0BA, UK. [email: E.J.McKendrick@gcal.ac.uk]
Brenda Porter, School of Accounting and Commercial Law, Victoria University of Wellington,
PO Box 600, Wellington, New Zealand. [email: Brenda.Porter@vuw.ac.nz]
William Stein, Cullen Centre for Risk and Governance, Glasgow Caledonian University,
70 Cowcaddens Road, Glasgow G4 0BA, UK. [email: W.Stein@gcal.ac.uk]
303
Public Policy and Administration 22(3)
Abstract
During the last 15 years corporate governance has become increasingly
prominent in the public sector. The Audit Commission’s 1993 report on
probity in local government recommended the establishment of audit
committees. However, progress on this was slow, as demonstrated by a survey
of Scottish local authorities by the authors in 1998. Recent major changes in
government in Scotland at both a local and national level have prompted
councils to improve the accountability, openness and integrity of their
operations. One major aspect of this exercise was the formation of scrutiny
committees to provide objective scrutiny of the process and audit committees
were the most common vehicle for this. This article explores recent
developments in Scottish local government and their impact on audit
committees. The article also reports the results of a 2005 survey of Scottish
local authorities and compares these with the 1998 survey. This indicates a
significant growth in the number of audit committees in Scottish councils and
although the level of their perceived effectiveness is patchy, they are a more
important feature of local government than they were in 1998.
Keywords
audit committees, corporate governance, local authorities, scrutiny
Introduction
Over the past 25 years governments, both Conservative and Labour, have intro-
duced a series of policy initiatives in relation to local government based on a
neo-liberal, positivist ideology that abandoned traditional approaches to public
administration and replaced them with New Public Management (NPM) (Hood,
1991). NPM sought to tackle the perceived inadequacy of public official account-
ability (Kelly, 2003) and shifted accountability from being a line management
function to a regulatory process by independent bodies (McGarvey, 2001). This
form of regulation involves oversight of organizations by other public agencies
operating at arm’s length acting as a ‘form of steering or control system’ (Hood et
al., 2000: 284).
Hood et al. (1998) trace the growth of this regulation, particularly in local
authorities, under the Conservative government, but Hood et al. (2000), while
confirming the continuation of the trend in the early years of New Labour, note a
subsequent retreat from untrammelled growth of blanket hands-off regulation (in
theory at least) to a new approach of ‘enforced self-regulation’ whereby success-
ful organizations would be given greater operational freedom, with government
intervention being limited to failing organizations (see Cabinet Office, 1999).
Such a change indicates the recognition that continuing expansion of hands-off
regulation and micro-management of public services by central government is
impracticable and Martin (2004) argues that, in this situation, accountability can
be improved by a relationship that increases the possibility of dialogue between
councils and those to whom they are accountable, particularly locally.
Power (1994) identifies two models of control and accountability. Style A
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control is conducted by external agencies, operating at a distance in a low trust and
disciplinary environment and corresponds to the regulation model introduced by
NPM. One of the ways Style A accountability is administered is through the
public audit process and Kelly (2003) sets out the regulatory and steering function
of the Audit Commission in setting a framework for the public audit of local
authorities to improve councils’ accountability. Style B control, on the other hand,
is carried out by internal agencies using local methods and dialogue in a high trust
environment – the approach suggested for local government by Martin (2004).
During the last decade of the 20th century, the issue of corporate governance
became increasingly prominent in a public as well as a private sector context in the
UK. Since the Cadbury Report (Committee on the Financial Aspects of Corporate
Governance [CFACG], 1992), the presence of audit committees comprising non-
executive directors has been considered best practice for the governance of listed
companies in the private sector. An Audit Commission report (Audit Commission,
1993) recommended that all local authorities should establish independent audit
committees as a means of improving corporate governance. In addition, the
Chartered Institute of Public Finance and Accountancy (CIPFA, 1995) proposed
that boards of public service bodies should establish an audit committee, compris-
ing non-executive members, with responsibility for reviewing internal controls
and the external audit process.
However, not all stakeholders considered audit committees to be appropriate
to local authorities. It was noted that the distinction between executive and non-
executive directors that exists in the private sector does not apply in local authori-
ties. Concern was also expressed about the possibility of councillors lacking the
necessary business skills to adequately fulfil the role of audit committee members
(CIPFA, 1995). Additionally, it was observed that elected members of local
authorities are already involved in committees that review the activities of their
local authority. Establishing another committee to address governance concerns
was unlikely to be effective (Whiteoak, 1996). In 1996, the Audit Commission
noted that while, in 1995, 8 percent of English local authorities had independent
audit committees, its research suggested that in most authorities there was no
single committee fulfilling all the functions of an audit committee. The Com-
mission argued that a single committee should be established to give corporate
governance and control issues the priority they deserved (Audit Commission,
1996).
The advent of devolution in Scotland was seen as providing an opportunity for
major changes to the way in which government operated. The Scottish Executive
adopted the European Charter of Local Self-Government, with its principle of sub-
sidiarity requiring powers to be delegated to local communities as far as possible.
This created the opportunity for councils to stake their claim for the freedom and
authority to take decisions that they, with their local knowledge, considered most
appropriate for their local areas. However, in order to obtain decision-making
powers, local authorities needed to demonstrate their adherence to the principles
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of openness, accountability and integrity – the fundamental principles of corporate
governance (Audit Commission, 1996). There was thus arguably a greater incen-
tive for the development of Style B regulation in a Scottish local government
context. In fact, the applicability of the term ‘regulation’ as used by Hood et al.
(1998) to Scotland is questioned by Midwinter and McGarvey (2001), who sug-
gest that ‘performance management systems’ is a more appropriate term to
describe the oversight of Scottish public service delivery – an approach that
encourages dialogue (Midwinter and McGarvey, 2001: 846).
Audit committees have an important role to play in facilitating local account-
ability through dialogue by following up recommendations by external and
internal auditors to ensure that these are being implemented. Thus the arms-length
reports by independent auditors (Style A) can be supplemented by a three-way
discussion between elected members in the audit committee, council officials and
auditors (Style B), resulting in an action plan that meets auditor concerns, is appro-
priate to the local situation and which is monitored. In addition, the audit commit-
tee’s scrutiny role over governance and risk management systems can provide
councils and their electorates with independent assurance that resources are being
used properly and cost-effectively (McIntosh Commission, 1999).
This article reports a survey in 2005 that investigated audit committees in
Scottish local authorities and compares the results with data extracted from a
survey of audit committees in both public and private...
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