If there has been unauthorised and fraudulent expenditure at Shepway District Council, is our external auditor Grant Thornton able to investigate? Yes, but to investigate they will have to ask Shepway District Council for more money to carry out the investigation. Is this something Shepway District Council would do – pay to investigate themselves about any suspicion of wrongdoing regarding unauthorised or fraudulent expenditure?
The person who would be responsible for paying the money to enable any investigation is the s151 officer Tim Madden at Shepway District Council. Mr Madden is the person, who is reluctant to allow our public face to see more than five Purchase Orders. If you can’t match the Purchase Orders to their invoices, this could indicate unauthorised and/or fraudulent expenditure.
There has been pressure on all Council’s including Shepway District Council to reduce the amount they spent through financial ‘variations’ in the negotiated contract of auditors. Yet such financial variations are critical where there is a suspicion of financial impropriety, since the auditor needs to request additional financial resources from the Council to conduct an investigation. In the new climate, external auditors might consider that it is not worthwhile to investigate allegations of fraud, corruption or misconduct. One Auditor we spoke to said,
“As an external auditor, if you suspect that something is going amiss, normally you would negotiate a variation in the fee in order to be able to investigate it. But now your economic incentive is to turn a blind eye, as the incentive structures created under the new system don’t favour going the extra mile.”
Shepway District Council will be able to appoint their own external auditors, from 2017, the independence of its auditor may be compromised further. They may feel even less able to act without fear or favour, moderating their behaviour with a view to having their contract renewed and ensuring that their bill is paid. Auditors may also be deterred from undertaking additional investigations for fear that the extra costs incurred will be disputed or go unpaid.
Audit professionals we spoke to saw these as serious concerns. One commented,
“If you come down tough on a client, and you ruffle their feathers, prior to the changes in 2017, what will happen when it goes to open competition. Will they retain you?”
“external auditors now have nominal independence but they will probably feel pressure to keep their clients happy so as to avoid losing the contract, future contracts, or non-audit contracts with the local authority.”
The Audit Commission used to play an intangible role in offering institutional protection to external auditors, such as Grant Thornton, which empowered them to pursue investigations without fear of being sued or losing future contracts with local authorities. If auditors complied with the Audit Commission’s quality standards, they could carry out a piece of work confident that they would not get sued and confident that they were appointed by the Audit Commission, not the finance director of the local authority that they were investigating.
Several experts we spoke to took the view that, in the case of past corruption scandals, auditors had only been able to investigate because they were appointed by the Audit Commission, rather than the council itself, and benefited from the support provided by the Commission.
So what do you think? Would Shepway District Council pay to investigate itself if they knew there was financial impropriety happening in their building? We’ll leave you to decide that?