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Grand Committee

Volume 746: debated on Monday 17 June 2013

Grand Committee

Monday, 17 June 2013.

Local Audit and Accountability Bill [HL]

Committee (1st Day)

My Lords, I remind the Committee that, if there is a Division in the House, this Committee must adjourn immediately and resume after 10 minutes.

Clause 1 : Abolition of existing audit regime

Amendment 1

Moved by

1: Clause 1, page 2, line 2, at end insert—

“(6) Before this section is commenced, the Secretary of State shall, by regulations, put into effect arrangements which will enable capacity for a national procurement of external audit to be available if required.”

My Lords, at the start of our proceedings, for the record I should declare that I am a member of the Institute of Chartered Accountants in England and Wales, although I am not sure it is an interest.

In moving Amendment 1, I shall speak also to Amendment 13. Amendment 1 focuses on the desirability of retaining capacity for national or central procurement of auditor appointments in future, in addition to the arrangements for smaller authorities. The amendment requires the actual arrangements to be in place, but not necessarily activated before the Audit Commission is abolished. We have tabled a further amendment, which we can debate on Wednesday, which is a more enabling and flexible approach, adapting the proposition in the Bill for smaller authorities. As we are in Grand Committee, we will, obviously, not be voting on these amendments, but they give us the opportunity for a serious debate on one of the central issues arising from this Bill.

By the time the key provisions of this Bill come into force, it is to be expected that all of the audit contracts for principal local bodies will be undertaken by private sector firms under arrangements entered into with the Audit Commission. This will comprise some 800 principal authorities, including local authorities, NHS bodies, police authorities, national parks authorities, et cetera. Perhaps the Minister might arrange for us to have a comprehensive list at some stage. These arrangements run through and cover audits for periods to March 2017. The contracts—I believe that there are 10 of them—can be extended through to periods to March 2020 at the discretion of CLG, but decisions to extend would effectively have to be taken by the beginning of the year 2016-17 if an EU-compliant procurement process is to be undertaken. If these contracts are not extended under the Bill, the local public bodies would go their own way and make their separate appointments, although there is flexibility for authorities to jointly procure, together with other bodies.

It seems very clear that procuring centrally on this basis is driven by significant savings in audit fees; 40% is the quoted figure, which I understand is accepted by the Government. These benefits can be extended should contracts be extended. This is a very substantial saving to local government, in particular at a time when budgets are under the severest pressure and likely to remain so as a result of the spending review.

Noble Lords will have seen the outcome of some modelling undertaken by the Audit Commission for the LGA, which looked at six potential procurement options ranging from local choice to central procurement. It summarised the outcome in its briefing to us; indeed, that briefing showed that of the six choices, from local choice through to central procurement, the central procurement was clearly the least-cost option. The conclusion reached was that central procurement could save the public purse some £200 million over five years.

We should not overlook the fact that along with central procurement comes the management of the contracts and, in particular, the arrangements concerning auditors selling other services to their audit clients. Perhaps the Minister will tell us what safeguards will be in place when local appointments hold sway. How will it be assured that such practices will not impede independence requirements? We hear that appointment of local auditors is part of the localism agenda and that local bodies should be able to choose auditors who better suit their needs. However, this seems largely to overlook the fact that audit is, quite properly, a heavily regulated activity. Who can act, supervision of the firms, a code of audit practice and the accounting requirements are, and will continue to be, set nationally. Those matters are not, by and large, optional, nor should they be. What will happen to audit fees when there is local procurement depends on a number of factors and will be made more complicated by the fact that local procurement is invariably a few years distant.

We can see the Government’s perspective on this at paragraph 103 of the impact assessment. It states:

“While local bodies may not realise the whole of this saving”—

that is, the 40% achieved on outsourcing and central procurement—

“when they procure their auditors themselves, there should be plenty of scope to negotiate fees well below … the 2009/10 [levels]”.

That means that the Government think that audit fees will rise as a result of local procurement.

Clearly, much depends on how the audit market develops over the next few years. The outsourcing by the commission did not do much to widen participation levels in the local authority and health sectors. The outsourcing of the in-house commission practice went to only seven firms—most to the big four plus Grant Thornton. Research shows that market concentration in audit services leads to higher audit fees. There is a credible argument that individual procurement would act against market concentration but the major providers in the market are large, economically powerful entities with resources to invest to tackle new opportunities. One of the risks is that the larger authorities will fare well in this because they will be more attractive clients to the big firms. Smaller authorities will in practice have less choice, may be junior partners in joint appointments, or may miss out on the services of the larger firms or be unable to afford them.

The market will be affected by developments in the EU and, quite possibly, by the deliberations of the UK competition authorities to which the big four have been referred. Procurement could be more costly. Given that those principal bodies are likely to award contracts for five years, it is estimated that more than 90% of them will have to follow EU procurement rules, and EU thresholds will apply to the total value of the contract awarded. For audit work this is €130,000. Pricing will be affected by other factors, especially as the commission will no longer be providing cover for limitation of auditor liability.

The Government will doubtless say that authorities can group together, as indeed they can, but there is no clear framework to support this. Indeed, there is no explanation, for example, of what happens if there is joint provision but a conflict develops between one of the authorities and the firm involved.

It is clear that there is great uncertainty about how the local procurement plans will work out, and that is why it must make sense to retain the option to undertake central procurement should the Government’s assessment be unduly optimistic. We have not been prescriptive about how that capacity might be provided—there are clearly a number of options—but it would be imprudent not to keep the opportunity in reserve.

Amendment 13 is a very narrow amendment. Clause 4 sets out the general requirements for audit and yet refers to the accounts of a relevant authority and the imperative for them to be audited in accordance with the provisions of the Bill. The clause requires the auditor to have been appointed by the particular authority in question. However, if the auditor for the relevant authority has been appointed by the Audit Commission under a contract which may not expire until 2017 or even 2020, these provisions would not seem to apply. I wonder whether that is the intention. The new regulatory regime is due to commence, as I understand it, in 2015-16. What will be the situation if there is a joint appointment or a framework agreement is operated? How can that requirement be met? I beg to move.

My Lords, I first declare my interest. I am leader of Wigan Council and the chairman of the Greater Manchester Combined Authority—which I notice is covered in Schedule 2. I am also a vice-president of the LGA. I apologise to noble Lords for missing the Second Reading. Unfortunately it clashed with the annual meeting of my council. As I am the executive leader of the council and had to choose which meeting to go to, I think that I probably made the right choice.

I want to speak in support of my colleague Lord McKenzie of Luton and particularly to expand on what he rather dismissively described as his Amendment 13, which removes those three little words. What puzzles me is that the Government are—I believe rightly—encouraging a lot of joint working with local authorities to deliver lots of services, in many cases allowing joint appointments for senior officers, particularly for smaller authorities. As we know, in many cases it is a financial necessity to do this. As we have discovered in Greater Manchester, which is working on the community budgets pilot, joint working is essential if we are to deliver the Government’s agenda of reforming public services. We are working with 10 authorities in Greater Manchester. The three boroughs in London and so on are also good examples of places working very closely together. However, if joint work is going on, where is the audit taking place? The sensible thing would be to have a joint audit—to have someone who can audit all of the activity in a simple and straightforward way.

Given my noble friend’s knowledge of the accountancy profession he addressed the power of large audit firms and the way in which that might operate unfairly in the market. One way of reducing that power would be to allow local authorities to procure jointly. That would give them greater power in the market, enable them to get larger contracts and—one hopes, with the economies of scale—help them to get reductions in fees. I think that Amendment 13 is important and I hope the Minister responds to it.

My Lords, I also must declare that I am a member of the Institute of Chartered Accountants in England and Wales. I am also chairman of a local authority audit committee at the London Borough of Barnet, and am a councillor in that borough. I also thank the Local Government Association for its very informative description of the various options available. I have been quite nervous about centralising the acquisition of external auditors. I feel that the role of the internal audits tends not to be recognised by external auditors who, from my research, seem to do a lot of substantive work which in many ways shows that they are not relying on the work in internal audit that the local authorities are paying for. That is what is happening at the moment.

As much as I would like there to be local acquisition of external auditors, I am happy to go along with making this option available. I believe that the way that the centralised body performs will depend on how the local authorities react and whether they are getting a good deal. I also believe that the wording in the amendment is right. The danger of not permitting this centralised option is that local authorities, and the auditors themselves, will cherry pick the audits they want, and that the local authorities will cherry pick the auditors they want. That arrangement could be too cosy. This issue arises and has become imperative because of the ending of the Audit Commission. We are examining what can be done due to that change in circumstances. The comment about taking out only one or two words was absolutely right. Without removing the word “authority”, Amendment 1 will not carry the same weight. From our Benches I support both amendments in this group.

My Lords, I thank the noble Lord, Lord McKenzie, for introducing these two amendments which fire the opening shots on this aspect of the Bill. As he said, Amendment 1 would require the Secretary of State to make arrangements to enable the national procurement of external audit before the closure of the Audit Commission. The Bill currently requires local bodies to appoint their own auditor. The intention behind the amendment is clearly to create the potential for bodies to have their auditor appointed on their behalf by a national body, which effectively would be mandatory.

Amendment 13 would support such arrangements by allowing a body to have its accounts audited by an auditor appointed on its behalf. At present the Bill requires a body to have its accounts audited by an auditor appointed by the body itself. I hope that I have interpreted correctly the points in the amendments.

It is argued that local authorities and local bodies are best placed to put in place whatever arrangements suit them locally for their auditing. Many local authorities have already welcomed the opportunity to appoint their own auditor. For example, during pre-legislative scrutiny, the two local authorities that gave evidence to the committee both signalled that they were happy to appoint their own auditor, and the chief executive of a foundation trust said that appointing its own auditors had resulted in a 50% reduction in fees.

I am not unsympathetic to the intention behind these amendments—which I understand to be to secure the lowest audit fees for local bodies by encouraging large-scale collective procurement of audit. The Government recognise the benefits of bulk buying and the Bill already allows local bodies, if they wish, to come together to procure jointly. It does not say how many local authorities or local bodies there should be or limit them, but it allows them. It says that local bodies must be able to choose what arrangements suit them. We do not think that it is up to central government to dictate to local authorities how they should go about appointing their auditor, regardless of whether they do it singly or come together jointly. We believe that we should be careful that provision for national procurement—if that is the way it is going, and the LGA seems to hope that it is—does not limit local choice and that we do not recreate the Audit Commission in another guise. We are saying that the options must remain. Local authorities should have the option to join the national scheme if they wish to do so. If they do not so wish, they have the option to appoint their own auditors or to join up with an external authority.

It has been made clear that there is some appetite for developing this national procurement arrangement. If such arrangements for this national procurement maintained choice for local bodies—which is effectively what I have said—and allowed them to take part or appoint locally then we would be willing consider the scope for allowing it under the Bill. It would therefore be not mandatory but permissive. If we are to consider such a change, it is important that we have further details on how the proposed scheme will work and an assurance on the commitment to ensuring that such arrangements are effective.

The noble Lord, Lord McKenzie, raised the matter of the savings that have come from the current national scheme, which was created by the Audit Commission some time ago. Even though the £400 million savings may not be achievable under this, we still see very substantial savings coming from local procurement and, indeed, even from a limited central procurement.

As result of what I have said and what has been said I am happy to take this matter away for now, and not to come to any decisions or put my foot down very firmly, but we must talk more clearly to the Local Government Association and any other interested organisation to see what arrangements they may want to put in hand so that we can see if there is any room for the optional scheme in what they are proposing. I hope that we might be able to get that into place. I emphasise that we will not and cannot agree to a mandatory scheme.

The noble Lord, Lord Smith, agreed—I hope that I am right in saying this—that joint contracting works perfectly well in other fields of local government. There seems to be no reason why it should not work in this one. I understand that the way that it works may be affected by the size and number of people who join in, so we would also want to discuss how one estimates how many people would like to join such a scheme before it is implemented.

The noble Lord, Lord McKenzie, asked what safeguards there are around the provision of the non-audit work by the appointed auditor. The Financial Reporting Council’s ethical standards already require auditors to identify and address conflicts of interest associated with the acceptance of non-audit work. Auditor panels also have a role in adjusting non-auditor work under the accounting code of practice. Local authorities are required to disclose additional payments to the auditors.

The noble Lord, Lord Palmer, was interested in the independence of the auditor. We are clear that the auditors will be subject to the Financial Reporting Council’s standards. These require audit firms to have robust systems and processes in place for ensuring the objectivity and independence of audit and addressing any issues on the non-audit work. We are also putting in place robust protections around the appointment and removal of auditors, and local bodies will need to consider advice from an independent auditor panel or audit committee before making their appointment. We will not deal with that in today’s amendments but I am sure that we will discuss it later. Finally, the Bill specifies circumstances where a person may not act as a local auditor on grounds of lack of independence.

I hope that I have covered the points that have been raised. The noble Lord, Lord McKenzie, also mentioned the auditor fees. We realise that the savings may not be quite as great as they are currently but we expect them to be there. With those reassurances and the offer to have further discussions with the Local Government Association—discussions which I believe are ongoing—I hope that the noble Lord is willing to withdraw his amendment.

My Lords, I am most grateful to the Minister for that offer to take this away for further engagement, and for her response. It is a good place to start in our deliberations. I am also grateful to my noble friend Lord Smith for his support, and to the noble Lord, Lord Palmer. A key point for the Minister was that there must be an option for people to continue to choose locally if that is what they want. A better term in all of this might be “central procurement” rather than “national procurement”. We have another amendment coming up on Wednesday. If we had got it down in time we would have grouped it with this one. It provides a more flexible approach and will, I hope, add to the debate as well.

Just two points: the noble Baroness said that local authorities should be able to choose the arrangements which suit them locally. I just reflect that in the private sector, if companies are looking around for auditors to suit them, it can sometimes ring alarm bells, because it is not always a good sign. It is a bit like shopping for counsel’s opinion—you shop until you get the one that you want—although I do not think that that was the intention. I think that you can distinguish audit services from many other types of services because it is properly regulated nationally because it is an assurance regime—in the private sector, for shareholders; in the public sector, for the public. That distinguishes it from other services which local bodies may want to procure.

I revert to Amendment 13, because I am not sure that I made my point clearly enough on that. Clause 4(1) states:

“The accounts of a relevant authority for a financial year must be audited … in accordance with this Act, and … by an auditor appointed by that authority in accordance with this Act”.

My point was that there will be a period, will there not, where the auditor might have been appointed by the Audit Commission under the outsourcing and bulk contracts that were in place, once the new regulatory regime under the Bill is also in place? There may be transitional provisions which cover all that, but that was the point of challenging that wording. I do not know whether the noble Baroness wants to respond to that before I formally withdraw the amendment, but I give her the opportunity to do so.

Certainly on the first point, in what I said about local authorities doing what suits them, I was very clear that that is the choice of whether, if it is possible, they join a central scheme, or whether they appoint their auditors jointly or on their own. I was not referring to them popping around to decide who they were going to have. That raises an issue which I did not deal with, which is the question of the number of auditors and audit firms that could take up those jobs. At Second Reading, I said that, yes, we know that the four are there. When this was being considered, there were at least another three expressing an interest and we expected there to be more. We will come to the point about CIPFA and the requirements. Probably, and hopefully, other auditors who may be more local will be able to meet them.

The noble Lord asked what happens when the Audit Commission goes and the auditors and the contract are still there. The due point will come into force later. I think that we may come to that later.

I am again grateful to the noble Baroness. Perhaps she might reflect on that last point and we could deal with it by correspondence, because I am not sure that it has been dealt with.

It is right to say that the process of outsourcing by the commission has helped to diversify the market a bit but, frankly, not very much. We know the history with the big four: how dominant they can be and the resources that they can throw at opportunities which small or even quite substantial medium-sized firms cannot do. That is a debate for another day. Accordingly, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Debate on whether Clause 1 should stand part of the Bill.

My Lords, I have a lot of paperwork here and I will try to go through it without more repetition than necessary. Like most of us here, I think, I need to declare an interest, as I did on Second Reading. I spent six years on the Audit Commission. I emphasise that I am not seeking to save my old school or some historic regiment. I am seeking to secure an organisation which has a remarkable record of achievement in saving local government money and improving cost-effective working in local government and elsewhere.

I was astonished when I read the Bill because much of it seems to have very little relevance to the present situation that the country and indeed local government face. In my view, it is inevitable that over the years the Bill will do more harm than good. There has already been significant pre-emption of the Bill, which to some degree could be argued leaves us with a fait accompli. The Government have underwritten the pension scheme—I do not know whether that has been particularly well reported, nor do I think that there are any great anxieties about it, but it is a fact; were there to be a big change, the risk could be considerable—and the Audit Commission’s staff have been significantly reduced. They have almost gone; only 70 out of 2,000 are left. That has been done at a cost so far of £45.8 million, and that may well increase. The current running costs of the commission are £7.2 million, and that is to manage £86 million of local public audit market.

The Minister spoke as though the decentralisation of audit were an end in itself and that it would produce results that would make everyone happy and local people would be overjoyed. However, providing for audit is not all that the Audit Commission does. There are eight separate tasks, including the appointment of auditors, that the Audit Commission carries out over the course of the year. Those are important tasks whose loss will certainly reduce work on cost-effectiveness. The gaps are considerable, and I do not believe that those tasks will survive. Either they will be done by someone else, and it is not clear who that will be, or they will be lost, and that is a very serious thing to happen at a time of serious economy.

In my judgment, it is not a matter of fees. There is as much risk of higher fees as there is of lower fees, and I will come back to that again in the context of what could conceivably be done by other firms. It is surprising that the number of additional firms coming in that the Minister was able to quote is so small; it is tiny in relation to the totality of audit work that has to be done. Central appointment is opposed not only by me but by the Local Government Association, and now we have a plea for provision to be made if some local authority prefers to go through such an organisation. It is not clear to me that that could be sensibly carried out by anyone else but the Audit Commission, which has the experience.

As my noble friend Lord McKenzie has indicated, contracts are now out for pretty well every local authority. The first audits that local government will appoint will be for the period 2017-18, after the next election. These can be extended by three years, which takes us to 2020—two general elections ahead. As my noble friend has pointed out, local authorities not only have to negotiate a contract but, in many cases, will be caught by the European requirements for open contracts. At the moment only 168 of the principal bodies, 20%, have annual fees for 2013-14 above the commission’s value, which is a contract for the whole, not per annum. If you are on a five-year contract, it is five years and it adds up. The present threshold is £113,057. If there is a change, probably something like 93%, 769, will be above the threshold.

We are not proposing to transfer a simple task to local authorities. We are not going to just pick up the phone and say, “Hello, Harry, you’re an accountant: will you do our audit?”. It will be an important, time-consuming and not inexpensive task. What incentive is there for any significant number of accountancy firms to incur the costs and trouble of recruiting further auditors and training them when there will not be any work for them until 2020? It does not make any sense. There is no sense whatever in planning for something that will happen that many years ahead and when we have no idea what the economic climate may be. To extend the contracts which exist by three years is essential. I do not see the point in throwing away £130 million in that event when nothing else much will happen for all those years.

Yesterday, there was a letter in the Observer, signed by Sir Merrick Cockell, the chairman of the Local Government Association, his vice-chairmen, who include both a Lib-Dem and a Labour vice-chairman, and 146 others. It primarily was about the prospects of further cuts in local government expenditure. They say that by 2015 they will have incurred 33% cuts and can take any more only by removing particular services. To do something of this nature instead of applying the minds of the Audit Commission to seeing how this can be done in the way of cuts cost-effectively seems to me to be sheer folly.

The Commons Public Accounts Committee—I think it was last month—pointed to dozens of local authorities on the brink of financial collapse. The Bill will not help any of that and we really need to think again. This is in the context of an urgent need for local government to develop its financial management. A very different economic climate lies ahead. The position after 2015 will not mirror the second-half of the 20th century or the first two decades of this century. I sense that in this country there is a feeling that, when we are all clear of our overindebtedness, all will be well again. I do not think it is possible for that to happen. Therefore, there has to be a major change in many areas of endeavour. That perhaps is for another debate. What should not be in dispute is that local government, as well as central government, are not alone by any means to have to be able to do more with less in the face of the serious continuing growth of inescapable demands.

Financial management will be essential, and not just the financial management of officials, who will have to convince politicians that what they are recommending should happen. We have to look beyond these things for what will last and what will serve the position. That will have to be apart from professional financial management, which should become part of the Audit Commission’s fresh mission; namely, it should ensure that this happens.

I find it difficult to understand why local authorities say that they would have fewer studies. That seems to be perfectly reasonable to suggest. They want a number—I think it is six—but I would not want to see anything like that locked into a Bill. We must not overlook what the Audit Commission has done since 1996. In its value-for-money studies it identified just over £1 billion of fraud and error. Who is going to do that? The Government have not told us who is going to do that. That is big money.

I have looked at three studies. In 2010 it found £1 billion of savings in the police services; £400 million in the buying of equipment and services—this is an important point for governments departments working together under whatever rules exist; and £200 million in the Fire Service without compromising safety. I have notes on two other studies which together could have saved more than £400 million over the course of 2008-12. If we have not got the Audit Commission, I do not know who will find these savings and act with this in the forefront of their minds. I strongly believe that the Bill clearly endangers all this. In no way will locally appointed and locally accountable auditors be able to provide it.

Local auditors will not be able to do it. They will need to have regard to common standards, local variations, triangular evidence and to identify inconsistencies. I could go on. It is nonsense to proceed and toss all this away. I am not clear what it is for. The only thing that jumps out of the Bill is that it wants to give local authorities the freedom to do what they wish. I can find nothing in the Bill which says, “We are going to have better local government and better decisions than we had before”. The greatest service this House can give, in my view, is to tell local authorities that we will add to, not subtract from, the Audit Commission’s capacity to assist in financial management.

I will leave it there. I do not see any benefits whatever for proceeding with this Bill. Clause 1 is at its heart and without it most of the Bill would fall.

My Lords, I declare my vice-presidency of the Local Government Association.

I have listened very carefully to what the noble Lord, Lord Christopher, has said and I share some of his concerns about risk. These will have to be addressed in the passage of the Bill and afterwards. However, I am fully behind the broad approach that the Government have taken. It is the right decision to abolish the Audit Commission, and there are a number of reasons why I believe that.

I was a board member of One North East, the RDA, and a member of its audit committee for a number of years. I could never understand why my council was being audited by the Audit Commission ultimately and why the development agency, a government department, was audited by the National Audit Office. I always felt that there was scope for savings to be made in the way that audit was managed.

There is inevitably risk in any change but, if asked the question, “Do I think there is a need for two nationally based auditors auditing the public sector?”, the answer is no, you can do with one. However, there has to be a number of provisions to ensure that the independence of audit and the functions undertaken by the Audit Commission are protected as far as is needed.

When the Audit Commission was set up, I was very positive. I said at Second Reading that it did good work in financial audit and carried out good value-for-money studies. I said that it suffered from mission creep and a target-based, tick-box culture, in which it set both its own programme of work and its own fees base. I could never understand why it was that they were allowed to do this. I am therefore quite attracted by the idea of having an independent local audit committee which is actually charged with overseeing some of these matters.

As I also said on Second Reading, I have had a concern that the Audit Commission was extremely good at identifying problems but not quite so good at explaining to local authorities what the solutions to those ought to be or what actions they should undertake to deliver solutions. I gave as an example health inequalities, but there could be others.

If the Audit Commission is abolished, how do we ensure that the independence from a public-interest point of view is maintained? I want to address the second part of my contribution on this amendment to the public interest as opposed to the interest directly of councils, of government or of anybody else. What is it that the general public would expect? The first thing is that there has to be a clear role for the National Audit Office. There will be up to six thematic reviews a year. That seems to me to be about right; if others are needed, the rules can undoubtedly be changed. It is important, in the context of local auditing, that value-for-money studies continue, and important that councils learn from each other. However, I am not sure that you need an audit commission to do that. That there should be a clear role for the National Audit Office in overseeing and underpinning the audit function across local authorities seems to me to be well set out in the Bill.

However, there is another risk, which the noble Lord, Lord Christopher, is quite right to have pointed out, and that is the risk that the Audit Commission was perceived to be an independent body which could stand apart from local authorities. That is a vital principle that needs to be maintained. The public interest needs audit to be an independent activity, and independent in each local authority, from any kind of party-political control. I happily support the Government’s view that there should be a majority of independent members and an independent chair. I am motivated in saying that by the fact that I do not believe that any audit committee should be controlled by the majority party in a council. Single-party control is what we simply must avoid. I want to see a competitive system for the appointment of auditors. Allowing all the business to go to the big four audit companies plus one or two other slightly smaller ones seems unhelpful in terms of competition and in driving down costs in the long term. Therefore, encouraging regionally based and locally based audit companies to tender for work seems the right thing to do.

Underpinning all this—that function of independence —a local audit committee needs to be seen by the general public to be independent of the offices and the councillors of that local authority and most certainly not under party-political control. I also think that you need an audit committee that is independent enough to ensure that there is a regular change of auditor as well and that it is not something that is simply voted through. It should not be that, after five years, you simply repeat the arrangements so that the same auditor carries on with effectively the same people and the same approach that was undertaken in the previous five years. I would want to encourage increasing competition and regular change of auditors.

Overall, however, I believe that the concerns of the noble Lord, Lord Christopher, can be addressed by the National Audit Office and the localisation of the independence of the audit structure. With those two things, I believe that the objectives that have been set can be delivered.

I certainly have a great deal of sympathy with the opposition to Clause 1 standing part expressed by my noble friend. As he himself conceded at the beginning, however, it is probably too late for that course to be taken. The Audit Commission is in an analogous condition to the famous parrot in the Monty Python sketch: it is in fact, to all intents and purposes, now an ex-commission. That is something, in my view, to be lamented, for many of the reasons that the noble Lord gave.

It is interesting to read the evidence given to the ad hoc Draft Local Audit Bill Committee, which considered these matters in great detail. My attention was particularly caught by the answer to a question raised by a Liberal Democrat MP, Mr Ian Swales, who is the MP for Redcar for the time being. He asked witnesses:

“Are you satisfied that, in this public interest area and so on, your organisations”—

three firms of accountants were represented—

“will have the mechanisms to do the kind of commentary and assessment that the Audit Commission is doing now?”.

The reply was given by Sarah Howard, who is a partner in the firm of Grant Thornton, which is not quite one of the big four firms, but nearly. She said:

“That is a really important point. Fragmentation and co-ordination are themes that have come through the various evidence sessions. How can we ensure that in the draft Bill? There does appear to be a gap there; that is a risk. One of the benefits of some form of national or regional procurement body is that it could fulfil some of those other functions and help address some of the other risks”.

That was interesting.

What was even more compelling was the evidence given by the noble Lord, Lord Heseltine, who, of course, created the Audit Commission in the first place. I am going to quote a number of his observations. He was asked by the chair of the committee, my right honourable friend Margaret Hodge:

“What are the key aspects that you will be looking at to ensure that the rationale for its creation, which probably has not changed, is maintained in the new arrangements?”—

that is to say, the creation of the Audit Commission. He replied succinctly:

“Independence of appointment to a central body, probity and value for money”.

Asked to comment on the feeling that it would be rather difficult to see how he will ensure the proper comparison across authorities and therefore be able to start getting a handle on value for money, he replied:

“I think your question answers itself. You have got to have a system that systemises the process of comparing value for money and like-for-like services. This is not the private sector, there is a vast range of different and complex services. There is no common means of evaluation and if you want to make comparisons authority by authority, you have to prescribe the information that you want to collect, and that can only be done centrally”.

The question was put:

“So in your view, the Audit Commission has not necessarily outlived its effectiveness?”

He answered:

“I have not seen any argument to suggest it has”.

He was asked again:

“Are you saying, essentially, that independence is necessarily compromised in cases where councils appoint their own auditors?”

He said:

“There is a pressure to get reappointed, and the language cannot avoid the word ‘compliance’. You do not want to get a reputation for being difficult”.

This is a matter to which I would like to return later as we discuss the Bill—the requirement that on a review of audit arrangements, after every five years it should not be possible to reappoint the existing auditor. I think that is consistent with the approach of the noble Lord, Lord Heseltine. However, he went on to say, and to foreshadow in a sense, the words of my noble friend:

“The work that the Audit Commission did in value-for-money studies created massive economies, and benefits therefore, simply by turning a spotlight on what you could achieve in a well-run authority. It has elevated the practice of the best to a standard that others could copy”.

That was a fairly persuasive argument.

However, other matters also arose in the course of his session. One of which is a matter that I have touched on in the Second Reading debate. The chair asked:

“Finally, the Department of Health has so far not put forward proposals as to how it is going to ensure accountability and allow us to follow the taxpayers’ pound in this new landscape”.

He was asked whether he had any thoughts about that. He said he did not know quite what was happening, but when asked whether it would be satisfactory, he said:

“As you describe it, of course not, but the way you describe it may not be the way the Government would describe it”.

It would be interesting to know how the Government would describe it. It seems to me that as with policing, health would be outside the remit of the new arrangements. There would be separate audit arrangements that would not be across sectoral reporting on value for money, which one might have expected.

As my noble friend has pointed out, there have been substantial savings generated by the Audit Commission from its value-for-money studies covering health and local government in particular. Indeed, the noble Lord, Lord Heseltine, having referred to those said:

“It would be interesting to know what the Audit Commission thought they had saved on their value-for-money services over an equivalent period”.

That is to say, the period in which the Government calculate £160 million will be saved, which will, in fact, be several years. My noble friend has already quoted a figure many times more than the amount that the present commission has identified.

At Second Reading, I voiced concern about the split, which is now to be institutionalised, between health and local government at the very time when the Care Bill is intended to bring considerable necessary integration in that key area of public social policy. It cannot make sense for that to happen between the two sectors. Even within the health sector, there are to be not two sets of auditors, as the noble Lord, Lord Shipley, said, but several, because clinical commissioning groups—there may be more than one in a given area—will have their own auditors. In addition, trusts will have their own auditors. In addition to that, somebody—presumably, the National Audit Office—will be auditing the National Commissioning Board, which has direct responsibility for, among other things, the commissioning of primary care and other elements of health provision. So there will be a range of auditors in the field of health when you would have thought that they should be brought together.

It is not only in the field of health that there is a need to look across different sectors. In local economies and arrangements for city deals, for example, or combined authorities, you could have a series of auditors reporting locally instead of having that overview. That is without mentioning community budgets, the new name for Total Place, where you should be looking at the pooling of public spending in an area across a range of national and local government services. How is that to be catered for? How are they to be evaluated? It is not simply a question of seeing that money is properly spent in terms of propriety; it is a question of effectiveness. After all, that is precisely the point that the move, slow though it may be, towards getting that cross-sectoral investment and pruning of budgets to achieve commonly agreed ends between a range of different partners. How is that to be evaluated in the new landscape?

I do not sense that the National Audit Office will have the resources to conduct all that alongside its manifold other obligations on mainline government expenditure. I understand that it is possible for the National Audit Office effectively to ask for more money through its parent body. I believe that there is a committee chaired by Sir Edward Leigh in the House of Commons which oversees that process. I am told that if it says that it needs more money, it will get it. That may be the case. It would be perhaps the only case in government where that would apply, and it would be welcome. One wonders whether in fact that outcome would be achieved.

There are very serious questions about whether the new arrangements will achieve what ought to be achieved in terms of a comprehensive overview of what is happening, of illustrating what can be achieved and what authorities and other partners—I repeat that the police and health are among others—should be doing to avoid cost-shunting to share benefits and, for that matter, basic overheads, back-office services and the like and, in particular, to achieve agreed outcomes for a given area. I do not see how that will be delivered under these arrangements. I think that it will be more difficult to deliver, as my noble friend has rightly pointed out. If there were a half chance of my noble friend’s Motion being delivered, I should be very much inclined to vote for it, but I fear that that is unlikely. Of course, it cannot happen in this Committee in any event, but it is unlikely to happen in the House when we reach Report. However, the issues will not go away. The danger is that we will see a decline in the sharing of information and the promotion of good practice across the board, which has been one of the more signal achievements of the commission.

Having said that, I share some of the reservations expressed by others. I shared them when I was in a position to do so as chairman of the Local Government Association. By the way, I should declare my interest as a vice-president of the association, as a serving member of Newcastle City Council and as a member of its independently chaired audit committee.

However, for all those reservations, the commission has in general done a good job and it is unfortunate that it is already falling off the perch and will shortly be interred without an adequate replacement having been devised.

My Lords, my noble friend Lord Christopher’s opposition to this clause standing part was delivered in a very knowledgeable and passionate way and with some understandable logic underpinning it. However, the Audit Commission would maintain that it has already been significantly changed from its prior status. Its in-house audit practice has been privatised and the commission’s routine inspection and annual inspection of local government has ceased, as has its work on comprehensive area assessment. It has already incurred significant redundancy costs, partly funded by CLG, and offices have been closed with early termination costs incurred. The NAO is already picking up the task of value-for-money studies.

The Audit Commission of today is not the same as the Audit Commission of three years ago, and we have heard from my noble friends Lord Christopher and Lord Beecham about some of the splendid and effective work that it used to do. It would be difficult to put it back together again in anything like its original form. To that extent, the Bill has been rather pre-empted. The challenge for us in considering the Bill before we sign it off is to scrutinise the proposed new framework to evaluate whether its proposals are fit for purpose, can deliver an effective regime and build on what was good about the Audit Commission, and some of our amendments seek to do this. That process of scrutiny should particularly pursue the line just outlined by my noble friend Lord Beecham to see how joined-up we can be in an era when we are at risk of fragmenting arrangements.

My noble friend Lord Christopher is right that a significant part of the commission’s work has been the commissioning and provision of local audit services. As he said, the need for further commissioning generally, other than dealing with changes in the existing contracts, will not arise until 2017. My noble friend made a very telling point: if the contracts are extended until 2020, what is the incentive for those audit firms that do not have contracts at the moment to invest in something that may not come to pass until seven years hence?

In a subsequent amendment, we explore what is involved in the ongoing management of these audit contracts. This raises the question of why the commission could not be retained at least to see these through to finalisation. Part of our task in scrutinising the Bill is to understand whether the regulation of local audit and the respective roles of the Financial Reporting Council, the professional accounting bodies and the NAO are fit for purpose. The Government may pray in aid the savings that have accrued from the closing of the Audit Commission, but the reality is that those savings have been measured against the 2009-10 baseline. As the Audit Commission has pointed out to the CLG, those savings had already been secured, and the annual costs under the future regime broadly equate to the annual costs of the commission in its current form. This is without taking account of the added ease with which it could facilitate the future central procurement of audit contracts. We are aware that the commission has submitted details to this effect to CLG, particularly in a letter dated 23 May 2013. Perhaps we can understand from the Minister how the department proposes to respond to that.

My noble friend’s Motion invites us to consider keeping the Audit Commission in its slimmed-down form, at least until the end date of the current centrally procured contracts. What work have the Government undertaken to specifically examine the option of the Audit Commission continuing until 2017, rather than designating another entity to manage those audit contracts? What assessment has been undertaken?

It is noted that there will be no central body for grant certification relating to grants and subsidies from government departments. The Government say that this will be undertaken through tripartite arrangements and other forms of certification. Will the Minister expand a little on precisely what is envisaged in that regard? Reference is made to the wind-down of certification for housing benefit, but of course housing benefit will run for some time after 2015, for no other reason than the delays in the introduction of universal credit, which will not come fully into being until 2017 or 2018. So precisely what will happen to housing benefit certification after 2015?

The problem is that we are where we are with the Audit Commission. Had we been able to have this debate two years ago, we could have prevented what has happened to that organisation. Our task now is to make sure that what is in the Bill to pick up the fragments from the Audit Commission is made fit for purpose.

My Lords, the debate initiated by the noble Lord, Lord Christopher, has, in many respects, touched on future amendments that are coming up for further discussion. I appreciate that what he is trying to do is to see whether he can reverse what is being done. However, the noble Lords, Lord Beecham and Lord McKenzie, have recognised that we are very far down the line now and that it is not possible, nor do the Government want, to reinvent the Audit Commission and the existing audit regime.

The Government believe that the Audit Commission presided over a regime that was unnecessarily centrist and bureaucratic. As the noble Lord, Lord Shipley, pointed out, it indulged in mission creep during its existence. It consequently had little incentive to reduce its costs. Its overall approach encouraged relevant authorities to focus more on the views of the Audit Commission and less on those of local people. The noble Lord, Lord Beecham, pointed out that substantial savings have already been achieved by lifting the burden of top-down regulation from local bodies. The savings were achieved, too, by putting the audit operation into the private sector. We want to make these savings secure and ensure that a central government body cannot again grow to dominate local government, and so the Audit Commission will cease to exist.

I shall briefly go through some of what the clause deals with. Clause 1 repeals the Audit Commission Act 1998, under which the commission currently operates, and it introduces Schedule 1, which makes provision for such matters as the transfer of property, the preparation of final accounts and various consequential repeals and revocations. There are amendments tabled on all those matters, which I think that we will come to quite soon. The clause lays the foundations for a new localist audit regime that hands powers and responsibilities to local bodies. Other parts of the Bill make arrangements for a robust framework that maintains a high quality of audit and transfers necessary functions to other suitably qualified and well respected institutions, such as the National Audit Office and the Financial Reporting Council.

Local bodies are capable of appointing their own auditors, as charities, companies and foundation trusts already do, and, by and large, they have welcomed the opportunity to do so. Putting local bodies in charge of procuring their own auditors will create greater transparency as they will have greater control over how much they pay for their audit services. They will not have to fund the Audit Commission’s overheads and pay for its other activities and, as a result, there will be greater incentives to keep costs down.

We have made good use of the time since the Government first announced their intention to abolish the Audit Commission in August 2010. We began our reforms to the local audit and inspection framework by ending comprehensive area assessment, freeing local authorities from £25 million in compliance costs. I am not sure that anybody was very troubled by the loss of the comprehensive area assessment.In addition, the decision to outsource the Audit Commission’s in-house audit practice has saved local bodies 40% in their audit fees. We touched on this in my reply to the last amendment. We have developed the proposals in the Bill with key partners and have consulted extensively; there has been proper consultation on this matter.

Schedule 1 to the Bill makes further provisions in relation to the abolition of the Audit Commission. Part 1 sets out the arrangements and, in particular, provides for the Secretary of State to make one or more schemes to transfer the Audit Commission’s property rights and liabilities. We are working closely with partners to assess the options for where the existing audit contracts will transfer after the Audit Commission closes. We will set out details of the arrangements to transfer management of the audit contracts in the transfer scheme outlined in Schedule 1.

Paragraph 1(1) enables the Secretary of State to make one or more schemes to transfer the property rights and liabilities to a person or persons specified in the scheme. Sub-paragraph (2) sets out the items that may be transferred under such a scheme. Sub-paragraph (3) states that such a scheme or schemes may make consequential, supplementary, incidental or transitional provisions.

Paragraph 2 allows for the number of Audit Commission board members to be reduced. Upon closure of the Audit Commission, the Secretary of State must prepare a final statement of accounts for the last financial year of the commission. The Secretary of State must also prepare a final annual report for winding up. Finally, paragraph 5 provides for the Secretary of State to make payments in respect of the Audit Commission pension scheme.

The noble Lord, Lord Christopher, raised the question of the pension scheme. This has been underwritten by the Government and is in pretty good shape. It is 104% fully funded at the moment. There is a clear understanding that should some disaster overtake it in future, the Government will pick up the bill; one way or another, the pension scheme is well accounted for.

Closing down the commission is part of an overall programme of reform that will save the public over £1.2 billion over 10 years. We are able to do that because of the reduction of the commission. Retaining the commission would leave open the possibility that it could build itself back up again to the size that it reached in 2009-10. That is when the Audit Commission ceased to be operable in its current form, which was another point raised.

The noble Lords, Lord Christopher and Lord Beecham, asked what will happen with the demise of the commission leaving no single body to take responsibility for supervising and co-ordinating local audit. The local auditors who will undertake the audits within a national framework will be overseen by the Financial Reporting Council and professional accountancy bodies and accorded the code of audit practice and guidance to be developed by the National Audit Office. So they will be regulated and controlled. Also government departments are, through the accounting officer, accountable to Parliament for the money voted to their departments. Where this money is distributed to others, as it will be under the grant system, it will need to be demonstrated that appropriate accountability is in place.

The noble Lord, Lord Christopher, asked what is going to happen about the value for money studies. The National Audit Office has the ability within the Bill to increase the work that it does. The expectation is that it might undertake about six more national studies to those that it is undertaking at the moment. It will be able to choose what it does and, provided that it is working within existing legislation, it will be able to look at what is going on, either across the piece of local authorities or in individual authorities.

On the fragmentation of the new regime and the quality of audit, government departments are accountable to Parliament through the accounting officer. That is the other helpful addition to ensuring that the new regime is well set up.

The noble Lord, Lord Beecham, asked about the five years. His question was not why we are asking for 10 or five years but why five years was not the absolute limit for auditors to continue. The requirement is that they make a new appointment at least every five years, in which case they will have to go out to further tender. They cannot just reappoint the auditors that are there but will have to go out through a new process. If within that process it was adjudged that the audit firm that was being used was the best, they would be entitled to appoint it again. We think that five years is the right time initially but it must be protected. We must make sure that it is not continued if that is not what should be done.

A number of other questions were raised. The noble Lord, Lord Beecham, talked about the health service sector. May I duck that today? I know that we are going to come to it later on in the Bill. It is very relevant. The auditing of accounts such as community budgets across public bodies is definitely germane to what we are talking about today. The expectation is that auditors who are auditing public bodies will come together to co-operate to ensure that they understand what is being done.

The noble Lord, Lord Christopher, also raised the question of the amount of money that had been saved by the Audit Commission in terms of fraud and error. It is certainly true that there is fraud and error and it is vital that local government and local authorities ensure that there is no fraud in their own accounts and their own way of delivering those accounts. I know that there is more than the local government fraud initiative. There are strong local government fraud policies and processes which are beginning to identify pretty sharply the amount of money that is being lost. With that and the national fraud initiative, for which we are currently about to find a home, the issue will be well addressed.

My noble friend Lord Shipley raised a number of questions, which again I think will come up in the course of the rest of our discussions. I agree totally with him that where there is a local audit panel, it has to be seen to be independent. Under the Bill it will be because, although it does not have to be big, it has to have a majority of independent members on it. As the noble Lord says, it is desirable for the audit committee not to be comprised of only one party, and that is what one would hope and expect in local government where there is more than one party. Again, if the local audit committee were to try to turn itself into an audit panel to recommend new auditors, it would have to create a situation where it had a majority of independent members. We will come back to that because it is an issue that will come up as we go ahead. If I have not replied to every question, I am sure that I will have an opportunity to do so as we proceed.

Would the Minister just deal with the issue of certification? The various references in the impact assessment and other papers that we have are a bit cryptic about how that is meant to proceed. We are particularly interested in knowing how it is going to work in respect of housing benefit for so long as housing benefit is in existence.

Yes, the noble Lord asked that question. At the moment, we are working with the relevant departments, particularly with the Department for Work and Pensions, to ensure that there are proper arrangements in place to consider the matter as part of the transitional arrangements. So work is being done and it has not been overlooked. Again, this is something that we can return to.

I am sorry, but may I pursue one further point on the consideration of continuing with the Audit Commission in its current slimmed-down form, the question of mission creep, and so on, until the contracts come to an end? Indeed, if that were done, it would pretty much align with what is currently expected to be the final phase for housing benefit and the introduction of universal credit.

My Lords, there will be the interim body of the Audit Commission as it winds down, or a separate body, to oversee the contracts so that they are not left unsupervised on their own.

My Lords, it was suggested that we needed to encourage competition. The Chancellor has not been successful in persuading and encouraging business to spend the billions, if not trillions, that they have. People will invest only if there is a profit at the end of the road. It was not an accident that 70% of the redundant staff of the Audit Commission went to the firms that have contracts; they did not go anywhere else. I do not know where else they may have gone—they are scattered around.

This is just a pipedream, it seems to me. It has not really been explained by anybody why there are so few firms to which the Audit Commission gives contracts. There are two tests. One is fitness to do the job, which is not an easy one. The second is what they want to charge—and there are nearly as many who are not given contracts because they want to charge much more. It is a pipedream to imagine that any significant number of audits is going to be done more cheaply than they are currently done.

It may be unfair to refer to this but, even so, I refer to today’s Telegraph. It is not fair to the Minister to start quoting a paper which I am sure that she never reads. The Government have received a report from Ernst & Young, from which I shall quote the headlines. The report says that the suggestion would save £1 billion, which is a lot of money. The headline is that,

“Energy bills ‘could fall’ if Big Six were whittled down to Big Four … Fewer suppliers would lead to more competition in the industry, Ernst & Young tells ministers”.

That is not comparing like with like in the job, but this confirms a great deal of the evidence which the Audit Commission itself received on the truth of the fact that competition comes only from a lot of suppliers. It does not, of course.

Lastly, will the Minister be a little clearer on what resources are going to be available in the National Audit Office? She may say that she cannot tell us until the end of the month, but I take it with a great big pinch of salt that they have the resources to fill the gaps that this Bill will produce.

Clause 1 agreed.

Schedule 1 : Abolition of Audit Commission: supplementary provision

Amendment 2

Moved by

2: Schedule 1, page 32, line 14, at end insert—

“(2A) A scheme must include arrangements for the effective future management of the pension scheme, taking account of the Crown guarantee for pension liabilities.”

My Lords, I think that we have covered this in some measure. I have a series of probing amendments to understand just a little more about the scheme and what is intended. Amendment 2 concerns the pension scheme. In the impact assessment, the commission set out that there is a Crown guarantee in respect of the scheme’s liability—we have just heard about that—which avoids the potential early crystallisation of long-term liabilities of the scheme. It is suggested that this would enable the scheme to be run on as a closed funded scheme in future. However, it suggests that this is just one of the options considered. Perhaps the Minister could outline what others are on the table.

The impact assessment explains that CLG has sought key protections and influence over the scheme to work with the trustees to minimise liabilities and/or manage them in line with the department’s method of financial planning and priorities. Will the Minister say more about this, including the extent to which the trustees of the scheme are being enjoined to minimise liabilities or manage them in line with CLG’s, not the members’, wider financial planning and priorities? I should also be grateful if the Minister could let us know how the Crown guarantee in these circumstances features, if at all, in public expenditure figures.

My Lords, we touched on this briefly in the previous discussion, but I agree with the noble Lord that the Government need to ensure that there are proper arrangements for the future management of the pension scheme. That goes without saying. It is particularly important, as he notes, in the context of the Crown guarantee that my department is given. In exchange for providing the Crown guarantee, the Government negotiated a number of amendments to the scheme rules that protect the interests of the Government as guarantor. These include, for example, a requirement for the trustees to consult my department on the scheme investment strategy; to consult on the appointment and removal of trustees; and to seek consent to any increases in member benefits above existing entitlements. Departmental officials now also sit on the scheme’s investments sub-committee.

The guarantee itself is an important part of protecting the accrued rights of members of the scheme. It provides that if it were ever unable to meet payments to members, the Government would make payments to the scheme to enable it to meet those obligations. I think it was in reference to that that the noble Lord was asking where the money would come from. That would have to be built in to the department’s future liabilities, but we certainly do not see that as a possibility of the moment. It is optional, and if the scheme were ever to fall below 104% and the draw on it became greater, at that stage that might become a problem.

We expect the cost of the Government to be very limited or even nothing as a result of the fact that it is so well funded at the moment. The arrangements are included within the formal rules governing the scheme, and there is therefore no need for separate specific provisions to be made to the Bill or within a future transfer scheme. I hope that the noble Lord’s points have been covered and that he is satisfied with that response.

I am grateful to the Minister for that. It has provided the sort of information that I was seeking. I understand that, as things currently stand, the scheme is fully and properly funded and therefore there is no call on the guarantee. We are seeking to understand whether the actual existence of the guarantee itself features in any way in public expenditure. I imagine that the answer is probably no if there is no current likelihood of a call on it. However, I would be grateful to understand that a little better. I see that the Box is producing a note, but perhaps the Minister could write if that does not cover it.

My Lords, perhaps I may respond to the noble Lord’s question because it will save a letter and give the Committee the answer. I more or less said it correctly but I did not use the correct words. The crime guarantee figure is included in a contingent liability in the department’s accounts.

Amendment 2 withdrawn.

Amendment 3

Moved by

3: Schedule 1, page 32, line 14, at end insert—

“(2A) The schemes should have the effect of ensuring that the benefit of any local government retained earnings existing immediately prior to the abolition date accrue to the local government sector.”

My Lords, this is another brief probing amendment which is designed to ascertain what is to happen to any retained earnings of the commission when it finally ceases business—that is, if there are any in 2015. Perhaps the Minister can help with the question. Much will doubtless depend upon the position of the pension fund. If that is fully funded and not drawing on the guarantee, it looks as though there will be reserves. There certainly are at 2012.

The accounts record that the operating income of the commission is overwhelmingly derived from audit fee income from local government and health. These streams have to be kept separate, and the amendments simply require that any final surpluses are used for the benefit of these two sectors. I beg to move.

My Lords, Schedule 1 allows the Government to bring forward a scheme or schemes transferring the Audit Commission’s property rights and liabilities. It is the Government’s intention to set out details of the arrangements to transfer management of these audit contracts and we are working with partner organisations and others on this matter.

Amendment 3 would require the transfer scheme or schemes to ensure the Audit Commission’s local government retained earnings existing immediately prior to its abolition. As the noble Lord said, Amendment 4 requires any retained earnings from health bodies to accrue to and therefore benefit the health sector.

Under the existing framework, the Audit Commission is funded through a top slice on audit fees. This is effectively the difference between income from audited bodies in the form of fees and the amount paid to firms to undertake the work. I understand this to be the source of the retained earnings to which the noble Lord refers. This has been steadily reducing since 2009-10, and we have stated in the impact assessment that was published alongside the Bill—I know the noble Lord has a copy—that such retained earnings at the point of abolition may be needed to cover transitional costs, including those associated with the continuing management of the existing audit contracts.

The effect of these amendments would be to divert the benefit of such retained earnings to the local government and health sectors and, while I am not unsympathetic with that in principle, it is probably not necessary to explicitly prescribe these arrangements within the transfer scheme. If we did so, those retained earnings would be unavailable for transitional costs, even if it were agreed by everyone that they should be used in that way.

One possible use of any surplus might be to benefit the local government and health sectors in the form of reduced fees. However, I agree that this is an issue the Government need to consider further and we will do so. If the noble Lord wishes to come back we might discuss it again at a later stage but, at the moment, I am happy to give him any further information as it arises, if it does, during the course of the Bill. I hope he will be willing to withdraw his amendments in the light of that response.

Amendment 3 withdrawn.

Amendment 4 not moved.

Amendment 5

Moved by

5: Schedule 1, page 32, line 14, at end insert—

“(2C) A transfer scheme must make effective arrangements for the management of existing audit contracts entered into with the Audit Commission including regular reporting thereon to Parliament.”

My Lords, I shall speak also to Amendment 6. Amendment 5 requires that a transfer scheme must make effective arrangements for the managing of existing audit contracts. These are contracts that are due to expire upon the completion of the 2016-17 audits unless they are extended up to 2020, as we have discussed. It is understood that there could be up to 10 such contracts as well as a few separate contracts relating to smaller bodies. Any successor body would have to manage these contracts after the abolition of the Audit Commission, effectively for a minimum period of about two and a half years.

This is no small matter, as the annual value of these arrangements is understood to be of the order of £85 million. We look to the Minister to share her thoughts on how this is all to be done. Presumably this is not just a case of novating the contracts, because the successor body will have to have some of the commission’s existing statutory functions relating to audit. Is it not the case that, in undertaking the management of these contacts, any body will have to set standards of performance, monitor delivery and effect payment but will to be able to exercise some of the statutory powers that reside with the commission, particularly powers relating to the appointment of auditors, the setting of scale fees, making arrangements for the certification of grant claims and returns? It is understood, for example, that the key functions would encompass specifying the terms of an auditor’s appointment; considering and approving, where appropriate, requests from auditors to accept additional non-audit work at audited bodies; specifying standards of performance, including setting target dates for the issuing of opinions; scoping, consulting and specifying the delivery of national mandated work programmes—for example, quality audits or IFRS arrangements reviews at NHS bodies; reviewing requests for new certification work; and a whole list of other things as well.

What is planned for the management of these contracts? There is complexity attached to that management. Does the Minister agree that whoever does this will need to have some of the statutory powers of the commission, with the public accountability that goes with such powers? What does the future hold for the additional audit-related functions undertaken by NHS audit—functions that would include collecting information from auditors; preparing and publishing summaries of the results of audits in the annual auditing and accounts report for the Department of Health accounting officer; co-ordinating requests for information from the NAO in connection with its group auditor role; collecting information directly from auditors and monitoring delivery; agreeing auditor submission requirements with the Department of Health and the NHS Commissioning Board in connection with consolidated accounts to monitor delivery; and providing a range of guidance and advice for auditors and dealing with technical queries from auditors on technical issues to promote consistency. That is just a snapshot of some of the activities that would be required.

Have the Government considered a sector-led approach and what are the implications of this? There is obviously a little time, but the clock is ticking, particularly for the staff in the existing compliance group who have a lot of expertise; where that will reside in the future is of significance, I suggest. I look forward to hearing from the Minister and I beg to move.

My Lords, I assure the noble Lord that it is the Government’s intention to ensure that the Audit Commission’s existing contracts are well managed—that is something we see as essential—and that auditors will continue to have the necessary means to undertake their role. We agree that the key function will be required to manage contracts for the remainder of their term, but they will particularly require powers to set fees, appoint auditors and certify grants. We are working to ensure that the interim management arrangements will allow functions to be exercised by the relevant body or bodies, and the provisions in the Bill already allow for that to happen.

Schedule 1 enables the Secretary of State to make a scheme or schemes to transfer the property rights and liabilities to the Audit Commission to one or more bodies. The scheme also includes provision for the transfer of employees, if appropriate, under TUPE regulations. We intend to set out details of the arrangements in transfer management of the audit contracts in such a transfer scheme in due course. We are working on this with these organisations, including those that the noble Lord has mentioned, and we are giving consideration to the transfer of current Audit Commission tasks, including the value-for-money profiles. I do not have confirmation of this but I dare say that that also includes the health service relationships as well.

So it would be premature to specify the detailed contents of the transfer scheme at the moment. However, I assure the Committee that this will provide the mechanism for ensuring good management. The noble Lord read out a whole series of things that he thinks we should take into account. If I may, I will say that those are clearly issues that we need to take into account. Once again, I should like to keep the noble Lord in touch with developments as they proceed.

We do not feel that the amendment is necessary; we have pretty good arrangements within the Bill to ensure that we have a proper transfer, and we are working that out at the moment. The amendment is probably not necessary in the light of what has been said, as we can already transfer schemes to include the robust management of existing contracts. I hope that the noble Lord will feel able not to press his amendment.

I am grateful to the Minister for her reply. I am particularly grateful to her for referring to value-for-money profiles, which I forgot to speak to when I was moving my amendment. To do so briefly, these profiles bring together data about the cost performance and activity of local councils and fire authorities. Using the profiles, it is currently possible to see how an organisation is spending its resources, how the costs and performance of an organisation compare to others’, the latest planned budgets, outlier reporting and so on, so this is pretty important information. Ensuring that that is available in future and maintained and updated is, I suggest, something that ought to feature in the scheme.

The Minister said that a draft of the scheme would be available in due course. I wonder if I might tempt fate and ask for something more specific. Is there the prospect that we might see a draft of this during our consideration of the Bill?

Probably not within the terms of our deliberations on this. I am not certain whether it will be available before it goes into the other House, which will be later this year. However, I will keep the noble Lord informed.

I am grateful for that. I hope that in the other place they will at least have a chance to see something a little more specific about the scheme. Having said that, I beg leave to withdraw the amendment.

Amendment 5 withdrawn.

Amendment 6 not moved.

Schedule 1 agreed.

Clause 2 : Relevant authorities

Amendment 7

Moved by

7: Clause 2, page 2, line 9, after “regulations” insert “, but only after consultation with such persons as may be affected by any changes,”

My Lords, I shall speak also to the other two amendments in this group. Perhaps we may start with the most substantive one, Amendment 9. This amendment was prompted by the third report of this Session by the Delegated Powers and Regulatory Reform Committee. It drew attention to Clause 47 of the Bill relating to regulations or orders under Clause 2. Clause 2 enables the Secretary of Statement by affirmative regulations to include someone as a relevant authority and to make provision about how the Bill affects them. This is the case even though the regulations might be a hybrid instrument, although Clause 47 requires it to be treated as not a hybrid. The Delegated Powers Committee makes reference to affording,

“any interests that would normally be afforded protection by the hybrid instruments procedure”,

some alternative means of protection. This is what Amendment 9 seeks to do, by requiring the publication of consultation on a draft of the intended regulation. Parliamentary counsel will doubtless be able to devise more appropriate wording, but there is a point that needs to be addressed. Hybridity arises when a provision can affect specific private or local interest in a different manner from the private or local interest of other persons or bodies of the same class. If hybrid, there is a wider process for consideration of an instrument. Let us hope that the Minister will accept the advice of the Delegated Powers Committee on this, or alternatively will justify why Clause 40(7) is deemed necessary. What situation is envisaged that would need this protection?

Amendments 7 and 8 require that any regulations made as a result of powers provided by Clause 2(3) and (5) require prior consultation with those affected by the proposed changes—a minimum activity. I beg to move.

My Lords, the noble Lord, Lord McKenzie, went in reverse order, but I shall go straight to his Amendments 7 and 8. I am sympathetic to their purpose, which is to ensure that the relevant bodies are consulted before they are added to or taken off the list at Schedule 2. Regulations that may be made to alter the list of authorities in Schedule 2 will also be subject to the affirmative resolution, so Parliament will have an opportunity to scrutinise any alterations and the extent of our engagement with the bodies concerned.

Turning to Amendment 9, the potential for hybrid instruments, I am clear that the Delegated Powers and Regulatory Reform Committee has drawn the attention of the House to Clause 40(7) of this Bill, which provides that regulations under the clause that would normally be considered a hybrid instrument will not be so considered for the purposes of this Bill. We expect that the need to bring forward such regulations will be rare. However, if there were such cases, there will be an especially compelling reason for the Government to consult, and we will address that point when we respond to the Delegated Powers Committee, which will happen as soon as possible. The answer is in draft anyway. The point that the committee has made about consultation is well understood and taken up. We do not think that it is necessary to add further legal requirements for consultation; we believe that they are there already. With those reassurances, I hope that the noble Lord feels able to withdraw his amendment.

My Lords, I took that reply to be yes to Amendments 7 and 8 with regard to consultation but not to put them in the Bill, and a probable yes to Amendment 9 but the Government will address that issue more formally when they respond to the Delegated Powers and Regulatory Reform Committee. Presumably they will respond favourably to the point that the committee has made. I have not before encountered an issue when something this hybrid must be deemed not to be hybrid for the purposes of regulations. Is this not to a certain extent Alice in Wonderland? I accept that there may be only a few instances when this occurs, but I take the assurance from the Minister that this will be covered in the Government’s response to the Delegated Powers Committee and that we will have a chance to see that before we get to Report. On that basis, I beg leave to withdraw.

Amendment 7 withdrawn.

Amendments 8 and 9 not moved.

Clause 2 agreed.

Schedule 2 : Relevant authorities

Amendment 10

Moved by

10: Schedule 2, page 38, line 7, leave out “5” and insert “7”

My Lords, Amendment 10 is a minor and technical amendment. It does not affect the intended effect of the Bill. Its purpose is to correct a reference in Schedule 2 so that it refers to Paragraph 7 of Schedule 4 to the Audit Commission Act 1998 rather than to Paragraph 5. Schedule 2 lists the relevant authorities to which the provisions of the Bill apply. Paragraph 29 of the schedule ensures that the Bill covers any bodies that were subject to audit provisions contained in enactments passed before the Audit Commission Act 1998, to which the provisions of the 1998 Act were then applied.

Paragraph 29 refers to Schedule 4 to the 1998 Act, which contains transitional and savings provisions. Paragraph 7 of Schedule 4 to the 1998 Act, rather than Paragraph 5, provided for references in previous enactments to earlier forms of audit, such as district audit, to be read as references to audit under the 1998 Act. Paragraph 29 of Schedule 2 is meant to extend this savings provision so that bodies covered by it will be covered by the Bill when the 1998 Act is repealed. That would be done better by my amendment. I beg to move.

My Lords, we are happy with the amendment. I would like to tell the Minister that we had spotted our technical error, but that would not be true.

Amendment 10 agreed.

Schedule 2, as amended, agreed.

Clause 3: General requirements for accounts

Amendment 11

Moved by

11: Clause 3, page 2, line 34, at end insert “and show a true and fair view”

My Lords, I shall speak also to Amendment 16. Amendment 11 amplifies the reference to the statement of accounts that must ensue from adequate accountancy records and adds the requirement that they show a true and fair view. Amendment 16 inserts an equivalent into the general duties of auditors in Clause 19. It requires them to satisfy themselves that the accounts give a true and fair view. That requirement is already included in the duties of auditors of health service bodies under Clause 20.

I am advised that local authorities were previously required by Regulation 10 of the principal regulations to prepare accounts that present fairly the financial position of the authority at the end of the year and its income and expenditure for the year, or a record of receipts and payments that properly presents receipts and payments for the year. Regulation 5 amends the principal regulation so as to require the responsible financial officer of an authority that must prepare an annual statement of accounts to certify that the statement provides a true and fair view from the 2009-10 financial year and in subsequent financial years.

I am advised that the move to a “true and fair view” opinion was based on the fact that from 2007 the code of practice for local authority accounting, issued at that time as a statement of recommended practice following endorsement by the then Accounting Standards Board, was fully compliant with generally UK-accepted accounting principles. The drive to full GAAP compliance was twofold: pressure from the then Accounting Standards Board for Local Authority Accounting to comply with GAAP, and the need for consistency of accounting practice across the public sector engendered by the preparation of whole of government accounts under the Government Resources and Accounts Act 2000.

Following representations to the Audit Commission by the body that drew up the code of practice for local authority accounting, it was agreed that accounts should be prepared to give a true and fair view. As I understand it, that took effect from 2009-10, and it is that which the amendment is intended to address.

I wonder whether it is necessary to have that provision here. By virtue of all the Acts that deal with accounts, they all have to show a true and fair view. We seem to be dotting “i”s and crossing “t”s on this one. I am not sure that the amendment is necessary.

Will the noble Lord consider Clauses 19 and 20? Clause 19 deals with “General duties of auditors” and Clause 20 with, “General duties of auditors of accounts of health service bodies”. The latter includes those words, saying,

“the accounts present a true and fair view, and comply with the requirements of the enactments that apply to them”.

That reference is missing from Clause 19 and is not referred to in the earlier clause at all, but somebody deemed it appropriate to put it in Clause 20. I am trying to get some consistency, or to understand why there should be a difference between the two.

My Lords, my only point is that the latter clauses deal with the general duties of auditors but the first deals with the accounts themselves. Whereas auditors must ensure that it is a “true and fair view”, in Clauses 19 and 20, it has always been an accepted belief that with accounts prepared and signed off by external auditors—it is the chairman of the audit committee in my authority who signs off the accounts, with the chief executive—it is always a “true and fair view”. I have no real problems with it being added, but I just wonder if it is necessary.

My Lords, the noble Lord, Lord Palmer of Childs Hill, raises a question that I hope to answer—that it should not be, and is not, necessary. We can see whether the noble Lord agrees with that at the end of what I have to say.

We intend to require larger relevant authorities to present statements of accounts that are true and fair and for local auditors to give an opinion on whether this is achieved. This requirement is not included in the Bill, but the same outcome is achieved and mirrors the approach currently taken.

Amendments 11 and 16 would put these requirements in the Bill for all relevant authorities, but we are of the view that this is not necessary. Larger relevant authorities are currently required to present accounts that are true and fair, and their auditors are required to give an opinion on whether this is achieved. I assure the noble Lord that it is the Government’s intention to continue these requirements. These requirements are currently achieved through the interaction of primary and secondary legislation, the Audit Commission Act 1998 and the Account and Audit (England) Regulations 2011. All relevant authorities must observe proper practices in the preparation of their accounts. The regulations require chief finance officers of larger relevant bodies to certify that the statement of accounts presents a true and fair view of the authority’s financial position before these are audited. We intend to mirror this requirement in the regulations to be made under Clause 31, and Parliament retains oversight of these regulations.

This approach is less complex than specifying “true and fair” requirements in the Bill, because further amendments would be required to disapply these provisions and include modified provisions for smaller authorities, which, as the Bill makes clear, are not required to ensure that their statement of accounts are true and fair. Instead, they are required to ensure that their accounts “present fairly” or “properly present”, which are briefer and more proportionate forms of accounting. It is our view that that the current split between primary and secondary legislation works, and we intend that the interaction of the Bill and regulations under Clause 31 will continue to require larger relevant authorities to ensure that the statement of accounts present as true and fair.

The noble Lord raised the question of health authorities. The Bill does not change the scope of health authorities’ audit, or that of principal local government bodies. Auditors of clinical commissioning groups will give additional opinions on whether their expenditure has been spent in accordance with Parliament’s intentions. This is necessary because the resources available to health bodies are provided by Parliament. Expenditure by clinical commissioning groups is consolidated into the Department of Health’s accounts, and the department must be able to demonstrate to Parliament that all resources have been used in the way that Parliament intended. I hope that, with that explanation, the noble Lord may feel able to withdraw his amendment.

My Lords, I am grateful for that response. I would like to read the record about the explanation for Clause 3. That clause deals with the general requirements for accounts of a relevant authority, not all authorities.

May I revert to that position about the difference in presentation between Clause 19 and 20? There is that very clear reference to “true and fair view” in Clause 20 in respect of health service bodies. Either that implies that there is somehow a different approach or the presentation has simply been chosen to be different in Clause 19. If it is easier to write on that matter, I am happy to accept that. It was the lack of such a reference in Clause 19, my having read Clause 20, that really prompted the inquiry.

My Lords, I think that I responded to that in my comments just now. This is directly a part of the Department of Health’s accounts, so the audit is much more geared that way. However, it would be helpful if I gave the noble Lord the full response on that. I think that I have done so but, in case I have not, I will write to him.

Amendment 11 withdrawn.

Amendment 12

Moved by

12: Clause 3, page 3, line 1, leave out paragraph (b)

My Lords, this is another probing amendment. Clause 3 deals with the general requirements for accounts and sets down the definition of “adequate accounting records”. Clause 3(5)(b) enables the Secretary of State by affirmative regulations to enable any requirement in the section not to apply, or to apply with modifications to a relevant authority. The requirement to keep adequate accounting records is fairly fundamental and it is difficult to see the circumstances in which it would be inapplicable. What use is envisaged of these provisions, particularly the Secretary of State’s power in relation to accounting records and statements of account in Clause 31?

My Lords, the amendment would remove a regulation-making power to lift or modify the duties imposed by Clause 3 as they apply to particular bodies. Clause 3, as the noble Lord has said, requires relevant authorities other than health service bodies to keep adequate accounting records and prepare an annual statement of accounts. These are fundamental duties, and I can see why the noble Lord might question these powers. Nevertheless, there is a need for them.

Changes in the structure of local bodies may mean that the production of a statement of accounts is unnecessary or that financial accountability would be better served by including the financial transactions of an authority in the statement of another authority. To give an example of this, last year the police authorities were replaced by police and crime commissioners. In November, accountability for police finances was better served by the commissioners producing a single statement for the full year, including the transactions of the police authority. The police authorities were therefore relieved of their duty to produce published accounts for their final months, and the police commissioners thereby took on that responsibility.

I would expect the use of the power to be confined to such situations where there is a strong case that financial accountability would be better served by a modification of the duties in the clause. The accompanying power to modify the financial year has existed in audit legislation for many years but has rarely been used. I hope that that explanation will satisfy the noble Lord and enable him to withdraw his amendment.

I want to ask the Minister a question that I should perhaps have raised when speaking to the earlier amendment. The Comptroller and Auditor-General was quite critical of the proposals to take policing out of the Audit Commission framework. Given that the commission is going, to what extent have the Government responded to his concerns about the auditing of police authorities?

My Lords, the police authorities are included in terms of this clause. Does that answer the noble Lord’s question? If it does not, perhaps the noble Lord will come back to me.

Amendment 12 withdrawn.

Amendment 12A

Moved by

12A*: Clause 3, page 3, line 5, after “application” insert “(including exemption)”

My Lords, as this is the first time on which I have spoken in Committee, I should declare my interests, particularly that I am president of the National Association of Local Councils, the parent body of parish and town councils. I am a vice-president-in-waiting of the LGA, if that is the correct term for the particular interregnum that I am in at the moment. I should declare one other interest in that one of my children works as an accountant for one of the big four accountancy firms, but they work on something that I think is called transaction services rather than audit.

I thank the Minister for arranging at short notice last week a meeting, which was extremely helpful in refining some things. I am sorry if, in a sense, I am going over old territory in order to get things on the record. I am also aware that I am in the presence of very great experience, not only of audit but of local government management at senior level. I certainly cannot claim to hold a candle to any of that.

For the purpose of this group, in speaking to Amendment 12A, I shall speak also to Amendments 13A and 13B, and 14A to 14C. My intention is to probe further the Government’s intentions. I accept that a sector with 9,500 parishes spending £500 million a year in aggregate requires oversight, and I do not quibble with the coalition’s intention to abolish the Audit Commission. However, unlike large charities with many branches, or for that matter small charities with a freestanding existence, this sector is hallmarked by thousands of autonomous and often very small councils, a large number of which are in this first tier of local government and benefit at the moment from economies of scale in procuring their audit and other routine tasks.

If the individual right is equated with an individual duty for a separate audit appointment, that does not sit entirely easily with the general geometry of the sector, especially as around 80% of them have come together voluntarily to form the individual members of the national association. Doing things together non-politically and collaboratively is a large part of how parish and town councils try to operate. I was heartened by the Minister’s earlier comments about the freedom of collective and individual audit appointment, although we may need to tease that out a little further to determine precisely how it will work.

A requirement for audit scrutiny of some sort, tailored to the risks and proportional to the gravity of the council undertakings, is common ground. The question is how we enshrine that in legislation and ensure that all those entrusted with public money are held to account to the degree necessary. In nearly every case, parish and town councils are quantifiably different from the scale of principal authorities. At one end of the scale there is a town council with 78,000 electors and a very substantial annual income, but that is not typical of the sector. One of the issues that we sometimes have is that the parish and town council sector is so diverse in terms of the size and complexity of what they do that it makes it very difficult to legislate in a cohesive way for all of them.

The proposal seems to provide for three tiers of regime, if I can call it that: namely, an exemption for those with a turnover of under £25,000, an intermediate stage requiring a limited assurance audit for authorities with a turnover under £6.5 million, and those above that which will face the full audit arrangements. According to my information, all parish and town councils, with one or two exceptions, will fall into the sub-£6.5 million turnover bracket, so we are dealing mainly with the cut-off point between total and partial exemption. So far as I know, 65% will be exempted altogether—they fall under the £25,000 threshold—and that leaves about 3,300 parish and town councils that will be caught. That is not a significant amount, particularly if the sector grows as the localism agenda envisages. That means that at the margin, at the break point, there will be a certain amount of toing and froing in the transition, to which I will refer later.

I flagged up at Second Reading the requirement for an audit panel to have a majority of independent members. What measures does the Minister think will be possible or practical to prevent it becoming the tail that wags the dog in small councils that none the less might have a turnover of more than £25,000? My amendments seek to explore these issues through the device of amending the suite of criteria governing the Secretary of State’s jurisdiction.

I was interested by the comment made in the previous group of amendments about a fair representation of the state of accounts. As a simpleton and non-accountant I had taken this for granted, I must admit, but there it is.

The purpose of Amendment 12A is simply to clarify that the Secretary of State may, in considering the application of the requirement, also exempt an authority. It is not clear whether there will be a facility to exempt once it had been caught. This would apply at or around the break point of £25,000. I say this because £25,000 is less than half of the cost of a qualified full-time clerk, which tells us something about what we are dealing with. I am concerned that the bar is set a little too low here, and perhaps that ought to be looked at.

I am mindful of barriers to the progression and growth of parishes, particularly when the threshold represents a significant cost or administrative impediment or is seen to do so. The Secretary of State should be able to develop more sophisticated criteria and not simply apply a numbers threshold by automatic application. I ask the Minister whether that point might be looked at further with a view to seeing whether it really works.

Amendment 13A describes some of the criteria that might apply. The key words here are “onerous or disproportionate”, which are intended to be the guiding sentiment. However, I accept that they are relative rather than absolute terms, and for that reason I am not sure that I will not get the answer from the Minister that naturally flows—that the matter is indeterminate. However, for the same reasons that I mentioned about the tail wagging the dog, I ask the Minister whether anything can be done about that.

Amendment 13B seeks to drill down what we mean by “turnover” and whether it is right to take a single year’s figure or, as my amendment suggests, an average. I can think of a situation where one year’s figures are skewed by a single, one-off event that could be for reasons wholly unrelated to an authority’s normal income, such as a developer contribution towards something or other. It would help to avoid councils flipping in and out of the requirements if we had an average, as my amendment suggests, spread over three years. However, there may be technical objections to this.

Amendment 14A is a paving amendment for Amendment 14B and follows the same principle of the Secretary of State’s discretion on amendments. Amendment 14C is consequential in ensuring that any exemption carries through into the consideration of any question of failure to appoint an auditor.

The National Association of Local Councils and the LGA are in agreement that the ability for local councils, where it is appropriate and cost effective, to jointly commission audit services on a national basis makes a good deal of sense.

I understand what the Minister said earlier about this not being, in a sense, a rerun of the Audit Commission. I can recognise that, as the whole idea is to bring in an element of competition and not to have a monocultural approach. However, the potential economies of scale, savings and cost could be significant. It may well be that the Audit Commission itself lacked competition to ameliorate its charges, but that does not avoid the principle of giving value for money for taxpayers. That is all that I have to say on this. I beg to move.

My Lords, the noble Lord has raised some important questions with these amendments. My Amendment 14 overlaps a bit with them, so I might as well get it out of the way now. It concerns the rules that govern these various thresholds—the £6.5 million, the £200,000 and the £25,000. This is a boring accounting point, but there is a question about how you actually compute them. Looking at what the income of a parish council might be, for example, there might be a precept, which presumably gets counted in as gross income. However, if there are things like entrance fees, the sale of publications or the letting of premises, do you have to deal with these on a gross or net basis for working out whether the threshold is breached or met? I first focused on this in relation to the £6.5 million threshold, but there seems to be a lot of headway for authorities there so that is unlikely to be great issue. However, if those same rules operate for the lower thresholds, then they could be important.

My Lords, this may take only a little time, partly because the noble Earl, Lord Lytton, and I have had an opportunity to discuss the issues that he has raised today. Actually, I may take a little more time to respond because it is quite important that this is on the record and that people can see where this is going.

I thank the noble Earl not only for the thoughtful contribution that he has made today but for the pragmatic way in which we have discussed the whole issue of having a central or non-central body to do this. The regulations that the Government propose in relation to smaller authorities need to accomplish two things. They need, first, to enable the development of a viable sector-led body to appoint auditors to smaller authorities and, secondly, to set up a proportionate accounting and audit regime for small authorities that minimises the administrative burden while ensuring accountability for the public money that they control.

In relation to the first of those points, I am grateful to the noble Earl for being pragmatic about this, and for listening to what I said earlier about systems such as this being central but not mandatory and giving opportunities for smaller authorities that wish to appoint their own auditors to do so. In reality, though, one is bound to say that for the small authorities it would be a godsend to have a body helping them with it. While we certainly will not change our view about the question of whether this is mandatory, we would expect quite a large number of the small authorities to want to join in. I am pleased to be able to offer the noble Earl the assurances that he seeks that we will bring forward regulations in relation to the sector-led body. I will write to him setting these out and then perhaps we can discuss them further if necessary. The second purpose of the smaller authorities regulations will be to set out proportionate accounting and audit requirements.

I intend to lay a statement of policy intent, which I hope is now in the Library—it should have gone in today—which will share with noble Lords further detail about the proposed audit arrangements for smaller authorities. In this document, the Government confirm their intention to retain the limited assurance form of audit. It will be specified in the code of audit practice, which will be produced following abolition of the Audit Commission by the National Audit Office. As the noble Lord said, limited assurance audit is a lighter-touch form of audit, which is conducted offsite and is proportionate to the small amounts of public money that the smaller authorities control.

The Government also intend to maintain the current accounting requirements for smaller authorities. In addition, they propose to exempt the smallest authorities—those with an annual turnover below £25,000—from the requirement to have external audit. In the command paper published with the draft Bill last year, we said that we would review how this level works, if necessary raising the threshold once the system is up and running. Therefore, it is in mind but how it is working will have to be demonstrated. The exemption will not apply in certain circumstances. For example, where a small authority is newly created or where an authority’s auditor issued a public interest report in the previous financial year, authorities exempted from external audit will be required to appoint an auditor to undertake those public interest duties.

With regard to the specific amendments, I think I will turn to Amendment 12A at the end. That is what the noble Earl did and, if I may, I will follow his line. Starting with Amendment 13A, this appears to capture the noble Earl’s concerns most fully. The amendment enables the Government, when making the regulations under Clause 5, to have regard to the size of the electorate, the authority’s income, and whether the effect of those regulations would be “onerous or disproportionate”. The Government’s view is that the regulation-making powers in Clause 5 allow us to do that without additional provision.

The Government’s purpose in taking those powers is to enable them to make regulations that will set out a proportionate accounting and audit regime for smaller authorities. The proportionality that the Government envisage will be defined in relation to the higher of the authority’s gross income and gross expenditure rather than just its income, a point raised by the noble Earl. We do not propose to take into account the size of an authority’s electorate because income and expenditure are the most relevant criteria in relation to the primary purpose of audit, which is safeguarding public money. The size of an authority’s electorate is not material and members of a large electorate may individually pay a very small precept and vice versa.

I turn to Amendment 12A. One of the purposes of Clause 3 is to specify the financial year for relevant authorities that are not health service bodies. It does that in subsection (4) with reference to 31 March, but subsection (5)(a) gives a power by regulation to change that period either for all authorities or for particular authorities. Subsection (6) allows regulations changed in the financial year to make amendments or modifications to this legislation or provisions made under it in their application to the bodies whose financial years are changed. The main purpose of that power is to allow dates to be changed to such purpose as the preparation and publication of the statement of accounts so that they are consistent with the changed period of the financial year.

I hope that this explanation will provide a useful background to understanding Amendment 12A. The amendment adds the words “including exemption” after the word “application”. I find it difficult to see what this adds to the power. If the purpose is to confirm that the financial year can be altered even for a body that is exempt from audit, I am happy to confirm that, but I have to say that the Bill as it stands allows that and the amendment would not do anything more.

Perhaps I may deal with Amendment 14 in the name of the noble Lord, Lord McKenzie, once I have finished with the amendments in the group. Amendments 14A and 14B would enable regulations to exempt or partially exempt a smaller authority from the need to have an auditor panel. The sector-led body for smaller authorities that, as we have already said, we intend to provide for in regulations that are non-mandatory, will in effect assume the functions of the auditor panel. We propose to exempt smaller authorities which have opted into the sector-led body from the requirement to have an auditor panel. By definition, the auditor scrutiny would be undertaken by the sector-led body. We will do that in regulations made under Clause 5 and we do not need to make additional provisions in the Bill.

The exemption will not, however, apply to smaller authorities which opt out of the sector-led body. I suggest that these will need to appoint an auditor panel to advise on the appointment of an auditor, which would ensure that proper scrutiny takes place. We do not expect those auditor panels to be large. The Bill does not set a minimum size, but Treasury and CIPFA guidance on audit committees recommends that they should comprise at least three members, in which case two independent members would be required. To make it easier for the authority to find panel members, we do not intend to preclude suitably experienced individuals from serving on more than one panel. In addition, the Bill allows authorities to share auditor panels if they wish to minimise additional costs of bureaucracy.

Amendment 14C has a similar effect to Amendments 14A and 14B. Clause 12 requires the authority to inform the Secretary of State if there is a failure to appoint an auditor and enables the Secretary of State to direct the authority to appoint the auditor named in the direction or to appoint an auditor on behalf of the authority. The precise effect of the amendment would of course depend on how such regulations were drafted and, in particular, which small authorities they captured.

The Government accept that the smaller authorities’ regulations will need to apply modifications to Clause 12 in the case of smaller authorities which opt into the sector-led body. We do not of course envisage that the sector-led body would default on its obligation to appoint auditors. We will not propose to disapply these provisions for smaller authorities which opt out of the sector-led body. As with the noble Earl’s other amendments, we do not need to take a separate power to make these modifications in regulations, as they are already allowed under Clause 5.

To conclude, the Government propose to publish draft smaller authorities’ regulations in the autumn for consultation. I am sure that the National Association of Local Councils and the Society of Local Council Clerks will continue to work closely with us to help shape those regulations and to ensure that they are fit for purpose for smaller authorities. I hope that with those assurances, the noble Earl is willing to withdraw his amendment.

Before he does so, perhaps I could refer to Amendment 14, tabled by the noble Lord, Lord McKenzie, which will scoop up this part. This amendment would place a duty on the Secretary of State to issue guidance on the definition of gross income and gross expenditure for the purpose of determining whether an authority qualifies as a smaller authority in a financial year.

Gross income and gross expenditure are terms used now in the accounts and audit regulations to define the smaller bodies threshold and no further guidance is given, but I see that with a duty in future being on the relevant bodies to assess their income and expenditure against the threshold, there may be times when guidance on interpreting the terms could be useful. This guidance need not be statutory or issued by the Secretary of State. However, the Secretary of State may issue guidance on this matter if he wishes. In addition, there is provision in subsection (5) to enable the Secretary of State to make regulations to amend Clause 6. This may be used to amend the threshold or to add further conditions and could be used to require smaller authorities to have regard to any such guidance.

However, the noble Lord makes good points and I am happy to take the question of guidance back so that we can have another look at it. If I do not manage to do that by Report, I hope at least that we will have it in writing before Third Reading. I put that marker down now so that there is no argument at Third Reading about whether it is relevant. I hope that, under those circumstances, the noble Lord, Lord McKenzie, may be willing not to press his amendment.

My Lords, I am very grateful to the Minister for her extensive reply and for setting that out for the record. Clearly, these are probing amendments. Picking up on a comment made by the noble Lord, Lord McKenzie, about his Amendment 14 when he said that it raises a boring accountancy point, when my daughter learnt that I was involved with something called the Local Audit and Accountability Bill, she e-mailed me saying, “That’s a really nerdy subject”, so we have been warned.

I quite accept what the noble Baroness said: that the whole thing is reviewable, particularly in relation to Clause 5. I also take the point about the electorate size not being material, it is about the financial activity that is going on. I hear in particular what she says about the auditor panel not being required where smaller bodies have opted in to the sector-led scheme.

The definition of independent in terms of members of the audit panel still slightly escapes me. I know what it means to me, coming from the sector of your Lordships’ House that I do, but I am not sure that I entirely understand what it means here, but we will leave that for another day.

I am extremely grateful to the noble Baroness. As ever, she has answered many of my questions with great courtesy, including telling me that some of them are not strictly relevant because they are unnecessary. I take that in the spirit in which it is intended. I beg leave to withdraw the amendment and shall not be pressing my other amendments in the group.

Amendment 12A withdrawn.

Clause 3 agreed.

Clause 4: General requirements for audit

Amendment 13 not moved.

Clause 4 agreed.

Clause 5: Modification of Act in relation to smaller authorities

Amendment 13A not moved.

Clause 5 agreed.

Clause 6: Meaning of “smaller authority”

Amendments 13B and 14 not moved.

Clause 6 agreed.

We did, my Lords, but in fact I can take us until the end of Clause 12 without need for further debate, I believe.

Committee adjourned at 6.03 pm.