The Audit Commission, the council watchdog, has held talks with banks and other potential sources of finance as it prepares to become an independent mutual.

Eric Pickles, communities secretary, announced last summer that the body, which provides audit services for local authorities, would be axed as part of the coalition’s “bonfire of the quangos”.

But Mr Pickles has encouraged it to pursue the option of mutualisation to compete as an independent body against private sector auditors, an option supported by most of its staff and management.

Since then, the body has restructured into a single national practice, cutting its senior management and support costs as it prepares to turn itself into an employee-owned business. About 500 staff have already been shed by the Audit Commission in the past 12 months.

Its management has developed a detailed financial model and business plan to become a standalone business, which would be the fifth largest accountancy partnership in the UK. It is also exploring a potential partnership with an existing private company to improve the group’s “commercial skills”.

The commission is being advised by the Baxi Partnership, a firm specialising in transfers to employee ownership. The process could start this year although it may not be completed until 2012 or 2013.

Details of the commission’s plans are set to emerge on Monday as Grant Shapps, minister for housing and local government, is questioned about its abolition by a committee of MPs.

The government is determined to wind up the Audit Commission by 2012, allowing councils to choose between private auditors or the mutualised commission to go through their books.

Michael O’Higgins, chairman of the organisation, said last week that dismantling it could take until 2014 or even – as a “possibility” – 2015. It would be feasible to transfer the main audit practice earlier, he told the BBC, but the process would take longer for other functions such as the “national fraud initiative” and health inspections.

That suggestion has prompted fury in the Department of Communities and Local Government, with one insider saying ministers would not be budged from their time frame for winding up the commission. “Their executives are on big salaries at the Audit Commission, which may explain why they are trying to delay this,” he said.

Mr Shapps said the commission was trying to deflect attention from “countless revelations” about inappropriate spending on “junkets” and “fine dining”.

“Instead of wasting time and taxpayers’ cash carrying out elaborate briefings to the media they should actually be getting on with their day jobs,” he said.

A report by the Lords’ economics affairs committee published last week backed the commission’s plan to turn its in-house audit division into a standalone entity.

With about 10 per cent of the audit market it could erode the domination of the Big Four auditors, increasing competition and choice, the report found. Conversely, if the commission was abolished entirely it could strengthen the “oligopoly”, said Lord MacGregor of Pulham Market, the committee chairman.

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