Local Audit and Accountability Bill [HL]
(11 years, 4 months ago)
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Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, Amendment 14F is quite a narrow probing amendment. At the start of our deliberations today, perhaps I should just make clear that although we have some concerns about the fragmentation of the new local audit regime—an amendment to cover this will be forthcoming on Wednesday—we accept the broad technical means by which the Government seek to implement its framework, drawing on the Companies Act 2006 and the Audit Commission Act 1998. Our probing should be seen in that context.
The Companies Act 2006 sets out who may be treated as holding an appropriate qualification for the purposes of acting as a statutory auditor. A Secretary of State can include in this persons who are qualified to audit accounts under the law of a foreign country and someone who holds a professional qualification in a specified foreign country. For these purposes, an EU state is not treated as a foreign country. These provisions are specifically excluded from operating under the Bill, so can the Minister please confirm, under the local audit regime, what is the position of individuals qualified in an EU country regime, especially given the broader nature of local bodies’ audit? What is the rationale for excluding other foreign qualifications, which are included in the Companies Act? I beg to move.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham)
My Lords, the Government believe that the Bill provides for sufficient suitable qualifications to be recognised for the purposes of local audit. As the noble Lord said, this amendment seeks to find out about the qualifications and, in particular, the approval of overseas qualifications from non-EU countries for the purpose of statutory audit. It also sets out the conditions that will need to be satisfied relating to the assurance of professional competence of those holding an overseas qualification.
Section 1221 provides for approval of all those in a specified country who are qualified to audit accounts or only those who hold specified qualifications in that country. In the case of the latter, the Secretary of State may specify any additional requirements to be satisfied. The section allows the Secretary of State to recognise an overseas qualification only if there is comparability and/or equivalence of treatment of United Kingdom qualifications in the country in question.
For local audit, an auditor will hold a suitable qualification if it is one recognised under Part 42 of the Companies Act 2006 or if it is another qualification recognised under the Bill. If a third-country audit qualification has been recognised for company audit through the application of Section 1221 of the Companies Act 2006, it would be deemed an appropriate qualification for local audit. I must stress that we would expect anyone employed under those circumstances to have experience of local audit as carried out in this country. I hope that will help the noble Lord and that he will feel able to withdraw the amendment.
Lord McKenzie of Luton
I thank the Minister. I may have missed it, but what provision allows the Secretary of State to take account of a third-country qualification? I ask because the Bill specifically omits the provisions of the Companies Act which permit that. I was trying to spot the precise bit of the Bill that allows that to happen. I think it is entirely appropriate that it does—if it does—but if the noble Baroness could give me the particular reference, that would be good. Presumably for EU nationals, the position has not changed. Whatever EU directive applies, they would be entitled to be considered, as indeed someone with a UK qualification would be in Europe.
Baroness Hanham
My Lords, EU auditors may be subject to an aptitude test if they practise local audit in the United Kingdom on a permanent basis. Under all these provisions, the expectation is that people would be qualified, as they are in the United Kingdom, to carry out local audit. We shall come to that further on, because it is the qualifications that will matter. We would not see any dilution of the competence of auditors, whether they come from here, the EU or non-EU countries. Have I still not answered the noble Lord’s question?
Lord McKenzie of Luton
Perhaps we might deal with it in correspondence. I was just trying to see the particular reference that allows back in the approval of those with third-country qualifications. I can see the provision that takes it out of the starting point, which is the Companies Act 2006. I think there may be something else coming from the Box.
Baroness Hanham
My Lords, it is blindingly obvious—the provisions in paragraph 8 of Schedule 5 to the Bill, which amend the Companies Act. Why did I not think of it immediately?
Lord McKenzie of Luton
My Lords, I think I am grateful for that follow-up. I shall read the record to see that it remains blindingly obvious. From what the noble Baroness has said, I do not disagree and am supportive of the provisions and facilities made in the Bill. It is important that there is no lessening of standards, whether a qualification is an overseas one or a UK one. For the time being, I beg leave to withdraw Amendment 14F.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, this amendment relates to Schedule 5 again, which relates to the new regulatory framework for auditors of local public bodies. It draws heavily, as we have discussed, on the framework contained in the Companies Act 2006, the provisions of which, as I have said, have our broad support. Schedule 5 applies Part 42 of the 2006 Act to local audits, as it does to statutory audits, but with some exclusions. The purpose of this amendment is to understand the exclusion of Section 1215(2) to (7) of the Companies Act.
Section 1215 takes us back to the subject of independence, and requires a statutory auditor to resign immediately on becoming prohibited from acting because of lack of independence, and this requirement is imposed similarly on local auditors. However the legal sanctions which underpin the failure to comply with this requirement for statutory auditors appear to have been omitted in the case of local audits. Doubtless the Minister will tell me that it is blindingly obvious and covered somewhere else. Could she draw my attention to a specific provision? I beg to move.
Baroness Hanham
My Lords, we may need to explain to Hansard that I was joking. The new audit framework sets out robust arrangements to provide confidence in the independence of the local auditor. This amendment seeks to replicate the criminal offences in Section 1215 of the Companies Act 2006 in the local audit framework, as the noble Lord explained. We have chosen not to replicate these particular criminal offences as we consider that there are other, more suitable mechanisms to do so—in short, the disciplinary powers of the recognised supervisory bodies and the ethical standards raised by the Financial Reporting Council.
The rules and practices that the recognised supervisory bodies will put in place will cover the independence of the auditor. They will also outline the disciplinary sanctions that could be applied if the independence requirements were found to have been breached. This could ultimately include the withdrawal of registration, and other sanctions could include that the firm responsible for the audit would not be able to accept new audits or particular types of audits, that a person may no longer be a responsible individual and that a specific employee may no longer be involved in audit work.
The Government have also been mindful of not introducing any new offences unless there is a compelling case to do so. Even though these offences are in the Companies Act 2006, they would be considered as new offences if applied to the provisions in the Bill.
That is the explanation. I hope that the noble Lord will be happy with it and that he will feel able to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I am certainly going to withdraw the amendment. If I understand the position correctly, there will be a difference of approach between local audit and the Companies Act provisions, where private sector auditors will continue to be subject to this regime. In a sense, they will still be subject to the supervisory requirements for local auditors that the noble Baroness outlined. Is that correct?
Baroness Hanham
My Lords, I think it is correct. As I suggested, the Financial Reporting Council issues ethical standards for auditors, and those cover the integrity, objectivity and independence of auditors, and it applies in the audited financial statement. Therefore, I think that we are covered from that point of view. We have also been working with regulatory partners, including the Financial Reporting Council, to decide how these may need to be applied to auditors of local bodies. Therefore, I think that some discussion is still going on about the matters that the noble Lord has raised.
Lord McKenzie of Luton
I will not dwell on it but I thought that one of the objectives of the current exercise was to align local audit with private sector audit arrangements. This seems to be creating a divergence. However, I am not sure that there is going to be further fruitful discussion on this. I hear what the Minister has said and I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“( ) The requirements must in particular take full account of the need to understand the wider scope of public audit covering the audit of financial statements, regulatory, propriety and value for money.”
Lord McKenzie of Luton
My Lords, as we discussed, Schedule 5 is concerned with the eligibility and regulation of local auditors. It covers independence requirements, the qualification requirements, the monitoring of audits and the inspections. The requirements that may be specified to be an appropriate qualification, enabling a person to act as a local auditor, include their qualification experience, practical training, examinations passed and so on. However, this amendment specifically requires that, in evaluating whether somebody has an appropriate qualification, regard must be had to the need to understand the wider scope of public audit. In fact, this is an issue that also runs for the Financial Reporting Council, which is of course to be the overall regulator.
The scope of public sector auditing was raised at the pre-legislative scrutiny committee—in particular, during the exchange with Mr Steve Freer, the chief executive of CIPFA. On 20 November 2012, he said in response to Question 378:
“Over the past 20 or 30 years—the period in which the commission has been in operation—we have seen that the entry of firms into this market”—
that is, the public sector market—
“is quite difficult. That reflects the fact that the transition from private sector auditing, which firms are clearly extremely good at, to public audit is not straightforward; it is very challenging and difficult”.
He went on to explain that the firms currently involved in public audit work would tend to set up specialist divisions. The responsibilities of auditors in the public sector include not only statutory functions in relation to financial statements but statutory functions in relation to being satisfied that there are proper arrangements for securing economy, efficiency and effectiveness in the use of resources.
It is clearly vital that an understanding of and an ability to undertake this wider role is part of an appropriate qualification for local auditors. The Minister will doubtless tell us that it is implicit in the requirements that may be specified in paragraph 8(5) of Schedule 5, but the amendment would make it explicit. It gives us the chance to probe the Government’s assessment of how many firms are likely to be in the market for local audit work, certainly for principal body audits. We are told that there were just 13 firms which prequalified when the Audit Commission outsourced its in-house practice, although only seven firms were appointed. Schedule 5 provides for the register of auditors of be maintained. When is it expected that the register will first be published and when might we have sight of the draft regulations? In particular, can the Minister say something more about the Government’s assessment of how many firms are likely to be in the market for local audits, and will they be appropriately qualified and have an understanding of the wider role of public audit? I beg to move.
Lord Tope
My Lords, I express my appreciation to the noble Lord, Lord McKenzie, for raising this issue, because I know it is one of concern. Indeed, it was one of the concerns, as I think he mentioned, expressed by the Chartered Institute of Public Finance and Accountancy, best known to us all as CIPFA. One of the concerns that it raised in its Second Reading briefing was that the wider scope of public audit has not been fully embedded in the Bill. This is perhaps an example of that. CIPFA makes the point, which those of us familiar with local government will understand very well, that public audit is a good deal wider than private sector audit. I do not think I need to labour the point. We are looking forward to the Minister’s response, which I see she is eager to give us.
Baroness Hanham
Too eager, perhaps. I say at the outset that we are absolutely clear that the auditors must be competent, appropriate and steeped in local government finance. We should start there, with that as the interest common to us all, to make sure that any changes are made in the most appropriate way so that we can be sure of getting the same high standards of auditing that taxpayers expect and to which they have been accustomed.
The Bill sets out a pretty robust regulatory regime. The National Audit Office will have to develop the underpinning code of audit practice and produce supporting guidance that will set out how auditors perform their role. What this means, essentially, is that the boards going for public audit will not change. In addition, the future local audit framework will require all auditors to be suitably qualified and competent to carry out local audits.
The Bill requires auditors to hold an appropriate qualification. This is either a qualification recognised under Part 42 of the Companies Act 2006, for a statutory audit, or another qualification recognised under this Bill. The Secretary of State will be able to make regulations setting out the minimum requirements that other qualifications will need to meet in order to be recognised for the purposes of local audit.
It is clearly crucial that local auditors are, as I have said, suitably qualified, that they attain an appropriate qualification and that that demonstrates that an individual understands, among other things, auditing standards, accounting standards and audit procedures. These standards and skills must be applied to audit assignments regardless of whether they are in the public or private sector.
However, while holding an appropriate audit qualification is necessary, it is not sufficient in itself for those individuals within firms assigned responsibility for signing audit reports of local bodies. What is important for local audit is that auditors have the skill and experience of local audit, which includes understanding the wider scope of public audit. As such, we believe that the amendment is unnecessary as the Bill requires all individuals to have this appropriate level of competence to carry out local audits, regardless of whether they hold a qualification under Part 42 of the Companies Act 2006 or another one recognised under the Bill. This critical requirement regarding competence is set out in paragraph 27 of Schedule 5. The amendment would apply only to the other qualifications recognised under the Bill, and not those recognised under Part 42 of the Companies Act.
It maybe helpful for me to outline briefly how the framework works for the companies sector and then explain how the framework for local audit will ensure that all local auditors understand the wider scope of public audit, thus removing the need for this amendment. Under the Companies Act, it is for the recognised supervisory body to set out the requirements for approving those individuals who will be responsible for signing audit reports for companies. The requirements established by the recognised supervisory bodies are subject to agreement and oversight by the Financial Reporting Council. Once an individual has been approved to sign an audit report of a company, it does not follow that they could sign such a report for any company. That individual would need to be competent to sign the audit report of the specialism of that particular company; they would need to have the relevant skills, experience and knowledge of the relevant subject matter of the company or industry in which they work.
We are replicating this framework for local audit. The recognised supervisory bodies for local audit will have responsibility for approving the individuals nominated by its member firms for signing the audit reports of local bodies. This will also be overseen by the Financial Reporting Council. Under rules that it will agree with the Financial Reporting Council, a recognised supervisory body will approve an individual to take a key responsibility in the audit of a local body only if that individual has an appropriate level of competence to carry out local audits. A firm that cannot demonstrate that a nominated person has recent experience of auditing a local body and understands the wider scope of local audit will not be considered competent and therefore cannot be approved by the recognised supervisory body.
To provide further assurance on this issue, I should also say that there are established standards and professional obligations with which firms must comply regardless of whether they are appointed to a company or a local public body. In particular, the international standard on quality control requires all firms to have policies and procedures that ensure that individuals have the right knowledge and experience to undertake a specific engagement. For local audit, this would mean that a firm could not put forward an individual to be responsible for a local audit if that individual did not understand the wider scope of public audit. If it did so, it would be in breach of its obligations and would risk breaching the terms of its registration with the recognised body.
The noble Lord, Lord Tope, raised the question of CIPFA and the discussions that have taken place. It may be helpful for noble Lords to know that I recently saw and had discussions with CIPFA about this, and it is being closely involved in discussions that are going ahead with the council, so its views are well taken into account. We recognise that it is probably one of the very few bodies with qualifications that continue to exist for auditors who will be required to do this work.
The register will be published when we see the draft regulations, which will be available at the next stage in the Commons. The register will be published in 2016, in time for the local appointment of auditors. We have discussed the question of how many firms will be able to do this, and I remember saying earlier that we hope and anticipate that smaller local firms will be able to get their staff qualified, if they do not have that qualification, so that they can bid for contracts. We expect that the smaller, new contracts will open up the market to smaller firms. We are anticipating that this will not just be the big four or the bigger four and three bidding—which I think got us to seven before—and that there will be increasing competition. We believe that there should be plenty of smaller companies available, once local authorities start to appoint their own auditors.
I hope that has picked up the points on the register and those made by CIPFA. I know that it is involved in what is going on to ensure that these regulations and qualifications are satisfactory.
Lord McKenzie of Luton
I thank the Minister for a very full reply. It is very helpful to have that on the record. I also thank the noble Lord, Lord Tope, for his support for this line of enquiry. I note that the register will not be available until 2016, but it is good that the draft regulations will be available when the Bill goes into the Commons. I think we shall have to see the outcome of that and how many local firms end up in a competitive position in the market. One of the fears is that those firms that are active in the local audit market currently do it through specialist divisions. They have the financial clout to invest in the training in these sorts of arrangements. I think we would have common cause in wanting there to be a number of firms in the market—certainly it should be expanded from the existing base. I am somewhat sceptical about whether that would be achieved. In the mean time, I beg leave to withdraw the amendment.
Lord Wallace of Saltaire
Lord Wallace of Saltaire
My Lords, this amendment removes an unnecessary provision from paragraph 16 which is a supplement to paragraph 15 of Schedule 5. Paragraph 15 substitutes Section 1248 of the Companies Act 2006, with which I am sure noble Lords are all familiar. It enables the Secretary of State to direct a relevant authority to retain an auditor to carry out a second audit in certain circumstances.
Paragraph 16 substitutes Section 1249 of the Companies Act 2006 and inserts supplementary provisions about second audits. Subsection (3) states that a direction given to retain a second auditor may be enforced by injunction, which exactly replicates the wording in Section 1249 of the Companies Act. However, given that all public authorities, unlike companies, are subject to judicial review, we now wish to remove subsection (3) which refers to the use of an injunction; this is clearly not necessary. Should a relevant authority fail to comply with the direction relating to a second audit, an action could be brought for judicial review. This is currently the way in which local public bodies are brought to account. This is a minor and technical amendment that removes an unnecessary provision. I beg to move.
Lord McKenzie of Luton
I thank the noble Lord, Lord Wallace of Saltaire, for the explanation of this amendment, and I have no problem with it. My question was about what alternative the Government had in mind by deleting this enforcement by injunction. The Minister dealt with that; it is by judicial review. As to being familiar with the Companies Act 2006, I have a great affection for it; it was the first piece of legislation I ever worked on. I spent days carrying the bag of the noble Lord, Lord Sainsbury, around committee rooms on it, although do not ask me what is in it. I support this amendment.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, Clause 20 covers the general duties of auditors of a health service body and sets down the areas on which the auditor must be satisfied. These include that the body has made proper arrangements for securing economy, efficiency and effectiveness in the use of its resources. Clause 20(4) precludes the auditor’s opinion on the accounts making any reference to this requirement unless he is not satisfied in that matter, so the auditor cannot positively state that he is satisfied that the body has made proper arrangements for securing economy, efficiency and effectiveness in the use of its resources. Obviously, an informed reader of the auditor’s report would be able to interpret what appears to be silence on this, but it seems an odd restriction. Perhaps someone could explain its purpose. I beg to move.
Baroness Hanham
My Lords, either my noble friend Lord Wallace or I will reply to the amendments. In this case it is me.
The amendment would remove the provision for auditors to report on value for money only when they are not satisfied that the authority has made arrangements for securing value for money. This would result in every audit report containing a specific conclusion on value-for-money arrangements.
I hope that it will help the Committee if I start by setting out why the Bill provides for value-for-money conclusions to be included only where the auditor is not satisfied about the arrangements. The provision relates only to the reporting of the results of the audit. The local auditor will still be required to carry out work to confirm that the arrangements for securing that value-for-money arrangements are made. The technical standards for that work will be set out by the National Audit Office in the code of audit practice that it will produce.
The report of the auditor is a detailed and technical document. The Government are of the view that for health bodies—in this clause we are referring only to health bodies—the audit report should contain those matters that are most important to the reader. We consider them to be: the opinion on the true and fair nature of the accounts; for those bodies that are directly funded from resources provided by Parliament—which includes all bodies that are now part of the health service—to confirm that the funds have been used for authorised purposes; and any cases where arrangements to secure value for money are not appropriate. This approach would provide for greater focus and attention where value-for-money arrangements are not in place.
The provision in the Bill also aims to bring consistency for all health bodies. Currently, the audit opinions of health commissioning bodies and NHS trusts contain a specific opinion on value-for-money arrangements. The audits of foundation trusts do not, so we are taking the opportunity to bring all reporting into line and to improve the clarity of auditor reporting in the health service. I stress that the work carried out by the auditors is the same, whatever the reported opinion.
I hope that that provides greater understanding of what we are doing and that the noble Lord will withdraw his amendment. If not, I look forward to what he is going to say.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister, as ever, for her explanation. I remain somewhat bemused about why there could not be positive reporting in this area, although it is not a matter that I intend to pursue. I accept that, whatever the outcome, the nature of the work and the task in hand would be undertaken in any event.
The Minister said that the opportunity had been taken to align foundation trusts and other health bodies’ provisions, presumably, from what she said, in favour of the foundation trust formulation. Is that right?
Baroness Hanham
Yes, my Lords. At present the other parts of the health service are required to have value-for-money audit reports. Foundation trusts do not. The noble Lord is correct that it is being amalgamated under the foundation trust umbrella.
Lord McKenzie of Luton
I am grateful for that further explanation. I am bound to say that it did not give me much greater comfort. Given what has gone on with some foundation trusts—I think we will come on to them later—and how many reports there have been about the nature of their financial circumstances, they do not seem to be a good precedent on which to focus an alignment of practice. Perhaps we will pick up that issue later in our proceedings. In the mean time, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“(d) a person who fell within any of the provisions under paragraphs (a) to (c) at a time to which the information or explanation required by the local auditor related.”
Lord McKenzie of Luton
My Lords, this is another quick one, I expect. This amendment relates to an offence under Clause 22. Clause 21 provides for an auditor’s right to documentation and information. Clause 22 makes it an offence without reasonable excuse for a person to obstruct the process or to fail to comply with any requirement of a local auditor. A person guilty of an offence can be subject to a fine on summary conviction. A local auditor can recover reasonable expenses in connection with proceedings alleged to have been committed by certain persons from the relevant authority. Those persons include, for example, a member or officer of the relevant authority. The amendment seeks to makes certain that the right to recovery runs, albeit that the person committing the offence is no longer a member or officer of the authority. This raises the issue of when an offence might have been committed when it includes, for example, continuing failure to provide information or explanations by somebody who has ceased to be a member or officer and perhaps put themselves in that position deliberately. This ties the position back to Clause 21(8)(f), which brings such individuals within the scope of those from whom the auditor can seek information. We do not want anyone to escape by jumping ship or, indeed, for the recovery of costs to be precluded in those circumstances. I beg to move.
Lord Wallace of Saltaire
My Lords, Clause 21 gives auditors a right to access documents and information that they consider necessary for them to exercise their functions under this Bill. Clause 22, as the noble Lord has just explained, provides that a person who obstructs the auditors’ rights under Clause 21, without reasonable excuse, commits an offence. Clause 22 enables the auditors to recover their expenses from relevant authorities in connection with offences committed by members or officers of the authority.
This amendment enables me to highlight two improvements we have made to the Bill since we published it in draft. First, we have included former members and officers of a relevant authority within the duty to provide information and explanation as required by the auditor. Secondly, we have increased the provisions supporting the auditors’ recovery of their costs. Auditors will be able to recover reasonable costs from the authority being audited for their time. We expect that the contracts between the auditor and relevant authority will also enable this, but to remove doubt, the Bill includes specific provisions to enable the auditors to recover costs or expenses for specified functions.
As I have set out, Clause 22 enables the auditors to recover reasonable expenses incurred from the authority as a result of any offence committed by a member or officer of the authority or a person within a connected entity of that authority.
This amendment would extend the provision set out in this clause to enable auditors also to recover expenses regarding offences committed by former members or officers of an authority from the relevant authority. This is a matter to which we gave some thought when we were strengthening the provisions supporting the auditor to recover costs and expenses incurred in undertaking its functions. We concluded that there are some circumstances under which it would not be right for a relevant authority to be required to fund these costs automatically; for example, where a person was a member or officer at the time to which the information or explanation relates but commits the offence of obstructing or not complying with the auditor after they have left the position. Rather than legislating to provide for such rare situations, we consider that it would be preferable for the relevant authority and auditor to agree via their contracts how the auditor’s costs and expenses would be covered in such an unusual situation. I hope my explanation allows this amendment to be withdrawn.
Lord McKenzie of Luton
I am grateful to the noble Lord. I think his explanation confirms what I thought was an issue about somebody who was involved and who had committed an offence but subsequently left the organisation. In those circumstances, if I understand the explanation, that precludes the recovery of the auditor’s reasonable expenses. Did I understand that correctly?
Lord Wallace of Saltaire
My understanding is that it means that the recovery of the reasonable costs does not automatically fall to the authority. If the person who had left the employment of the authority was unreasonably obstructing the provision of the information—refusing to give it—there are circumstances in which the reasonable costs might indeed fall on him or her; that would be a matter to be agreed in the contract between the auditor and the authority.
Lord McKenzie of Luton
I am grateful for that. I missed that part of the explanation originally. If we are not saying that the costs are not going to be recovered, if it is not the audited body, it is going to be the individual. I am grateful for that explanation, and I beg leave to withdraw the amendment.
Lord Wills
“Auditors right to documents and information of private contractors
(1) A local auditor has a right of access at all reasonable times to audit documents from private companies that the local authority have contracted services to during the last financial year.
(2) A local auditor must publish any audit documents, obtained under subsection (1), as part of a local audit publication.”
Lord Wills
My Lords, both this amendment and Amendment 18A, which is grouped with it, seek to improve transparency in these new arrangements for local government. Such transparency is key to greater accountability and therefore to better government and over and over again we have seen what damage can be done when transparency is smothered. The NHS has provided some tragic examples recently, as the Francis report into Mid Staffs and the Grant Thornton report for the Care Quality Commission have both shown.
The work carried out by private contractors for local authorities will often be of equal importance in the way that it involves issues of public safety, but it may also raise other issues of concern to the public such as corruption. The public should also have rights of access under the Freedom of Information Act to the work carried out by local auditors, because they are the ultimate clients of those auditors. Those auditors may be carrying out their tasks for a local authority, but that local authority serves the public.
The amendments are particularly necessary because the Localism Act envisages that a growing proportion of local authorities’ functions will be carried out for them by private companies under contract. If the authority carries out the work itself, then all information about that work is subject to the Act and subject, of course, to the exemptions in the Act. But the public’s right to information is less straightforward when the work is done by a private contractor. Section 1 of the Freedom of Information Act establishes that the right of access is to information which a public authority holds. Section 3(2)(b) of the Act provides that information which another person holds on behalf of the authority is treated as held by the authority itself.
However, how much of the information a contractor holds about the contract is held on behalf of an authority? The answer is not self-evident. The contract itself may specify that particular information is to be treated as held on behalf of that authority or it may say a specified type of information must be provided to the authority if it asks for it, to help it answer an FOI request. But what if such a provision applies only to a very limited class of information? The effect may be to exclude the public from access to any information which is not specifically mentioned. The amendments will help, I think, to overcome any such oversights.
Lord McKenzie of Luton
I speak briefly in support of my noble friend’s amendment concerning freedom of information. He has opened up a very important area of discussion. My understanding—as he said—is that the Audit Commission, as a public authority, is subject to freedom of information but that those private sector firms appointed to undertake local public audits are not. The purpose of the amendment is to put them in a position where they would be subject to freedom of information. My noble friend made a good case for this.
As I understand it, there was a consultation on that in 2011 and the Audit Commission’s response was that it was sensible for auditors to be brought within the Freedom of Information Act, adding that it would be necessary to make it clear that freedom of information requirements applied only to information held in support of the functions of local public auditors. My noble friend made a good case.
In relation to Amendment 17, I am not quite clear about the extent to which my noble friend wishes this to proceed. It talks about the audit documents from private companies to which the local authority has contracted services. It is sometimes, possibly frequently, the case that it is not just one entity that is providing services. There is a whole range of sub-contractors in the chain and I am not sure quite how it would work in those circumstances. However, I believe that my noble friend has raised a very important point and, like him, I look forward to the Minister’s reply.
Lord Wallace of Saltaire
My Lords, I recognise the importance of this transparency issue. I suppose that I should start by declaring an interest as someone who has received a number of parking tickets from Wandsworth Council. It strikes me as odd that I have never received any parking tickets from Bradford Council. London councils must be sharper on the draw on this, and of course they use private contractors rather more than do councils in Yorkshire and, for all I know, councils in Newcastle.
There was considerable consultation on this issue, and I regret to tell the noble Lord that one thing that came back most strongly from it was a fear that this sort of provision would increase audit fees.
Amendment 17 seeks to give auditors a right of access to the audit documents of companies with which local authorities have entered into contracts and a duty to publish those documents. Following consultation, we believe that the Bill provides sufficient powers for local auditors to access all documents and information that they need in order to undertake the audit and that they have powers to publish those documents, and that therefore the amendment is not needed.
Clause 21 includes a broad power that enables auditors to access all documents and information that relate to the relevant authority which the auditor thinks are necessary to support him or her in undertaking the audit. These rights apply not only to documents and information held by the authority, its members and staff but to documents and information held by other persons—including the authority’s contractors—that the auditor thinks are necessary to undertake his or her statutory duties in relation to the audit of the relevant authority. Clause 22 makes it an offence to obstruct the auditor’s power to obtain these documents and information or to fail to comply with the duty. These provisions are very similar to those under the existing Audit Commission Act regime, which have not proved to be lacking.
In terms of publication of documents, the auditor is able to refer to information and documents from private companies in audit reports where these are appropriate to the audit of the local authority. In addition, the Government’s code of recommended practice for local authorities on data transparency encourages local authorities to publish all expenditure over £500, as well as copies of contracts and tenders. All councils are publishing spend above £500 and many provide contracts information. In late 2012, we consulted on updating the code and making it mandatory through regulations, and we will publish a government response later this summer.
Amendment 18A would amend the Freedom of Information Act so that auditors appointed by local authorities are defined as public authorities and are subject to the provisions under that Act. Auditors appointed by the Audit Commission are not currently included within the remit of the FOI Act. When we originally consulted on the future of local audit framework in spring 2011, we asked whether the future regime should bring local auditors into the Freedom of Information Act. After considering the broad range of responses to the consultation, the Government concluded that there was no compelling case to bring the auditors’ public office functions within the remit of the FOI Act.
There are two key reasons for that. First, we believe that doing so would add little to the existing provisions within the Freedom of Information Act and this Bill. Local authorities are already covered by the Freedom of Information Act, and therefore these requests could be directed at the local authority. Secondly, all respondents to the question—I stress “the respondents”, not the Government—said that they thought that bringing auditors into the Freedom of Information Act would increase audit fees.
In addition, the Bill already supports local transparency and local electorate access to the auditor in a number of ways. For example, the Bill retains all the existing rights for electors to inspect the statement of accounts and audit documents, and to raise questions and objections with the local auditor. Schedule 11 to the Bill enables an auditor to release material in response to this, unless it could prejudice the effective performance of the auditor’s functions.
I hope that that provides assurances that the new regime will support openness and transparency at all stages of the audit process. Auditors will have access to all documents and information that they consider relevant to the audit, local authorities will publish information relating to expenditure and contracts with private firms and local people will be able to inspect the accounts and raise objections with these assurances.
Having debated many previous amendments on other Bills with the noble Lord, I suspect he may nevertheless say that he is not entirely satisfied with all this. If he would like to talk to the Government between Committee and Report, we would be happy to do so, but I hope that, with those assurances, he will be prepared, at this stage, to withdraw his amendment.
Lord Wills
First, I am very grateful to the Minister for that response and for the offer to talk to the Government. I will be very happy to take it up. He is not right that I am not entirely satisfied with his response; I am not at all satisfied with his response. Indeed, I find myself rather saddened by this resiling from the fundamental principle of the importance of transparency. It is in the coalition agreement that the coalition Government are committed to greater transparency. After all the evidence we have seen from the NHS in recent months, I would have thought that the Government would have been persuaded of the importance of that commitment but, sadly, we have the same old excuses that are always trotted out when freedom of information and greater transparency are proposed.
For all that the Minister says that local authorities should be able to provide all the information needed under freedom of information, he did not address the specific examples that I gave to show why there may be cases where the current provision is not adequate in which people will not be able to gain access to the information to which they are entitled. I hope that when he and his officials read Hansard, they will look at that again before we meet so that we can examine this particular case because existing provision is not adequate and neither is the provision in this Bill.
On the question of audit fees, again I had hoped that I would have pre-empted some of these arguments but it is, I have to say, pathetic for the Government to accept this argument. This is an argument for a steady withdrawal of transparency from the public in terms of local government as more and more services are contracted out, as the Government wish, rightly or wrongly, because that is envisaged in the Localism Act. There was a lot of discussion of it when that Bill was going through. As that happens, there will, according to the argument just advanced by the Minister, be decreasing transparency. That stands to reason. The provisions in this Bill are not adequate for that, so I am very disappointed.
Finally, I shall withdraw the amendment for the time being, subject to further discussions with the Minister and officials, but I ask Ministers to reflect on this. There will be abuses of power in local government. Wherever power resides, whether in local government or anywhere else, such as in the National Health Service or in central government, power is abused. Nearly always, greater transparency and freedom of information are the key to preventing, or at least mitigating, the effect of such abuses of power. We have seen it over and over again. So at some point in the future, unless changes are made to the Bill, this Government will be in the dock for having had the opportunity to increase transparency and having refused to do so. The consequences will then be visited, perhaps on some future Government, and some hapless Minister will have to stand up, as we have just seen Health Ministers do twice in the past few months, and apologise to all those who tried to get the information and were denied it and will then have to take remedial measures. Ministers have a chance to do something now before further damage is done. I hope they will think again.
Lord McKenzie of Luton
Before my noble friend withdraws his amendment, will the Minister clarify something? I think part of his answer was that all the transparency that is needed is provided for in the Bill and the regime that we are discussing. In that case, why is there concern about additional audit fees? What extra transparency is being forgone to keep those audit fees down if they would rise if my noble friend’s amendment is pursued?
Lord Wallace of Saltaire
I take the noble Lord’s cynicism about it always being a question of costs, although costs are not entirely a negligible issue at the moment for any of us. We had better pursue through further discussions the particular examples that the noble Lord raised and the question of how far into the internal workings of private contractors one needs to go to be sure that one is getting the value for money and service that one really requires.
Lord Wills
I am very grateful. My noble friend reinforces the point about the pathetic nature of the Government in accepting these arguments about increased audit fees. They really need not be there. These auditors are getting access to a very lucrative new stream of work and they should pay the price to the public in making information available.
Lord Beecham
Before my noble friend withdraws the amendment, what is the present position when a contract is let by the local authority for a particular service in terms of the audit? What is the relationship of the district auditor to a council-commissioned contract in relation to its own service? Does he have access and is he subject to the same disclosure requirements that my noble friend seeks as if the council itself were directly providing that service?
Lord Wallace of Saltaire
My clear understanding is that auditors do have access to the relevant accounts of the contractor, but that would probably differ a great deal from one contract to another. I therefore need to make sure that in saying that they have access I am talking about all the cases rather than some. It may well be that a number of contracts differ one from the other.
Lord Wills
Again, I am grateful to my noble friend, who has made an important point. We will return to these issues in private discussion and I hope that I can persuade the Government that they need to be a little more robust in responding to the consultations. They often are, but not in this particular case. In the mean time, I beg leave to withdraw the amendment
Lord McKenzie of Luton
“Comptroller and Auditor General: prescribed persons
The Secretary of State will undertake that the Comptroller and Auditor General be added as a prescribed person for the purposes of the public interest disclosure provisions.”
Lord McKenzie of Luton
My Lords, the pre-legislative scrutiny committee reminds us that in many instances serious cases of financial or governance failure are not identified through the audit itself but are brought to the attention of the appropriate authorities by individual whistleblowers. This matter could hardly be more topical. It is vital that robust protections are available for individuals in all relevant bodies, including health bodies.
So far as whistleblowers are concerned, currently the Audit Commission is a prescribed person under the 1998 public interest disclosure provisions. Its appointed auditors are also prescribed persons. The Public Interest Disclosure Act protects from recriminations employees who make disclosures about a range of subjects. Whistleblowers can claim protection by disclosing their concerns either to an employer or, if they prefer, to another organisation authorised to receive disclosures—a prescribed person. The commission provides a confidential public interest disclosure line for employees of councils and NHS bodies where they are unable or unwilling to report internally. Once employees contact the commission, the commission alerts the relevant auditors.
The Bill makes no mention of whistleblowers, and this is an area that needs to be strengthened. We believe that, while appointed auditors should remain a prescribed person, there should also be another prescribed body which could pass on information to an auditor—for example, in cases where employees are unable to contact the auditor directly or where, as the ad hoc draft Bill committee suggested, they may not be comfortable approaching a private auditing firm that has a commercial relationship with the local body or council.
The draft Bill committee recommended that the Comptroller and Auditor-General should take on this role in the future, and that is what the amendment provides for. We may be at one with the Government on this issue and the NAO can provide a hotline for whistleblowers. If the Government are to provide this by order, what requirements will be placed on the NAO as to what it does with the information provided? The Audit Commission would currently, as I said, forward any disclosures to the relevant auditor. I beg to move.
Baroness Hanham
My Lords, I shall respond briefly, but I can also pick up some extra points that the noble Lord raised.
The Government, in response to the committee that undertook the scrutiny of the draft local audit Bill, have already indicated their intention to make the Comptroller and Auditor-General a prescribed person under the Public Interest Disclosure (Prescribed Persons) Order 1999. It is not necessary to include this in the Bill, as we intend to do it by making an amendment to the order following the closure of the Audit Commission.
On the powers of the NAO, at present it is the auditor that considers a disclosure in the context of the existing statutory powers and duties—for example, in relation to considering whether to make a public interest report on the matter. We do not think that it is necessary or appropriate to duplicate this by giving additional powers to the Comptroller and Auditor-General. This mirrors the current arrangements.
The noble Lord also asked why the Bill did not say anything about whistleblowing. We do not believe that it is necessary for the Bill to include provisions around that matter, because that is covered in other legislation. The Audit Commission and its auditors are included as prescribed persons in the Public Interest Disclosure (Prescribed Persons) Order 1999. Amendments will be made to that order to designate local auditors and the Comptroller and Auditor-General as prescribed people—that is, the people to whom whistleblowers can go. The Comptroller and Auditor-General will not necessarily have a duty to investigate those concerns as a disclosure in the context of the existing statutory powers and duties—for example, in considering whether to make a public interest report on the matter. We do not think that it is necessary or appropriate to duplicate this by giving extra powers to the Comptroller and Auditor-General, as I said.
I hope that it is clear that we are not in any way trying to reduce the role of whistleblowers or to put them under any sense of restriction from acting in such a way. There will be a very clear route concerning to whom whistleblowers can go, and they will be protected, as they are at the moment, from any retribution if they do that. I hope that that gives the noble Lord a satisfactory explanation.
Lord McKenzie of Luton
My Lords, again, I thank the Minister. I accept entirely that there is no attempt to dumb down the role of whistleblowers and that that will be fully supported. What is it that the Comptroller and Auditor-General is expected to do with information provided to it as a prescribed person which does not go to the local auditor?
Baroness Hanham
My Lords, exactly as happens at the moment, the Audit Commission directs whistleblowers to the relevant auditor, who is the person in power to take appropriate action. Whistleblowers will continue to be able to go directly to the auditor, as I said, and we extend that to the Comptroller and Auditor-General, who will refer it back again to the local auditor to take up.
Lord McKenzie of Luton
I am grateful for that and beg leave to withdraw the amendment.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, the amendment amends the requirement that a local auditor must notify a relevant authority’s auditor panel before making a public interest report and requires the notification to be made when the report is made. There was a very strong recommendation from the pre-legislative committee that an auditor should be able to raise a public interest report without prior reference to the audited body’s auditor panel or audit committee. This amendment would fulfil that recommendation in the knowledge that the Bill is an improvement on the draft, which required consultation with the auditor panel.
Public interest reporting is, of course, a vital part of public auditing and assurance. There is a statutory requirement in the Audit Commission Act and the Bill that we are considering. Under Section 8 of the Audit Commission Act 1998, the appointed auditor is required to consider whether to issue a report in the public interest of any significant matter coming to his or her notice in the course of an audit and to bring it to the attention of the audited body and the public.
Baroness Hanham
My Lords, the Bill retains the auditor’s duty to consider whether there are any issues on which he or she should make a public interest report, and auditors will use their professional judgment to decide whether to do so, as they do now. The auditor must inform the auditor panel before issuing a public interest report.
These two amendments would change the auditors’ consideration of whether to issue a public interest report. Amendment 17B would require the auditor to inform the independent auditor panel at the same time as, rather than before, issuing a public interest report. Amendment 17C would place a duty on the National Audit Office to provide advice and support to the auditor, if asked, before and during the issue of a public interest report. The noble Lord made that very clear in his opening remarks.
I understand the intent behind these amendments but do not consider them to be necessary. First, regarding the requirement on the auditor to inform the auditor panel, I should explain that we have refined this requirement in the light of the pre-legislative scrutiny committee’s recommendations. The draft Bill required the auditor to consult the auditor panel before making a public interest report, but the Bill now requires the auditor only to inform the panel before issuing a public interest report.
As we have discussed, an auditor panel has a key role in overseeing the independence of the relationship between the auditor and the relevant authority. We believe that this requirement on the auditor to inform the panel supports the panel’s role in overseeing the independent relationship between the auditor and the audited body. We would not expect the panel to try to influence the auditor in the discharge of his or her functions or on whether to issue the report. In practice, auditors will often need or wish to discuss issues with persons within the relevant authority when investigating the matters under consideration to ensure a full understanding of the situation and to gather the evidence. I therefore do not believe that it is necessary or particularly desirable to make this change.
Secondly, on the role of the National Audit Office, the Bill already places a duty on the Comptroller and Auditor-General to produce and maintain the code of audit practice and provides a power to issue guidance in support of the code. These will support auditors to undertake their full range of functions under the Bill, including the issue of public interest reports. We do not believe that placing a duty on the National Audit Office to provide guidance is the right approach. Auditors are accountable for their actions and will exercise their professional judgment when deciding how to undertake their functions. Individual auditors will base decisions on their professional judgment, supported by their firms. This is how it operates now. The Audit Commission issues guidance but does not seek to influence the auditor’s judgment. I think it would be fair to say that the Comptroller and Auditor-General would stand behind the auditor. The guidance will be there, and I am certain that under it if the auditor wished to seek further clarification, it would be perfectly possible under this legislation for them to do so from the National Audit Office or the Comptroller and Auditor-General.
Auditors will still have a statutory duty to consider whether they need to make a public interest report. That will occur at the time of informing the panel or subsequently, and they do not need to do anything more than inform it and tell it they are going to do it, although they may discuss it if necessary. Their professional judgment will decide whether a public interest report is necessary. Nothing will change in that respect, and the Bill provides for auditors to recover reasonable costs.
Finally, the noble Lord raised foundation trusts, which appoint their own auditors but have a regulator. Monitor said to the draft Bill scrutiny committee that there is a rigorous monitoring system which detects problems early and tiered support and intervention from Monitor to help resolve problems before they escalate, so the system is different. Also, auditors have qualified accounts of foundation trusts which demonstrate that they are not reluctant to give bad news or to raise issues as necessary.
I hope that the noble Lord will be satisfied with those responses and will feel able to withdraw his amendment.
Lord McKenzie of Luton
I thank the Minister for her reply. The point that I was trying to make was that, since foundation trusts have appointed their own auditors, the lack of public interest reporting has been equated with concerns about how independent auditors are and whether they feel that they have the strength and support to issue those reports. I take the point that some of them may well have had their accounts qualified, although I do not know on what grounds. I think that it may help to put the issue in context if we could have a note on how many foundation trusts have had their accounts qualified and in what respect.
I accept entirely that the Bill as it stands is a considerable improvement on where the draft Bill was on these issues. In a sense, the amendments that I was seeking to press are relatively minor, although I suggest that they are important. The noble Baroness made reference to the importance of the auditor panel being informed before the report is issued. I am a bit unclear as to what it is then expected that the auditor panel will do. I think that in a lot of instances there will, as the Minister said, be engagement along the way before we get to the final document. However, the difference between it being done when the report is issued and before that suggests that there is a perceived role for the auditor panel before the document is finally issued. It is another hurdle, and that is what I was seeking to avoid with this amendment.
I well understand the point about the NAO and the code of practice, and that that will be the route. However, from what has been said, whether it will replicate the sort of sounding board that the Audit Commission has and currently exercises for auditors who are contemplating developing thoughts around public interest reporting, I am not sure. I do not think that I got the sense from the Minister’s reply that that more proactive engagement was expected. If it were not, that would be a loss, but perhaps the Minister will follow up on that.
Baroness Hanham
My Lords, I am sorry if I did not make it clear that the NAO, while issuing the guidance, will also be behind the auditor, who will be able to discuss issues with it and receive support. The Audit Commission will, as in the past, provide the backbone to the auditor and clarify how to go ahead. That will not change, and I think that there will be strength in that.
We have not really covered this but the noble Lord’s amendment would effectively mean that the auditor about to issue a public interest report would not have discussed it with anybody outside. He would have to issue the report to the panel and the council at the same time. The ability to go to the auditor panel and say, “This is what we are about to do, this is what we think is wrong.”, would, first, probably just give the auditor panel responsible an opportunity to know that something was coming up which it would need to be aware of. Secondly, it would possibly give the auditor the ability to discuss a particular issue with someone independent of the council. I do not think that that would in any way be a retrograde step; it would give strength to the auditor.
Lord McKenzie of Luton
I thought that I said when moving the amendment that I recognised that in many instances there would be engagement with the auditor panel or the audit committee, or whatever the final formulation might be, but that I was keen to ensure that there was not another loop in the process at the point that the auditor concluded what he or she needed to do. There might be no engagement at all. It might be an issue that affects the relationship between the auditor panel and the authority involved. It was a case of not wanting to put in an additional loop right at the end of the process without in any way restricting or precluding the opportunity of engagement along the way, which I imagine would be the norm.
There was one other point. If the Minister covered the issue of indemnities, I was at fault and missed it. I should be interested in the Government’s view on that issue.
Baroness Hanham
The noble Lord is right that the new framework does not replicate the Audit Commission’s indemnity scheme, which funds legal expenses faced by auditors as a result of their exercising their functions. We believe that it is appropriate for private audit companies to bear the risks and costs for any consequences resulting from the exercise of their functions, covering by definition anybody who is employed by them. Furthermore, we do not believe that this will unduly deter auditors from exercising their functions. The Audit Commission’s indemnity has very rarely been called upon.
Lord McKenzie of Luton
I understand that; we have been through that before. I can see that it would not be the norm, but if there is no ability to give indemnity on some basis, what if we have a repeat of risks of the Westminster council sort, and 14 years of litigation? I accept that we are in a different era, but on technically complex issues, will that not discourage auditors from issuing that report?
Lord Beecham
If I might add to my noble Friend’s question, will that not deter smaller firms from engaging in the tendering process?
Baroness Hanham
My Lords, I am not sure that the Westminster case is very helpful now. We are a very long way down the line. As others will know, it was not a straightforward case by any stretch of the imagination. The legal action was taken to recover the surcharge, so it was not only to do with the report, but with trying to surcharge the councillors.
If the company concerned appoints an auditor, it has to stand behind them as well. That would be the expectation of indemnity in this case. I am sure it will not be unique to a company to have to do that. With regard to small auditors, the situation would remain the same. They would presumably cover themselves for the risks.
I hope the explanation is sufficient. If not, and the noble Lord has other points that I have missed, perhaps we can pick them up by correspondence.
Lord McKenzie of Luton
I am grateful for those further points. I do not think we are a million miles apart on this; our differences are perhaps fairly narrow. I shall reflect on our discussion. In the mean time, I beg leave to withdraw Amendment 17B.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, Clause 26 draws on Section 16 of the Audit Commission Act. This allows a local government elector for an area to make objections in respect of matters where the auditor could make a public interest report, or where the auditor could seek a declaration that an item of account is unlawful. Where objections are received, the auditor must decide whether to take action under these powers.
The purpose of the amendment is to open up some debate around the circumstances where the auditor does not need to consider an objection, circumstances which do not appear to be spelled out in the Audit Commission Act. The amendment introduces a slightly higher threshold for the auditor not to consider an objection, by adding that the auditor must have reasonable grounds for considering that exemptions apply. The Minister may say that this is implied by the current wording. We have no problem with the auditor being able to ignore frivolous or vexatious objections, or indeed an objection that has already been considered. The reason of disproportionate cost is somewhat more problematic and requires potentially more refined judgment—especially when it may involve governance issues rather than considerable sums of public money. Of course, there is a get-out clause in that these provisions cannot be used to avoid the action of an auditor who has serious concerns as to how an authority is managed. Is it envisaged that there would be guidance on this matter—part of the audit code, perhaps? Would the Minister expand on the Government’s views of the parameters of this particular provision?
Baroness Hanham
My Lords, the Bill retains the rights of local government electors to question the auditor, as the noble Lord, Lord McKenzie, has said. They can raise objections, if they think that there are matters that the auditor should report on in the public interest, or items that they think constitute unlawful expenditure. The auditor can decide not to investigate an objection—and noble Lords have mentioned the frivolous or unconstitutional—if he or she thinks that it meets certain criteria.
Amendment 17D replaces the basis for an auditor not to consider an objection from “thinks that” to “reasonable grounds for considering”. This means that an auditor would be required to meet a reasonableness test before being able to decide not to investigate an objection. Following consultation, the Government decided to modify the objection process. The Bill, therefore, gives an auditor the discretion not to consider an objection in certain circumstances—where the auditor thinks that the objection is frivolous or vexatious, or it repeats an objection previously considered. The auditor has further discretion to not consider an objection if the financial value is disproportionately small when compared to the cost of the auditor’s time in investigating the issue, as long as the auditor does not think that the objection might raise concerns about serious failures of leadership or management within the organisation.
These specific exclusions are new and we think that providing the auditor with discretion not to consider objections as outlined can help to avoid circumstances where an authority—and therefore the taxpayer—incurs significant additional costs for auditors’ time in investigating an objection which is vexatious, or for the other reasons I have mentioned. Auditors will continue to use their professional judgment in exercising this discretion, as they do now for all their functions. We believe that this amendment would add an additional burden and cost in that an auditor would need to meet a reasonableness test before deciding not to investigate an objection. The auditor’s independence and professional exercise of duties is sufficient to ensure that this will be undertaken properly.
I hope that the noble Lord will accept the explanation and withdraw his amendment.
Lord McKenzie of Luton
My Lords, I will not pursue the issue. I was with the noble Baroness until the end, when the comments about a reasonableness test being an extra burden were outlined. If it is envisaged that undertaking a reasonableness test is a significant event, then that is all the more reason to have it because, presumably, it is a meaningful process. I beg leave to withdraw.
Lord McKenzie of Luton
“(2A) The court may also—
(a) order that any person responsible for incurring or authorising expenditure declared unlawful shall repay it in whole or in part to the body in question and, where there are two or more such persons, that they shall be jointly and severally liable to do so;(b) if the expenditure declared unlawful exceeds £2,000 and the person responsible for incurring or authorising it is, or was at the time of his conduct in question, a member of a local authority, order him to be disqualified for being a member of a local authority for a specified period.”
Lord McKenzie of Luton
My Lords, this amendment concerns the declaration that an item of account is unlawful. It draws on Section 17 of the Audit Commission Act 1998, which contains similar provisions, although this Bill does not give the Secretary of State power to sanction an item of account which is contrary to law—unless it is tucked away somewhere else in the Bill, in which case perhaps the Minister would let us know. However, the Audit Commission Act does give power to the court to order a person responsible for incurring or authorising unlawful expenditure to repay it in whole or in part to the body affected. It can order that the person is disqualified from serving as a member of a local authority for a specified period. These powers seem to be missing from Clause 27, and the amendment simply seeks to rectify the omission by using the wording from Section 17. The Minister will doubtless say that it is blindingly obvious that these powers are covered elsewhere. If they are, it would be helpful to know where—and, if not, why the exclusion?
Baroness Hanham
My Lords, there is a sort of déjà vu about this amendment. The power of surcharge, as the noble Lord said, enables auditors to recover money from individuals whose actions caused losses to their councils, and was taken out in 2000. It was first introduced in the 19th century, and it is felt to be quite unnecessary in modern local government. In its 1997 report on standards in public life, the Nolan committee concluded that surcharge was an “archaic penalty”; what was archaic in 1997 is surely even more so today. Moreover, surcharge was unfair because of the technical difficulties in calculating the relevant sums, which could be well beyond the means of the individuals involved and bore no relation to people’s ability to pay. This could result in damage to families as property and assets were disposed of to pay the surcharge.
I note that this amendment offers no protection to those who act in the belief that the expenditure that they were authorising was lawful, meaning that, as it stands, the amendment might result in councillors or officials having to make a substantial payment as a result of a decision that they make in good faith. Following the abolition of surcharge, the Standards Board regime was introduced to prevent personal misconduct by councillors in office. Unfortunately, the Standards Board regime became a vehicle for petty and malicious complaints so, in 2012, we abolished it and put in place new arrangements for the conduct of councillors. These new arrangements include tough new rules to prevent genuine, wilful corruption, with councillors having to be transparent about their pecuniary interests. The auditor can himself, or after a concern has been expressed, raise the issue of a public interest report, as we have just discussed. We have backed up these rules with a criminal penalty for the wilful disregard of pecuniary interests, giving the courts the power to impose a fine of up to £5,000 and to disqualify a guilty councillor from office.
Surcharge is archaic but, what is more, it is unnecessary. I hope, with my reassurance and a reminder of things as they stand, the noble Lord will withdraw his amendment.
Lord McKenzie of Luton
My Lords, I think that I had better move swiftly on. I am grateful for that explanation and a bit of a history lesson, and I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“(d) where two or more auditors are appointed in relation to the accounts of a relevant authority, other than a health service body, the power to issue an advisory notice may be exercised by the auditors acting jointly, or by such one of them as they may determine”
Lord McKenzie of Luton
My Lords, in moving the amendment, I shall speak also to Amendment 17FA. I have now noticed that the point that it seeks to cover is, I think, dealt with in Clause 7(7). Clause 27 is concerned with advisory notices and who can issue them. Under Clause 7(7) it seems clear that, in the case of joint appointments, it can be done jointly or by either one of the joint auditors, which was the point that I sought to cover. The same point comes up with regard to who can make an application for judicial review, although I notice that, in Clause 30, the reference is to the Senior Courts Act 1981. The Audit Commission Act, unless it has been amended since, makes reference to the Supreme Court Act 1981. I ask for confirmation on those points and beg to move.
Baroness Hanham
My Lords, the noble Lord is correct that Clause 7 dealt with this. However, I think he has a winner coming, because the amendment has raised concerns about its exact correctness. We will ask parliamentary counsel to have a look at this before the next stage. We will probably, or may, return to it and I will advise the noble Lord, in which case, which way. It clearly needs a tweak. I hope the noble Lord will be happy that he has moved us in one direction and will be willing to withdraw the amendment, although, as I say, I think we will be looking at it again at the next stage.
Lord McKenzie of Luton
I am grateful to the Minister. I knew there was some reason why I moved this amendment. Can the Minister deal with the point about the reference to the Senior Courts Act and the Supreme Court Act? What is the difference there? Something has happened along the way, I guess, to make each of those separate expressions meaningful in its context. It may be that the Ministers would wish to write on that, unless there is a meaningful note from the Box
Baroness Hanham
My Lords, I will certainly write, but I also think we will check. That seems to be the first thing to do. The noble Lord has raised yet another interesting point on this amendment and, if I may, we will come back on both those aspects.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, this is a probing amendment concerning advisory notices. It would appear that this regime has replaced the prohibition order regime contained in the Audit Commission Act 1998, but with some key differences. Advisory notices can be served if an auditor considers an authority is about to make a decision that would be unlawful or lead to unlawful expenditure. Under the advisory notice regime, the decision or course of action would be unlawful unless the authority, having reflected, considers it appropriate to proceed. This would appear to contrast with the prohibition order procedure, whereby, unless the order revokes it, the action or decision remains unlawful subject to an appeal to the High Court. Is that correct? Presumably, the risk of proceeding when faced with an advisory notice is that the order would seek a determination from the court that the expenditure involved is unlawful, so the onus has been switched from the local authority to the auditor. Can the Government explain this changed approach?
Our specific amendment was to delete the protection given to auditors from any loss of damage alleged to have been caused by the issuing of the advisory notice, which was issued in good faith. This mirrors the protection given in respect of prohibition notices and raises the question of who is to suffer the loss if there is one. Obviously, this is not without its importance given the difficult financial times that local government is in.
Can the Minister also take the opportunity to spell out for us the difference of treatment of health service bodies where the duty of the auditor is just to refer equivalent circumstances to the Secretary of State and the National Health Service Commissioning Board? What follows from this? I beg to move.
Baroness Hanham
My Lords, my note is rather short; it is getting briefer by the minute. The Government think it is important to retain this exemption in order to support the auditor’s ability to undertake the important function according to their professional judgment without fear of facing a damages claim, which, even were it not upheld, would be costly and time-consuming to defend.
Auditors generally report on things that have happened, their opinions on the accounts and the issue of public interest reports, and apply to the court for a declaration that there has been unlawful expenditure. The power to issue an advisory notice is forward-looking, seeking to prevent the authority taking some action that could be unlawful. It is possible, therefore, that auditors will have to act quickly and action may be based on partial evidence. The limitation of liability is to give the auditor some protection to enable them to use their professional judgment. We think it would be right to continue the protection.
With regard to the noble Lord’s questions, the Audit Commission Act includes advisory notices. No major changes have been made to the power to issue an advisory notice. It is still there. This mirrors existing provisions under which the auditor can issue an advisory notice if he thinks that the authority or an officer has undertaken or is about to undertake an unlawful action: a decision on carrying unlawful expenditure, unlawful action or entering an unlawful item of account. There are detailed requirements about the contents of the advisory notice and how it should be served. Within seven days of issuing an advisory notice—this may be something that requires quick action—the local authority is going to have to serve a statement of its reasons for putting forward the advisory notice.
The noble Lord asked me about the difference from the health service. I think I may be able to answer that question—it would seem that I will be writing to the noble Lord to clarify this point on health service bodies, except that I can tell that him that the clause contains the current requirement for local authorities. An equivalent requirement for health bodies has not existed previously and is not required because the governance arrangements for health bodies are different. Health bodies are consolidated into the accounts of the Department of Health and are covered by the requirements of Managing Public Money issued by Her Majesty’s Treasury. As such, they are accountable to Parliament for their expenditure, not to local people. The difference between the two is in the process. Under those circumstances, I may not need to say that I will write to the noble Lord on health service bodies. He will tell me whether he thinks I have answered his question and the others. I hope that I have given him a satisfactory explanation.
Lord McKenzie of Luton
Indeed, the Minister has given me satisfactory explanations. It appears that my copy of the Audit Commission Act is not quite up to date because it certainly has references to prohibition orders. I imagine that, somewhere along the way, that was adjusted to advisory notices.
Baroness Hanham
My Lords, we will check the matter the noble Lord has raised. I will write to him about that. He will tell me whether he is happy about the health services bodies, in which case, I will not need to write to him.
Lord McKenzie of Luton
I can exempt the Minister from writing on health service bodies. I am happy with the explanation and to receive a note on the broader drafting point. I beg leave to withdraw the amendment.