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Audit Commission

Volume 515: debated on Tuesday 7 September 2010

(Urgent Question): To ask the Secretary of State for Communities and Local Government if he will make a statement on his intention to abolish the Audit Commission.

On 13 August, I announced plans to disband the Audit Commission and to refocus audit on helping local people to hold councils and local public bodies to account for local spending decisions. Those changes will pass power down to people, replace bureaucratic accountability with democratic accountability and save the taxpayer £50 million a year.

Earlier that day, I spoke to the commission’s chairman, Michael O’Higgins, informing him of my decision. I also informed him that I intended to invite Lord Adebowale of Thornes and Bharat Shah to serve a second term as members of the commission. As we have announced today, I am pleased to confirm that they have agreed to continue to serve, with Bharat Shah as deputy chairman. As I have also announced today, further commissioners will be recruited to the board through open competition to bring in new private sector expertise, as the commission focuses on the changes that I have announced.

These changes mean that the commission’s responsibilities for overseeing and delivering local audits stop. Its research activities will end. Its in-house audit practice will be moved to the private sector, and we will consider a range of options for doing that. Councils will be free to appoint their own independent external auditors from a more competitive and open market. There will be new audit arrangements for local health bodies. All local audits will be regulated within a statutory framework, overseen by the National Audit Office and the profession.

With the ending of the inspection regime of comprehensive area assessment, many of the Audit Commission’s functions have disappeared. While its corporate centre may have lost its way, the well-respected in-house audit practice has consistently done a good job, and it is to protect the future and to increase competition in auditing that we seek to put it into the private sector. The Government are happy to see a mutual set up by existing staff. My intention is that those arrangements will be in place from 2012-13, which involves introducing legislation this Session.

We will now work closely with local government, the health sector, the commission, the accounting profession and other partners to complete the detailed design of the new arrangements, and to take forward, in the most effective way, the transfer of the commission’s in-house audit practice to the private sector.

I thank the Secretary of State for his response, but I am not sure that I am any clearer about the precise reasons for his decision. First, may I ask why it was necessary to announce this decision in the middle of the recess, rather than coming to the House and making a statement? There did not seem to be any particular time imperative. Will he place in the Library of the House all the detailed papers that he must have gone through showing how he came to his decision? Presumably it was not a rushed one, or a knee-jerk reaction.

As for the annual audit function, does the Secretary of State believe that the private sector has the capacity to carry it out at the same cost as the district audit service? If business is transferred to the private sector, will there be a return to the public purse? Value-for-money studies are not, as he tried to make out, some attempt to dictate to local authorities, but an important way of making comparisons between authorities, which are useful to the authorities and to the electorate in holding them to account. Who will undertake those studies in future? Finally, if the Secretary of State really believes in localism, why did he not consult local councils and the Local Government Association before announcing his decision?

I am grateful for the hon. Gentleman’s questions and, indeed, I look forward eagerly to meeting him and his Committee next Monday to go through this in a more discursive way.

Of course I think there is plenty of capacity to deal with this. After all, the Audit Commission is the fifth-largest accounting practice in the country. The hon. Gentleman will readily understand that the Audit Commission was thinking along identical lines, and had already begun to engage in discussions with some of the larger practices regarding a potential sale, long before I talked to the chairman.

Do I think that going to private practice will operate at the same level of audit fees as currently? The answer is no. I expect it to be a lot cheaper. After all, audit fees have doubled in the past 13 years. With regard to the value-for-money practices and services, in the past the Audit Commission performed a very useful function. When it started out, it was virtually alone in doing that, but now there are many organisations providing those services, not least the National Audit Office. We should not be duplicating such reports.

I welcome the announcement. One of the problems with the Audit Commission, as opposed to the National Audit Office, is that it did not have a dedicated Committee in this place to which it could report—namely, the Public Accounts Committee. Presumably, this will now change. Can my right hon. Friend reassure me that with regard to local government and other matters covered by the Audit Commission, such as what goes on in hospital wards, the value-for-money work can now be taken up by the National Audit Office through the Public Accounts Committee and reported to the House?

The short answer is yes, and I thank my hon. Friend for that contribution. The House should celebrate the rigour that the National Audit Office has brought to the study of value for money, the work that it has done to offer good practice, and its accountability to the House. What the coalition Government have done will increase accountability to the House.

I share with others the concern that the Minister felt he could make such an extremely important announcement in the middle of recess, without making it to the House. I understand that he wishes the National Audit Office to have a new role, but does he understand that the National Audit Office is not a Department of Government but is accountable to Parliament, and that it is staffed not by civil servants but by officers of the Crown? In that context, is he aware that he cannot instruct the National Audit Office to play any particular role in this instance? Will he undertake to have proper consultations—I do not think my Committee has even had a letter from him—both with the Public Accounts Commission and with my Committee before he makes any other proposals, to ensure that these proposals are workable and bring to proper public account the massive expenditure and many programmes from local government?

I am sure it was a slip of the tongue by the right hon. Lady when she said that she had received no communication from me. She was one of the first people to whom I wrote—

I am amazed at that. I will send the right hon. Lady a copy. I assure her that I was at great pains to write to her, and I spoke to her principal officer to ensure that she would be briefed on the matter, so I am very surprised at that and will seek to speak to her immediately after this urgent question.

I apologise to the hon. Member for Sheffield South East (Mr Betts) for not dealing with why the announcement had to be made during recess. The simple truth is that we needed to appoint a number of commissioners. Had I appointed a commissioner on a short-term basis, it would have been obvious what was happening and that would have led to all kinds of speculation. I appointed just a sufficient number of commissioners at the end of August to ensure that the commission would remain quorate and that we would have an opportunity of appointing some commissioners with experience of transferring such a valuable asset to the private sector.

As the Secretary of State knows, the Audit Commission appointed ConnectPR to lobby parliamentary candidates, MPs and Ministers in the last Parliament. What is his Department doing to end the scandal of Government agencies that are supposed to be independent using public money to lobby other arms of Government in that way?

I share my hon. Friend’s concerns about that. At a time when money and resources are short, it is clearly inappropriate for public bodies to use public money to lobby other public bodies. Indeed, my Department has issued instructions to all our bodies, including arm’s length bodies, to cancel all existing contracts with lobbyists, and we will shortly issue guidance to public bodies on the use of lobbyists.

Over the past 15 years, is it not true that the efficiency and effectiveness of local government improved significantly? By 2008, four out of five top-tier councils were rated in the top two performance categories. Councils were making £5.5 billion of efficiency savings in the current spending period, and the Commonwealth Fund recently judged the national health service to be the most efficient health care system among industrialised countries.

Is it not the case that the independent Audit Commission played a significant role in achieving those improvements? Why was the decision to abolish the commission taken in secrecy? It was not in the coalition agreement or in the published work plan of the right hon. Gentleman’s Department. Why did it have to be rushed out without consultation? Will the Secretary of State apologise for briefing that the commission was spending money on trips to the races, when he knew that it hired a meeting room on a non-race day? Why did he hide behind tabloid headlines that he knew were wrong?

When the noble Lord Heseltine set up the Audit Commission, he said that

“because local authorities appoint their own auditors, audit is not seen to be obviously independent of local government.”—[Official Report, 18 January 1982; Vol. 16, c. 53.]

Was not the noble Lord right? Are not the Government recreating between local councils and auditors the cosy, incestuous relationships that also failed Enron and, more recently, the banking system?

The Audit Commission was increasingly looking at whether local services as a whole were working together to provide quality and cost-effective services, and letting the public compare the value for money that taxpayers receive from area to area. Is it not true that the Secretary of State stopped that work because he wants to see unjustified variations in service quality and an unfair postcode lottery?

The Conservatives said at the election that the independent Audit Commission would judge whether changes to local government finance were fair. Has not the right hon. Gentleman now abolished that body so that he can make changes without any effective scrutiny?

The Audit Commission was not perfect. I too blocked the appointment of an unduly highly paid chief executive, but is the Secretary of State not destroying one of the tools for challenge and improvement? It was the Audit Commission to which I could turn to investigate the boomerang bosses who walk out with big pay-offs and go into new jobs. It was the Audit Commission that advised first me and then him on the action to be taken with Doncaster city council. The House might share my fears that this move will end up costing local taxpayers far more than it will save.

The right hon. Gentleman seems to have changed his tune slightly, because at the time of the announcement he said:

“I…warned the Audit Commission against excessive wage increases and their fate seemed to be sealed when they ignored this”.

The right hon. Gentleman refers to the use of Newmarket race course. I am not concerned that the Audit Commission spent £40,000 on pot plants, £8,000 on a conference at that race course or £4,600 on bagels. Nor am I worried that it spent £6,000 to celebrate its 25th anniversary at the Reform club, £3,000 on fine dining at Shepherd’s or £170,000 on role-playing and training for its staff. The commission might have made a number of mistakes and errors of judgment, but this measure is about saving the audit function.

The Audit Commission itself recognised that it was working on identical sets of proposals, because it recognised that the future of audit was in the private sector. John Seddon, a visiting professor at Cardiff university business school, recently described the commission as

“an instrument of the regime…The regime has fostered compliance rather than innovation, and compliance with wrong-headed ideas to boot.”

It was once a great organisation, and it did make a change to local government. However, local government has changed itself and it is time to move on. No doubt the right hon. Gentleman will spend some considerable time living on past glories, but the Audit Commission cannot do that. It is time to pass the baton to the National Audit Office for the supervision of the process, and it is massively important to ensure that audit remains rigorous.

I hold no brief for the present regime, but will the Secretary of State explain the mechanism under the new arrangements whereby local communities will be able to tell on an annual basis whether their council is good value for money? If an individual or company wants to bring a particular query to the attention of auditors and get a quick reply, will they be able to do that, so that there is relevance both politically and economically?

The hon. Gentleman has a long and distinguished record of supporting localism. What we are doing passes the power to local people. We will ensure that a rigorous auditor is appointed and that there is rotation of auditors so that no cosy relations are built up. Auditors will have a responsibility for public probity and if a member of the public is unhappy about how their council is operating and has reason to believe that what it is doing is financially inappropriate, they will be able to report that directly. In addition to that, we will ensure that the ombudsman’s powers are increased and made legally binding.

The Secretary of State has said that he expects the costs to the public purse to go down as a result of abolition. Will he undertake to publish each year the actual costs of the arrangements with the private sector? Will he also ensure that there is a method whereby constituents can see comparability across the audits conducted for each area?

I am delighted to tell the hon. Gentleman that I can do better than that. We will ensure that all local authorities—and, indeed, my Department—will publish every single item of expenditure over and above £500. Members of the public will have a very clear idea where their money is being spent. That is not in any way meant to replace the auditing function. The cost of the auditing function will be made available to the public. There will be no hiding place for the Government; £50 million a year—at a Conservative estimate, if you’ll pardon the pun—will be saved for the public.

I welcome this decision and, like councillors across the country, I suspect, I am looking forward to one of the benefits. We are all here to represent residents, and councils are there to serve them. Am I right in thinking that one of the key benefits for residents, thanks to this measure, is that councils will be able to move forward and make decisions based on what their residents want and need, rather than just ticking a box for the Audit Commission, which leads to unpopular decisions such as fortnightly waste collections?

My hon. Friend makes a valid point about fortnightly waste collections. He is not alone in this; he will be delighted to know that he is in the company of the former Mayor of London, Ken Livingstone, who has welcomed the abolition of the Audit Commission. He said:

“This is one Tory cut I support”.

I am sure that we are all with him on that—although it is, of course, a coalition cut, not a Tory cut.

My hon. Friend has mentioned a prime example of the Audit Commission being keen to please the Government rather than perform its functions. When the Government were clear that they wanted fortnightly collections, it went out of its way to push local authorities in that direction. My hon. Friend is right: this measure means more power to local people.

After the implementation of this decision, what will happen to the rigorous but usually free audit support that the Audit Commission gives to small parish councils?

Given that 30% of all audit functions in public bodies are now in the private sector, I suspect that it will make no difference.

I am very pleased to hear the Secretary of State’s announcement. I am also pleased to hear that these contracts will be rotated. However, one of the things we will all want to see is vigour in the process and expertise built up. What regulation or guidance will be issued on the length of contracts to ensure not only that a cosy arrangement does not grow up between auditors, but that expertise can be built up to speed up the process and reduce costs?

My hon. Friend is quite right to wish to ensure that there is a rigorous regime. He is also right to warn about the consequences of auditors remaining within a particular local authority for too long; it is always important to have a fresh eye. We will be looking to the National Audit Office and the professions to build up a very rigorous regime that will last and will pass the test of time.

The guarantee of probity is one of the central functions of the audit, and achieving that requires independence. One remembers very clearly the role of the Audit Commission in the political corruption at Westminster council, which revealed millions of pounds effectively being taken away from the public—the ratepayers—there.

May I draw to the House’s attention the remarkable coincidence that the day on which this announcement was made—13 August—was the same day that Sir Philip Green was appointed the Government’s efficiency tsar? Was there any connection between the two announcements? Can the Secretary of State give the House an assurance that Sir Philip Green, given his tax arrangements, will play no role whatsoever in guaranteeing probity in public expenditure?

I have known the hon. Gentleman for a long time, so I am genuinely sorry to do this to him, but may I politely remind him that the auditor in Westminster was a private sector auditor working for KPMG? It was not a district auditor—it was somebody in the private sector.

With regard to any outside organisations dealing with these matters, we are looking to the National Audit Office and the professions.

May I congratulate my right hon. Friend on doing this and on the speed with which he is carrying it out? I think it will be welcome right across the public sector. Does he agree that the problem with the Audit Commission has been one of function, structure and, I am afraid, on occasion, questionable leadership? Will he distinguish that from the excellent audit function that many who work at the coal face in the commission carry out and will presumably continue to carry out under different managerial structures?

I am very glad to make that distinction. There was an element within a part of the Audit Commission that was about press releases, sucking up to Government and being part of the latest fad. That never percolated to the audit function, which has always upheld a very high standard. While we will pursue all options, I certainly hope that the workers within the Audit Commission get the opportunity to be able to set up a co-operative. We are keen to see that it is not the bosses of the Audit Commission who benefit from this but the workers.

May I remind the Secretary of State that the auditor for Westminster was appointed and supported by the Audit Commission? What assurance can he give us that the rigour that was shown by that auditor will be repeated in future when auditors are appointed and chosen by local authorities themselves, inevitably leading to cosy relationships?

I note that the hon. Gentleman has conceded the point, although a little reluctantly and perhaps not with the greatest grace, that the auditor was a private sector auditor. That clearly demonstrates that the private sector can be trusted as auditors. The majority of those dealing with industry are private sector auditors, and that is the best guarantee of probity. We will ensure that the National Audit Office and the professions oversee this. There is a distinction, and it is this: we trust local authorities; Labour Members clearly do not.

Does the Secretary of State agree that under the previous Government, the Audit Commission became increasingly an agent of central control? The decision that he has rightly made sends a very important signal that this coalition Government have confidence in local government and in driving through a decentralisation agenda. That is why I welcome his decision—it is the beginning of a decentralisation path that I wholly support.

I am most grateful to my hon. Friend for his support, and he is quite right. That is one reason why I believe the Audit Commission, despite all its defects, recognised that the time had come to acknowledge that the fifth-largest auditing function in the country would be better, safer and regulated more safely in the private sector.