With the Conservatives threatening to scrap the CAA if they form a Government, George Jones and John Stewart look at the Audit Commission's often-fraught relationship with ministers and Whitehall.

A book published last year, Follow the Money (London: Allen Lane, 2008) by Duncan Campbell-Smith, has been much neglected but it has considerable contemporary relevance. It is a study of the first twenty-five years of the Audit Commission. It received little attention in local government, because its 743 pages required wrists of steel to hold it, and many must have thought that, as a celebratory volume, it lavished too much praise on the Commission. But there is much to be learnt by those who probe beneath the surface, especially about the Audit Commission's relationship with central government.

 Initial independence

The book illustrates the tension between the independence of the commission and its increasing dependence on central government. The commission was established in 1983 to be independent of central government. It was even given powers, by Section 27 of the Act setting it up, to undertake studies of the impact of central government legislation, directives and guidance on the economy, efficiency and effectiveness of local government.

The first commission and its comptroller, John Banham, saw the independence of the commission as central to its role. Only if it were seen as independent of central government and not its agent would it gain the support and co-operation from local authorities. The commission made its declaration of independence in its Section 27 report on The impact on local authorities' economy, efficiency and effectiveness of the block grant distribution system (1984), showing that, while it could be critical of practices in local authorities, it was prepared to be as critical of central government, indeed calling, in a story The Times newspaper headlined ‘Watchdog bites owner', for a ‘complete reversal of policy'. The Government resented the criticism. 

A further tension was the belief in central government that the commission should focus on issues of management and administration in the implementation of policy, but not on policy itself, but the reality is they cannot be separated in the search for value for money.

The critical choice: Expansion or independence

While in its early years the commission and the comptroller saw the independence of the commission as of paramount importance, there came a change, not so much because there was an explicit retreat from that position but because other aspects of its strategy undermined its proclaimed independence. 

The commission faced a central-government policy of developing audit and inspection in other services related to, or paralleling, those in local government, including police, housing and health services. 

It sought to undertake these activities as a development of its role. In some cases its involvement was proposed by central government, and it was natural for the Audit Commission to respond positively.  Step by step its role expanded without consideration of the implications for its independence. To secure and sustain this extended role it needed the support of central government. In extending its role the commission became increasingly concerned with the sensitivities of central government, with consequences for its independence. In Follow the Money, all but one of index references to Section 27 reports occur in the first half of the book covering the early years (and there are no references to Section 34 of the Audit Commission Act 1998 that replaced it). The commission became more cautious in exercising its independence.

The best value saga

The tension between independence and the need to gain support from central government is reflected in the story of best value. Follow the Money shows that the way best value was introduced was typical of all that is wrong with central-local relations. Local authorities were prepared to welcome best value as a replacement of CCT, not anticipating an over-prescriptive approach. Senior staff in the commission saw that the success of best value was dependent on initiative by local authorities themselves. But by the end of 1997 this view had ‘been stood on its head' by the Government. 

‘Far from promoting a greater autonomy at ground level, best value was starting to be seen as a vehicle for greater direction from the centre. The notion of councils selecting just a few key targets for external inspectors had gone by the board. Labour wanted to see rigorous inspections of all best value reviews. It wanted to see every council having all of its services inspected every five years' (page 428). Hilary Armstrong, the then local government minister, wanted the commission to carry out these inspections.
The response of the Audit Commission was uncertain. Some felt the inspections could be integrated with audit. Others, including David Prince, the head of district audit, resisted this approach. Ms Armstrong wanted the commission ‘to take up the lead on Best Value... Armstrong made clear the agency role that she envisaged for the commission, in a forthright style that would have struck a jarring note in the 1980s: It would have ... an enhanced role in monitoring and targeting those authorities not prepared for the required cultural change' (page 430). 

Duncan Campbell-Smith says: ‘How exactly all this was to be done, she would leave to the commission's members... Armstrong and her colleagues essentially turned to the commission for a governance structure that, arguably, should have been designed from the outset in Whitehall' (pages 430-1).

The commission was given a choice between independence and a role as an agent of central government. There was protracted discussion by the commission. Helena Shovelton, a member of the Commission, posed the issue: ‘If you don't do best value, there won't be an Audit Commission. If we settle for just being an audit shop, we shall lose our NHS franchise. And while we focus on regularity, best value will go to the National Audit Office.

The next thing is that they will get VFM work. Then they will pick up probity audits as well. And that will be the end of the Audit Commission' (page 432). Extending the role of the commission was more important than its independence. The Audit Commission took on board best value as the Government's agent. It embarked on the attempt to make sense of the process.

During discussions with the Department over the scope of the new inspectoral regime the commission put forward three options, a substantial, a middle and a low-cost regime. After a meeting with Government officials the two commission officials were amazed that what the Government wanted was ‘twice the size of our big regime and at least three times the size of what we'd felt confident of agreeing'. 

Mr Campbell-Smith comments ‘New Labour ministers were presiding over the creation by officials of a hopelessly over-prescriptive regime that would simply be unworkable.' Ministers ‘seemed determined to spurn the advice of those urging a radical rethink, as the only alternative to a disastrous outcome' (page 437). 

The commission had to act in haste, not least to recruit hundreds of inspectors. Inevitably mistakes were made in rushed appointments.

The inspectors faced a hopeless task. 4,500 reviews had to be inspected. One newly-appointed regional director said: ‘By the time we turned up, best value was probably already irretrievable. It was just a shocking mess. People had done endless, minuscule reviews of small things – because that was what they had been asked to do.' Mr Campbell-Smith writes: ‘Given the mathematical impossibility of coping with so many reviews, the best value inspectorate had no choice but to be severely selective' (page 473). 

Yet the commission itself was committed as an agent to carry out the Government's policy. In the end, after bitter arguments among the senior staff in the commission and in the Department, it was recognised an alternative to best value was required. Best value was relaxed and later abandoned for all practical purposes.

The main lessons

What lessons can be learned? The Audit Commission had become an agent of central government. An independent commission would have reported on the problems best value would create in the form proposed by the Government rather than attempt to carry it out. Instead of providing that critique, it was overwhelmed by the task of making workable a process based on unrealistic requirements. Most serious of all, the commission had lost its independence, which was not recovered with CPAs, and now CAAs, which replaced best value. 

The commission is still an agent of central government, and while its present leadership seek to establish a new direction, something significant has been lost: its perceived independence. When a judgment is made by CPA or CAA, it is seen as the Government speaking, for the Government normally accept what the inspectors say as if they were its own staff. What the inspectors say is not infallible but rests upon a judgment based on what they assume to be best practice, and their views on best practice are likely to reflect Government's views and concerns. 

Much can be learned from the book about the lost independence of the Audit Commission and central-local relations. 

George Jones is emeritus professor of government at the LSE, and John Stewart is emeritus professor at INLOGOV