Joint Committee on The Draft Corruption Bill Written Evidence


APPENDIX 17

Memorandum from the Audit Commission (DCB 28)

INTRODUCTION

  1.  The Audit Commission welcomes the opportunity to contribute to the work of the Joint Committee on the draft Corruption Bill ("the Bill"). We consider that measures to rationalise the law in this area may assist the work both of audit regulators, such as the Audit Commission, and law enforcement agencies. Reinforcing the legal basis and potential sanctions against fraudulent and corrupt activity may help to bolster public confidence about corporate governance and public office. This is a constructive step forward while the corporate world and the accounting and auditing profession are recovering from the negative impact of several high profile private sector failures in recent years. However, in the public sector the accounting and auditing profession has enjoyed a more positive profile from its work on public interest issues.

ABOUT THE AUDIT COMMISSION

  2.  Established in 1983 the Audit Commission (the Commission) is an independent body with statutory responsibilities to regulate the audit of local government, health, criminal justice and housing services in England and Wales and to promote improvements in their economy, efficiency and effectiveness. The auditor's role as a safeguard against fraud and corruption has been and remains a key feature of public audit since the creation of the District Audit service over 150 years ago.

  3.  As an audit regulator, the Commission appoints auditors, specifies their audit work, provides them with technical support and monitors their performance through a rigorous quality control process. We do this through our Code of Audit Practice (the Code), which applies to all the external auditors we appoint and which is approved by Parliament. Once appointed, auditors discharge their statutory responsibilities independently of the Commission. All our appointed auditors are qualified accountants.

  4.  Under the Commission's Code, auditors have two specific and distinct responsibilities in relation to both fraud and corruption:

    —  auditing the accounts to provide, amongst other things, reasonable assurance that they are free from material misstatement whether caused by fraud or other irregularity or error; and

    —  to consider whether audited bodies have made adequate arrangements for proper standards of financial conduct and to prevent and detect fraud and corruption.

  5.  In reviewing the arrangements in place at audited bodies, our auditors have regard to requirements of statute (such as the Local Government Act 2000), ethical codes and generally accepted corporate governance arrangements. In carrying out their work, auditors will draw on what is commonly perceived to constitute "corruption".

  6.  We require auditors to complete an annual return for each audited body, which looks at many aspects of audited bodies' activity and performance, including the volumes and values of detected fraud and corruption. This is our main mechanism for identifying fraud and corruption in local government and the NHS. Very few cases of corruption have been reported to us. Since the 1995-96 year, the number of detected corruption cases has averaged 43 per annum, with annual losses averaging £262,000.

  7.  However, the risks and realities of fraud in the public sector are well documented. Since the 1995-96 year, the number of detected fraud cases reported to us has averaged 167,000, with annual losses averaging £91 million. Housing and council tax benefit fraud accounts for the majority of these losses. Our National Fraud Initiative data matching exercises in local government have consistently identified up to £50 million per annum of fraud and overpayment. The latest report on our National Fraud Initiative is enclosed.

RESPONSIBILITIES OF PUBLIC SECTOR ACCOUNTANTS AND LOCAL AUTHORITIES

  8.  We understand that the Committee would be especially interested in our views on how the new law will affect the responsibilities of public sector accountants and local authorities. We have noted that the Bill does not appear to impose specific duties on accountants or auditors and that it might not directly affect our audit work. However, the enhanced clarity on what constitutes corruption would be of benefit. In this context, our comments on the draft Bill are as follows, set out on an exception basis under the headings specified in the consultation:

Other options which could have been pursued

  9.  Audit work in relation to the arrangements for preventing and detecting fraud and corruption is a longstanding feature of our Code. We consider that fraud and corruption pose equal threats to the financial standing, probity and integrity of public bodies. These factors have a direct bearing on the public's confidence about the stewardship of their money.

  10.  We recognise that the draft Bill covers corruption exclusively and responds to Law Commission recommendations (LC Report 248, January 1998). However, from our discussions with the Law Commission we understand that their similar recommendations to modernise and rationalise the law surrounding fraud (LC Report 276, July 2002) have yet to be addressed. We are aware that the limited relevance of the current laws surrounding fraud and corruption have hindered prosecutions on alleged breaches in both areas.

  11.  We recommend that the draft Bill presents an opportunity to modernise the laws on both fraud and corruption together and that this opportunity should be taken. Modernisation of the law would provide an important statutory underpinning to our auditors' interests in counter fraud and corruption measures. It would assist local authorities (and health bodies) by clarifying the actions which constitute fraud and corruption and, in turn, facilitating better decision making as to whether or not to prosecute. While we welcome the draft Bill, we suggest that:

    —  the limitations in current laws, (cited by the Law Commission (LC Report 248 and 276) as being the age of the laws, the complexity of offences and the limited extent to which they are comprehensible) apply equally to fraud as to corruption and therefore should be addressed simultaneously; and that

    —  in view of the levels of fraud versus the levels of corruption reported to us, local government bodies (and health bodies), their auditors and the public may benefit most from rationalising fraud law.

Whether proposed definitions are workable and sufficient

The removal of the presumption of corruption

  12.  We consider that the effect of removing the presumption of corruption may be minimal. Recent statutory developments have imposed rigorous and specific criteria regarding the disclosure of member's (of a local authority) interests and the recording of hospitality. Similar statutory developments are expected regarding the conduct of employees (or officers) of local authorities.

  13.  For instance, the Local Authorities (Model Code of Conduct) (England) Order 2001 (SI 2001/3575), under the Local Government Act 2000, stipulates that ". . . a member [of a local authority] must not in his official capacity, or any other circumstance, use his position as a member improperly to confer on or secure for himself or any other person, an advantage or disadvantage . . .". The Act also stipulates that a member must disclose within 28 days of receipt any gift or hospitality over the value of £25. We understand that a Model Code of Conduct for employees is being developed through the Office of the Deputy Prime Minister (ODPM).

  14.  We consider that the criteria set out in the Model Code of Conduct indicate the threshold at which interests, gifts or hospitality become material and that this largely reflects the presumption of corruption unless proven otherwise. The extension of these criteria to employees, under the forthcoming Code of Conduct, should further reinforce this. We suggest that the impact of the draft Bill in omitting a presumption of corruption would be minimal in view of the exacting criteria under the Local Government Act.

  15.  It should be noted, however, that the timescale regarding the implementation of the employee Code of Conduct and its content have not been decided. The removal of a presumption of corruption may be significant in this respect, until the employee Code of Conduct is resolved.

Omission from the draft Bill of misuse of public office and trading in influence

  16.  We are aware that there has been much debate over the possible creation of a new offence of "misuse of public office". We would support moves to clarify the state of the present law: a number of recent prosecutions have highlighted the existence of common-law offences, the scope and components of which are at present unclear.

  17.  We remain unconvinced at present that there is behaviour, action or inaction which should constitute the commission of a criminal offence and which is not already covered either by existing offences or those proposed in the draft corruption legislation. We would therefore suggest that in local government the position should be reviewed once the work of the new Standards Board has had time to take effect. The outcome of that review would inform the debate over the potential new offence and assist in bringing it to a conclusion. We may also need to consider the implications of this for the health sector.

May 2003





 
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