Auditing Practices in Local Governments: An International Comparison

Public sector audit has grown in importance since the 1980s across the world. In this chapter, the authors outline the state of the current debate about public sector audit – including the role of the auditor, the purpose of audit, developments in the content of audit and the function of audit. The authors argue that these can be conceptualised through the literature of regulatory space. Drawing on the work of Ferry and Ahrens (2021), the authors set out categories which can be used to compare the ways in which different systems of local government audit can be compared and provide the justification for the intellectual approach taken by the rest of the volume.

Accountability in the public sector has generally been discussed in light of public sector auditing and performance measurement. Performance audit or ‘value for money’ audit practice has been implemented at various government levels for assessing three key areas of performance – economy, efficiency and effectiveness. This practice has been significantly influenced by recent reforms in the public sector globally. Local governments or city councils play a significant role in providing community services at grass-root levels. How different actors are involved in auditing practices at the local level has attracted recent research interest world-wide. This chapter contributes to the global public sector accounting literature by presenting a critical overview of the development of local government auditing in Australia. It focusses on the role of the local government regulations and various stakeholders in audit scope, methodologies and practices with an illustration from the state of Victoria in Australia. The evidence presented will contribute to understanding international audit practices in local governments across the globe.

The local government auditing (LGA) landscape in Austria can be characterised as fragmented terrain, due to different regulations in the nine regions and a plethora of involved actors. The contours of the landscape have changed significantly during the past decades, with three major interrelated developments taking place: (1) administrative decentralisation led to an increase in the number of auditee organisations; (2) with the establishment of regional audit institutions (RAIs), new auditor organisations appeared as actors; and (3) auditing practices evolved, for example, with respect to an expansion of performance audits and the use of technology. In this chapter, the authors put a focus on RAIs that play a major role in LGA. The authors portray the historical roots of the LGA landscape and give a descriptive overview of the current structures and practices.

This chapter provides an overview of local government auditing in Brazil. The mandate of regional Courts of Accounts, which are public audit organisations, includes overseeing states and municipalities’ legal compliance and public policy performance, while the federal Supreme Audit Institution scrutinises fiscal transfers from the central to local governments. Each of the 32 regional Courts of Accounts is autonomous. However, all follow the Napoleonic audit model and are internally organised in three main functions: auditing (comprising investigation, fair hearing and adversarial phase, and accusation), prosecuting (comprising legal compliance analysis), and judgmental. Despite the comprehensive legal mandate and recent digitalisation efforts, Courts still focus on compliance audit. Due to their autonomy, the Courts lack central coordination, standardised audit techniques, and uniform procedural rules. Moreover, the Courts’ lack of independence and transparency may impair their capacity to promote democratic accountability.

Audit within China has developed since the 1980s in line with developments in Chinese society and political life more generally. The system of Chinese local government audit is deeply related to Chinese national audit. The Chinese National Audit Office sets the standards by which the systems work and each auditor both works for the national auditor and the appropriate tier of regional or local government. The system of audit is designed both to check the way in which the government operates financially and in some cases to examine the effective operation of the government.

English local government audit has gone through fundamental change in the last decade and this period of instability looks certain to continue. Since 2014, councils have been audited by private sector auditors appointed theoretically by the councils themselves (though an overwhelming majority of councils have delegated this responsibility). The scope of audit after 2014 reduced to focus mainly on top-down financial management, rather than value for money or inspection. After growing concerns about the scope and quality of audit however, in 2020, the government commissioned Sir Tony Redmond to review local audit arrangements in England. The Redmond review identified several problems with the reformed structure and made recommendations for change. Currently, the sector is uncertain about what changes will be adopted to solve the issues discovered by Redmond.

In France, local government external audit is controlled by external auditors called ‘chambres régionales des comptes’ (CRC – Regional Audit Office) which mimicry at the local level the audits conducted by the ‘Cour des comptes’ (CC – National Audit Office) at the national scale. These institutions conduct three kinds of control: legal controls of local public accounts, budgetary controls on behalf of prefects that are political representatives of the central government in the territory and audits of regularity and performance. An experimentation of accounts certification is ongoing. The main part of activities of regional audit institutions is dedicated to performance auditing. But this performance audit is limited to economy and efficiency as the article L. 211-8 of the Code of financial jurisdictions do not allow the CRC to discuss the goals of policies and programmes.

Auditing is a traditional function in the German system of local public finance. Its’ basic mission is to control local finances for accuracy, to avoid misuse of public resources and to support local councils. The priority of auditing is the annual financial statement and accounting, still. Performance is of limited relevance. Given the federal setting of 13 territorial states, the system is complex and fragmented. Another German peculiarity is a parallel structure of financial supervision executed by different public bodies having a particular focus on balanced budget and debt. Local auditing, generally, organises in a two-level structure. The lower level is part of the respective local government, the higher-level is part of the state administration. Beyond this basic setting, there are manifold structural options in place lacking transparency and a clear separation of duties. Private involvement in local auditing is very limited. Legislation guarantees independence of auditing with regard to personal independence, autonomy in auditing issues and methods. Local auditing faces several challenges, as local governments do. However, there is no sound discussion on reforms.

This chapter describes the audit of local government in Italy. In Italy, as elsewhere, local audit has been affected by the implementation of new public management based reforms. There is an increasing trend towards collaboration and cooperation between the audited authority and the auditor. Audit has begun, as in other jurisdictions to widen its remit, so that it focusses on performance as much as financial and compliance issues. This change in role brings with it opportunities for the auditor to help public sector improvement but also challenges – as new skills are required for the new roles that the auditor takes on and audit independence is complicated by the cooperative nature of modern local government audit.

In the Netherlands, the majority of financial and compliance audits of local government are conducted by private audit firms, while courts of audit are in charge of conducting performance audits. External auditors are appointed by the municipal council based on a tendering procedure, creating a dual system of responsibilities between the council and the Board of Mayor and Aldermen. The recent trend that several large audit firms have withdrawn from the municipal audit market and the strong need for public sector expertise because of the complexity and uniqueness of local government call for rethinking current auditing practices in this sector.

This chapter provides an overview of local government auditing in New Zealand by outlining the nature of local government, particularly the legislative requirements in respect to financial and service performance reporting and those for external audit. It also summarises the role and powers of the Controller and Auditor-General and their office in respect to local government audit in New Zealand.

The Portuguese local government is subject to several controls that have evolved substantially throughout the last decades. This chapter offers a summary of the current state of these controls, particularly focussing on municipalities. The political parties of the opposition who sit in the Executive Board monitor all decisions. The Assembly exerts supervision and political control. The central government supervises legal and financial activities through a finance inspection body. The Court of Audit has a technical and jurisdictional control. Finally, the external auditor gives an opinion on the true and fair view of the municipality’s accounts, comprising both budgetary and financial statements. Because public financial management still mainly focusses on the (inputs-based) budget, conformity auditing takes precedence over other types of control.

The Court of Auditors – Tribunal de Cuentas – is the Supreme Audit Institution (SAI) of Spain which, together with the Regional Audit Institutions (RAIs) of the Autonomous Communities – Órganos de Control Externo – carry out the institutional external audits in Spain. At internal level, the Intervención General de la Administración del Estado (IGAE) and the internal comptroller bodies of the Autonomous Communities and the Local Entities, carry out the internal audit on the three levels of the Spanish public sector, contracting in some cases private audit firms. So, the structure of the public audit in Spain is fragmented. With respect to the scope, although in theory the three types of audit are carried out on the public entities in Spain (legality compliance audits, accounting and finance audits and performance audits), in practice the last one is not enough implemented. There are room for improvements. Public audits in Spain include more and more actions for electronic administration environments.

Swedish local government audit has remained stable for a number of years. Political auditors are appointed to assess each local council’s work by the local council. They are assisted by professional auditors – however there is little standardisation of what audit means. The local council has considerable control over what the professional auditors do, setting out how they should be regulated, how they should be funded and what should happen in the aftermath of their reports. While the system has remained stable for a number of years, there are criticisms of how far the system advances local political accountability.

This chapter captures and summarises the public sector auditing practices of Swiss subnational and local governments. Following the federal structure of Switzerland and the constitutional principle of decentralisation, lower government levels independently self-elaborate their audit institutions and structures, which is why a large variety of public sector audit arrangements exists. Local government audit mainly varies between the subnational states/cantons regarding the allocation of the external audit function and the qualitative requirements underlying the constitution of the auditing bodies. Depending on the cantonal legislative framework, local government audit is performed by a body of direct-democratically elected lay-auditors, a professional audit firm, an own independent auditing office or in a shared arrangement involving multiple of these actors.

This chapter summarises the analysis of the preceding chapters. Whilst different countries use different models for their audit, some continuities do emerge. The audit explosion has led to the advance of both financial and performance audits. Inspection however remains an infrequent feature of the audit landscape. Many countries have a localised system of local audit in which the role and influence of audit is variable. Furthermore, the audit of local government lacks a clear democratic role at the moment.