That the Grand Committee do report to the House that it has considered the Code of Audit Practice 2010 for Local Government Bodies.

Relevant Document: 7th Report from the Joint Committee on Statutory Instruments.

My Lords, the Audit Commission, in accordance with its obligations under the Audit Commission Act 1998, has prepared codes of audit practice to prescribe how auditors must carry out their statutory functions when auditing local government and local National Health Service bodies. The codes are to be used by the independent professional auditors that the Audit Commission appoints to audit local government and NHS bodies.

The commission, as previously, has prepared separate codes for local government and the NHS. This reflects the different accounting, corporate governance and performance management frameworks in the two sectors.

The codes prescribe the way in which the external auditors of local authorities and NHS bodies should discharge their statutory duties when auditing the accounts of those bodies. The codes must be approved by affirmative resolution by both Houses of Parliament every five years, and the end of the five-year period for the current codes is 9 March 2010. These draft codes have already been debated in another place.

In preparing the codes, the commission has worked closely with and consulted key stakeholders, including the representative associations of local government and health bodies, finance directors, the accountancy profession and their partner firms. The preparation of separate codes has facilitated the process of agreeing the NHS code with the Care Quality Commission. In line with the Audit Commission Act, the commission has obtained the agreement of the Care Quality Commission to the changes made in the NHS version of the code.

The codes are high-level documents that prescribe the way in which auditors of local government and of local NHS bodies carry out their audit functions. They omit material that simply summarises the requirements of professional auditing standards. Changes to the codes are minimal, reflecting legislative and technical changes since the current codes were approved, including the abolition of the audit of best-value performance plans for specified local government bodies and the replacement of the Healthcare Commission by the Care Quality Commission. Consultation on the draft codes has seen the proposed changes to the codes endorsed by stakeholders.

The codes set the scope of the audit and auditor’s objectives, and the general approach to be adopted by auditors in meeting their responsibilities. They also underline the need for auditors to preserve their independence and to ensure the security and confidentiality of data received or obtained in the course of the audit. In addition, they prescribe how auditors should carry out their statutory functions in respect of the audit of financial statements, the core of the audit process. They cover the auditor’s responsibilities to satisfy himself or herself that the audited body has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources—in other words, value for money.

The codes also cover reporting the results of the audit work to the audited body, including through the published annual audit letter and, where appropriate, how auditors should exercise their statutory reporting powers. Public reporting by auditors is a powerful way of holding public bodies to account.

Lastly, the local government code sets out how auditors should engage with local electors who choose to exercise their rights to ask questions about local authorities’ accounts.

The codes come into effect when they have been approved here and in another place and, once in place, will continue to provide assurance that public bodies will be subject to effective independent audit.

The codes are very important documents, being key elements of the accountability framework for local government and the National Health Service at a time when there is intense interest in spend by public bodies, where there is a drive to stretch every public pound and to cut waste. I beg to move.

My Lords, I thank the Minister for his comprehensive explanation of the two codes. I declare at the outset an interest as chairman of my parish. As my honourable friend Bob Neill said in another place yesterday, we on these Benches take no great issue with either of the codes, which have received only minor adjustments since Parliament last approved them in 2005.

I have three questions that I would like the Minister to address. As he explained, the changes to the code include the abolition of the audit of best-value performance plans for specified local government bodies. What is the rationale for this? Will the Minister set out why best-value performance plans need no longer be audited? Is this simply a red-tape cutting measure?

Secondly, I turn to the question of fees for having audits done. Local authorities are statutorily obliged to be audited, and the cost of compliance must be met from their funds; yet even the smallest authorities must stump up for an audit. If the turnover of a small body is anything up to £200,000 per annum, it will require a basic audit. There is concern that the cost of the audit may be out of all proportion to the sums that are being audited. I would appreciate it if the noble Lord would comment on the cost of these small audits, and say whether he believes that the auditing of those financial statements really adds value.

With this in mind, in recent years Governments in several parts of the world, notably Europe, have repeatedly raised the turnover threshold below which businesses and organisations can exempt themselves from statutory audits. In several member states the threshold is set at £6.5 million in turnover, or £3.9 million in gross balance-sheet total assets, which allows a significant swathe of businesses and organisations to exempt themselves from statutory audits.

My third point picks up on the theme of section 5 of the local government code, which gives electors the opportunity to scrutinise for themselves their local government grants. We welcome the measure as a step towards greater openness and transparency. However, perhaps the noble Lord will explain why that openness is not extended to the accounts of NHS bodies. I welcome the Minister's response.

My Lords, these codes are not controversial. I thank the Minister for explaining their purpose and the degree of consultation that has taken place. The principles of external audit require independent and robust examination, and the codes provide for that. My understanding is that the Local Government Association has no issues that it wants to raise in relation to the codes, and that the Care Quality Commission is satisfied with the code that relates to local NHS bodies. However, it is important that the codes are reviewed every five years.

I looked back at the discussion on these orders in 2005, when we broadly welcomed them. I noted the comments of my noble friend Lady Scott of Needham Market about the valuable work of the Audit Commission in acting as an external auditor. The principle must be that people should have confidence that local authorities and NHS bodies are properly subject to such auditing. These regulations enable the Audit Commission to do its work. We support the approach outlined in the codes.

My Lords, I declare my interest in this matter because I am a member of the board of the Audit Commission, which is responsible for approving the codes before they are submitted to the Secretary of State for laying before Parliament.

It is true to say that nearly all public comment about the work of the Audit Commission focuses on our high-profile national value-for-money reports on our inspection and assessment work—particularly the comprehensive area assessment or its predecessor, the comprehensive performance assessment or CPA. There is relatively little comment about the work of the commission’s appointed auditors. Yet, as the commission’s name implies, audit is its core business. It is easy to take the audit process for granted. It occurs mostly behind the scenes and is generally regarded as an unexciting, and some would say even boring, activity. Having spent two days with auditors in a local authority setting, I have sympathy with that idea.

However, audit in the public sector is an essential element in the process of accountability for public money and the proper conduct of public business. The fact that we in this country enjoy very high standards of financial probity and propriety across the public sector is in large part a result of the strength of the public audit regime.

These codes of audit practice are an important part of that regime. They prescribe how independent auditors appointed by the commission should meet their statutory and professional responsibilities. They underpin the statutory independence of auditors, which enables them to speak without fear or favour. The codes are deliberately pitched as high-level principles, and that is a good thing. They are principles-based documents rather than “how to” manuals. This enables the commission in the guidance and advice that it gives to auditors, and auditors themselves, to focus audit work on emerging risks. That is surely a matter of great importance these days. This ensures that our public audit regime can adapt and respond to developments in the operating environments of local government and NHS bodies.

The commission made some fundamental changes to the codes in 2000 and 2005, but this time it has decided to make only minor changes to reflect legislative change since the code was last approved and various tidying-up amendments. This approach has been welcomed by stakeholders. In summary, these are important documents underpinning an important, if unsung and often boring, activity, and I hope that the Committee will support them.

My Lords, I am grateful to the three noble Lords who have spoken in support of these codes of practice. The noble Lord, Lord Adebowale, spoke about the importance of audit. He is absolutely right; it is part of the accountability process for local government and the NHS. He rightly explained the history of these proposals and the fact that only minor changes have been made between the previous set and those before us this afternoon. The noble Lord, Lord Rennard, talked about the importance of independent audit in giving us confidence in local government and its expenditure of public funds. I very much support the noble Lord in that. Particularly at this time, when there will be pressure on public finances, it is important that people are assured that money is spent in best-value terms and is properly accounted for through audit processes.

The noble Earl, Lord Cathcart, raised three questions for me. In the first, he talked about section 5 of the local government code and asked why there was no equivalent for NHS bodies. The rights of electors of local government bodies reflect the fact that those bodies are funded by local taxation and date back to the mid-19th century. NHS bodies are of course funded by national taxation. The noble Earl may well point out that, given the range of support that comes from central to local government, perhaps there should be some qualification of that; but that is the history of why that process is in place. He asked about the abolition of reporting on best-value performance plans. This is about reducing the burden on local authorities and the Government legislated to remove the statutory requirement.

So far as small bodies are concerned, I should say first that the code of audit practice itself does not address any thresholds; it simply provides for the approach for small audits. The thresholds are set out in other legislation. At the moment, the requirement for the audit of small bodies is when there is a turnover of more than £1 million. That is specified in the regulations. Schedule 1 to the code specifies a proportionate approach to the conduct of the audit, but the commission is discussing with CLG raising the threshold for small bodies to align with small companies—the £6.5 million level. In terms of the importance of that on fees, the code continues to specify separate audit arrangements for smaller audited bodies such as parish and town councils, and the new, lighter-touch audit regime has established itself well. The new code maintains that. While the commission has reduced the burden of audit on small parish councils, it has done so recognising that there continues to be a need for appropriate and proportionate audit of bodies spending public money and potentially taking on new responsibilities. The limited assurance arrangements have significantly reduced audit costs for smaller bodies, and the number of complaints regarding audit arrangements for parish councils. The previous approach had become unsustainable and disproportionate.

I hope that dealt with each query that the noble Earl raised. If there are no further points, I will simply commend the codes to the House.