Considered in Grand Committee
My Lords, the regulations we are considering today were laid in draft before the House on 21 October 2021. If approved and made, they will provide for the appointing person to set fee scales for local audit later in the financial year, apply standardised fee variations in specific circumstances and appoint auditors for shorter contract periods where appropriate.
These regulations are designed to provide the appointing person with greater flexibility to ensure that the costs to audit firms of additional work are met, and to reduce the need for time-consuming case-by-case consideration of fee variation requests, in order to support the timely completion of local audits.
The Local Audit and Accountability Act 2014 enables the Secretary of State, through secondary legislation, to make regulations. This statutory instrument was laid before Parliament under the affirmative resolution procedure. The 2014 Act placed responsibility on local bodies to appoint their own auditors. However, the Act also provided for an “appointing person”, specified by the Secretary of State, to appoint auditors on behalf of local bodies that choose to opt in to such arrangements. Public Sector Audit Appointments Ltd, a subsidiary of the Local Government Association, is the body currently appointed to perform this role.
In September 2020, Sir Tony Redmond published his independent review into the effectiveness of external audit and transparency of financial reporting in local authorities. The Redmond review found that there was an increasing disparity between the fee scales set by Public Sector Audit Appointments Ltd and the amount of work being carried out by auditors. This had led in turn to a large increase in the amount of fee variation requests. These are requests from auditors to charge additional fees beyond those provided for in the fee scales set by Public Sector Audit Appointments Ltd for each audit year.
The Local Audit (Appointing Person) Regulations 2015 provide for fee variations relating to the audit of a particular authority to be considered by Public Sector Audit Appointments. In practice, this means that Public Sector Audit Appointments Ltd can consider and approve fee variations on a case-by-case basis only.
In its response to the Redmond review, the Government committed to review regulations to provide Public Sector Audit Appointments Ltd with greater flexibility to ensure that the costs to audit firms of additional work were met more easily. To provide this flexibility, earlier this year the Government consulted on potential amendments to the 2015 regulations. The overwhelming majority of respondents to the consultation agreed with the Government’s proposals, which we now propose as the following amendments to the 2015 regulations.
First, this statutory instrument will amend the regulatory deadline for Public Sector Audit Appointments to set fee scales from before the start of the financial year to 30 November of the financial year to which the fee scales relate. This will enable Public Sector Audit Appointments Ltd to take into account more up-to-date information when setting fee scales, including results from previous audits. More accurate fee scales should help to reduce the number of instances where fee variations are required.
Secondly, this instrument will enable Public Sector Audit Appointments Ltd to set standardised fee variations to be applied to all local bodies or groups of local bodies. This change is designed to streamline the fee variation process where a particular issue has had a similar impact on the audit of large numbers of local bodies. Circumstances in which these may apply could include a regulatory or policy change, such as a change to accounting or auditing codes, or even one-off events that have a national or far-reaching impact, as we have experienced with the pandemic. In these circumstances, Public Sector Audit Appointments Ltd will be able to apply a standardised fee to all affected bodies, preventing the auditor from having to submit a fee variation request for each individual body. Public Sector Audit Appointments will be required to consult both opted-in local bodies and local auditors before setting standardised fee variations.
Thirdly, this instrument will give Public Sector Audit Appointments the flexibility to appoint auditors for one or more financial years at time, up to a maximum of five consecutive years. This could include years which precede the date on which the local authority opts in, if those years still have an audit outstanding. Under existing regulations, Public Sector Audit Appointments is required to appoint an auditor to that authority for the remainder of the compulsory appointing period, which could be up to five years, depending at what point in the appointing period the authority elects to opt in.
In conclusion, these changes will help to support the stability of the local audit market by making it easier for firms to claim for the costs of work completed—
Sitting suspended for a Division in the House.
My Lords, in conclusion, these changes will help to support the stability of the local audit market by making it easier for firms to claim for the costs of work completed. Alongside this, we are continuing to implement all the recommendations that we committed to in our response to the Redmond review.
I hope that colleagues will join me in supporting the draft regulations. I commend them to the Grand Committee.
My Lords, I thank the Minister for his introduction and the details he has to hand. Can he give instances of the likely typical fees that will be set by the appointing person? Fees are public money. How will the appointing person be selected or chosen? Will it be a ministerial appointment, or will it be left to local government itself via its own representative bodies? What will be the likely salary of the appointing person, or is that settled already? I ask questions the answers to which may not be to the Minister’s conscientious hand. If that is the case, might he please write?
My Lords, I draw attention to my relevant interests as a vice-president of the Local Government Association, a member of Kirklees Council and a member of that council’s audit and governance committee.
The Redmond review into local authority financial reporting and audit is far-reaching in its recommendations and broadly welcomed by those in local government, who want greater simplicity and transparency in financial reporting and auditing. One challenge facing local government audit requirements is the narrowing number of private audit firms willing to take on such audits. Yet sound auditing is an essential prerequisite for value-for-money judgments and financial transparency, as local government financing becomes ever more complex.
The proposals in this SI tackle some of the issues regarding process. These relate to fee scales, deadlines, standard fee variations and the length of time for which an auditor is appointed. Setting the end of November as the deadline for setting fee scales so that up-to-date information can be included in the calculation seems sensible, as does setting standardised fee variations. However, can the Minister confirm that such fee variations will be in proportion to the local authority accounts being audited?
I have some concerns about the potential for an auditor to be appointed for as long a period as five years. As external auditors rely heavily on a good working relationship with the local authority finance team and its internal auditors, there is always a risk that a cosy relationship develops. Can the Minister explain the thinking behind the ability for the same auditor, rather than the same audit company, to continue for five years? An explanation of the criteria that will be used by the appointing person to appoint for shorter periods “where desirable” would be helpful, as would an outline of the circumstances for audit firm rotation partway through an audit period, to understand the thinking behind that. If the Minister does not have all that in front of him, it would be good if he could write me a note.
There is a far deeper concern with local authority audits than will be dealt with by this SI. The Financial Reporting Council, which regulates the accounting industry, said this year that 60% of the English local authority audits it had reviewed did not meet its required standards. The House of Commons Public Accounts Committee detailed the problems this July. I will quote from the summary of its report, as we need to think about it:
“Without urgent action from government, the audit system for local authorities in England may soon reach breaking point. With approximately £100 billion of local government spending requiring audit each year”,
the Ministry of whatever it is called now—levelling-down, communities and whatever—
“has become increasingly complacent in its oversight of a local audit market now entirely reliant upon only eight firms, two of which are responsible for up to 70% of local authority audits. This has not been helped by the growing complexity of local authority accounts … If local authorities are to effectively recover from the pandemic, it is critical that citizens have the necessary assurances that their finances are in order and being managed in the correct manner.”
Both the FRC and the Public Accounts Committee report raise fundamental issues about local authority auditing which are not addressed by this SI, but which I hope the Minister can respond to either now or in writing. Having said that, with the exception of the questions I raised earlier, I concur with the changes that have been proposed.
My Lords, I, too, declare my interest to the Grand Committee as a vice-president of the Local Government Association.
Audit is about ensuring the proper inspection of a body’s financial affairs, ensuring that the financial dealings of the organisation, and the information that residents get, is correct and proper. It gives confidence to local people and, of course, to the Government and everybody else that an organisation is acting properly—or it identifies irregularities.
I was first elected a councillor in 1986—I am showing my age now. I remember the old district auditor, who used to look after the accounts. Of course, that is now all gone; we have local audits run through the Local Government Association.
The noble Baroness, Lady Pinnock, raised an important point on fee scales, what those fees are, when they can be varied and changed, and why. There is also the risk around the relationship: if the same person does the work every year, there may be an issue with things becoming too cosy. For me, there is the whole question of value for money. This is council tax payers’ money that we are spending here—so what are we doing to ensure that, when any fees are varied, we are getting value for money? The noble Baroness made the point that fewer and fewer firms are willing and able to do this work, which is also an issue for the Government to look at.
For me, it is about ensuring that public money is spent wisely, properly and legally. If fees are going to be varied, how do we ensure value for money? Then there is the issue of the reduced number of firms doing this work. How do we ensure that the relationship is not too cosy and is always properly professional? Having said that, I have no issue with the regulations, and I shall leave it there. I hope that the Minister can respond to the issues raised. I know that, if he cannot, he will come back to noble Lords with a letter and place it in the Library of the House.
My Lords, we have had an interesting short debate on these regulations, and I thank all noble Lords for their contributions. The problem around audit is long-standing. I remember when I first became a councillor, which was a little later than the noble Lord, Lord Kennedy, back in January 1996 —a very cold month, if I remember—there were real difficulties with filing accounts on time, even then. This has been a long-standing problem and is not a recent one. Those who have read the Redmond review will recognise that the best way to deal with it is by investing and providing additional funding to support local bodies to improve standards. The point made by the noble Baroness, Lady Pinnock, is important. There is a contribution of some £15 million to support local bodies with rising audit fees, making sure that there is the competence required to file accounts in a timely way.
Often, there will be an issue around reconciliation of accounts, which is quite shocking. If you cannot reconcile your accounts—the fundamental accounts in control—money can be lost. There have been examples of councils losing money. So, having high-quality audit is extremely important, as is the completion of audits, which is vital in maintaining transparency and assurance of local authority accounts. Late delivery of local assurance can have a significant impact, not just on local authority financial planning but on the timely completion of whole government accounts. That is why the Government are continuing to implement all recommendations of the Redmond review, including the regulations before us today.
I will do my best to answer some of the questions and I will follow up in writing if I am not able to. In answer to the noble Lord, Lord Jones, the appointing person is specified by the Secretary of State at the Department for Levelling Up, Housing and Communities. It is not a salaried position; they are paid by the local authorities. Importantly, we are keen on the use of the scheme through the Local Government Association and Public Sector Audit Appointments Ltd, which has the specific technical expertise. Of course, local authorities can choose who they like. We recognise that this is a good scheme, which happens to be over a five-year period.
In response to the noble Baroness, Lady Pinnock, I will write on her specific points about shorter appointments, but all appointments require local authorities to voluntarily opt in. We recently consulted on proposals to establish the audit, reporting and governance authority, which is due to replace the Financial Reporting Council as the new systems leader for local audit. We will publish our consultation response in due course.
This is a largely technical provision, which I think has the support of noble Lords.