Local Audit and Accountability Bill [HL]

Baroness Eaton Excerpts

Wednesday 19th June 2013 Grand Committee

[Lord Beecham]

My Lords, this amendment addresses the question of the appointment of local auditors, covered by Clause 7. The procedure requires the local authority to appoint an auditor. Clause 7(2) provides that an auditor may be appointed,

“to audit its accounts for more than one financial year”.

Clause 7(2)(b) states that,

“the authority must make a further appointment of a local auditor at least once every 5 years”.

The amendment would remove the following subsection, which states that the paragraph to which I have just referred,

“does not prevent the relevant authority from re-appointing a local auditor”.

The object of my amendment is to ensure that there is a change after a five-year period. In my submission, it is possible for the auditor and the local authority to have too cosy a relationship. As I read it, there is nothing in the procedure for appointments set out in Clause 8 even for a tendering process to be entered into by the local authority, although I may be incorrect in that regard.

Clause 8 provides that:

“A relevant authority must consult and take into account the advice of its auditor panel on the selection and appointment of a local auditor”.

If a panel did not recommend a competitive tendering process, or even if it did, as long as the local authority had regard to that it would not necessarily follow that there would be such a process.

I agree that five years is a sensible sort of period for a firm to be engaged. However, it seems unfortunate, to put it mildly, that people could be reappointed for a substantial period of five years and then be reappointed with, or particularly without, a tendering process. That would be an invidious and unfortunate position to have arrived at. We are aware, of course, that the market for the larger authorities is likely to be dominated by a handful of firms. That was one of the reservations expressed on Second Reading and during our previous day in Committee, and I think that most of us, possibly including the Minister herself, are not entirely comfortable with that. To see such a process as a repeat appointment, particularly in the context of these large national outfits, is anti-competitive, if I might put it in that way. It also raises an issue about the kind of relationship that might develop when a firm is anxious to retain the contract.

For those reasons, in my submission it would be better to require not simply a reappointment process but a process that excluded the original firm. There might have to be a backstop position in case nobody else presented. That matter might require, for example, the agreement of the panel and the authority or even, potentially, of the Minister or the department. I suppose one might need that safeguard, but the important principle is that there should not be indefinite appointments of the kind that, as I see it, the Bill would facilitate. I beg to move.

[Baroness Eaton]

I find it somewhat surprising that there is this perceived idea of auditors being too cosy with their client, a local authority, because all the probity and requirements of audit mean that they would be being professionally negligent if they did not do the job they are supposed to be doing. I really do not think that this is quite as much of an issue as the noble Lord, Lord Beecham, is suggesting.

[Lord Tope]

My Lords, I am struggling to understand the implications of what the noble Lord, Lord Beecham, is proposing. I think we all share his concern—I accept that it might not always be a widespread concern—that sometimes, maybe after five years, it could become too cosy. I hope we would all accept that a tendering process after five years is certainly desirable; whether it should be mandatory is something that we can debate. However, in such a tendering process, would the existing auditor be precluded from taking part in that process, or, if it was to take part in it and was clearly to submit the best value tender, would the authority then be prevented from reappointing it on that basis? That is the point I struggle to understand.

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[Baroness Eaton]

It is not often that I agree with much of what the noble Lord, Lord McKenzie, says in this context, but I fully agree with much of what he has said about the role of the audit committee. Having chaired the audit committee of a large metropolitan authority myself, I see great value in it. The proposal for an audit panel in addition is really a sledgehammer to crack a nut. It adds again to the bureaucracy.

I have slight concerns about the requirement for a majority of independent members. I see fully the value in the noble Lord’s suggestion of an independent chairman, but it is extremely difficult in many authorities to find suitably knowledgeable and qualified people to take these roles. I know that under the old standards regime, finding suitable people to chair those bodies was quite difficult. In some cases, they had the desire to take over the world and gradually grew, like Topsy, the role of that body. If we could have independent chairmen, that would satisfy what is perceived as the body’s independence. I certainly do not see the need for an additional body in the audit panel to decide who should audit the authority. There are many checks and balances already within local authorities on probity issues, as I said earlier, so this is an unnecessarily bureaucratic step. The audit committee could happily perform that role.

[Lord Tope]

My Lords, the noble Lord, Lord McKenzie, has raised a very important and useful issue. We will discuss in relation to a later amendment the actual composition of a committee or panel and the number of independent members on it. I would guess that most principal authorities have an audit committee. I do not know, but it had not occurred to me that they would not until now. In many cases, as in my own authority and as that of my noble friend Lord Palmer of Child’s Hill, that committee is chaired by a member of the opposition. That is very much not the same as an independent chairman. Nevertheless, it is a good practice that is followed by many authorities. In my case, it is a Liberal Democrat authority, while in my noble friend Lord Palmer’s case it is a Conservative-controlled authority. It is therefore a useful extension to have a panel or committee chaired by an independent member.

There is room now for further discussion and consideration about whether we really need to have completely separate and independent auditor panels, as proposed in the Bill, or whether there is some way of meeting that through the existing audit committees and amending that practice. Rather than reinventing something that in most cases is working quite well in practice, I would rather see us adapting it. It can certainly be adapted without too much difficulty to meet the Government’s requirements through the Bill, which I think we all broadly support. We are all trying to achieve the same ends, so having poked a little fun at the noble Lord, Lord McKenzie, for the previous amendment, I thank him sincerely for raising a very important issue with this series of amendments.

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[Lord Beecham]

My Lords, I endorse what the noble Lord, Lord Tope, has just said about the principle, which my noble friend also referred to, of combining these two roles. It does not seem at all necessary to have panels on the one hand and a committee on the other. As the noble Lord has reminded us, most authorities have established audit committees. I ought to declare an interest again as a member of Newcastle City Council and as an elected member serving on the audit committee, which is independently chaired and has a majority. It works very well and it seems to make absolute sense that that body should also have oversight of these appointments.

Perhaps I may refer to the noble Baroness’s observations. Although technically the noble Lord, Lord Tope, is right that it is not for this amendment, as the remarks have just been made I shall endeavour to rebut the thrust of the argument. This is really a matter of perception. It is important that the public are convinced that in the matter of the propriety and regularity of an authority’s financial transactions, the oversight of the process—not just the appointment process, but the whole job of audit—is carried out without the conflict that might arise from, for example, a controlling group in an authority having a majority of members on a committee.

Whereas of course in many cases there will be a mix of members, in some councils the political position is that there is no opposition, or there is insufficient opposition to be represented on the committee. It is desirable that we should go that further step, to which we will no doubt address our minds shortly. The cardinal point is that the Government are right that there should be audit committees, but they should do the whole job, including the appointment process. I very much welcome my noble friend’s amendment.

[Baroness Eaton]

My Lords, I failed to declare that I am also a member of the audit committee of my council.

[The Earl of Lytton]

My Lords, I have an amendment coming up, Amendment 14BBA, but had I known how the discussion on this amendment moved by the noble Lord, Lord McKenzie, would proceed, I would have asked for it to be grouped with these amendments, so it is possibly better that I make my comments now and consolidate the entire process somewhat. Otherwise, I fear that Amendment 14BB will have stolen a large part of my thunder, apart from anything else.

I queried the majority of independent members issue on Second Reading. I am mindful of what the Minister said on Monday: that the panel would not need to be large but that independence was important. I can certainly relate to the question of whether you have a committee and a panel as a term of art, with the duplication that that involves, to which I referred earlier. I think that the principle of an independent chairman is a given, but it appears to me from my much lesser knowledge of these procedures than that of other noble Lords that some councils might have few politically independent members. I do not know how many would have none at all, but there must be some. Even political independence, it seems to me, is no guarantee of freedom from bias, if that is the point that the Bill is intended to address. The subtitle of my amendment would be, “Precisely what do we mean by independent in this context?”. That ought to be explained.

Picking up on the point made by the noble Baroness, Lady Eaton, it seems to me that objectivity and competence, rather than independence, would be a better test for this purpose. I am bound to admit that I am at a loss to know which would be the more readily capable of definition and, if necessary, enforcement, so to some extent I can see it from the Government’s side. I think we are all agreed that we are trying to get a true and fair picture of an authority’s financial affairs. Up to a point, that works back to the basis of oversight from within the council.

Apart from asking the Minister whether she can enlighten the Committee on the question of independence, I remind your Lordships, who all know it far better than I do, of the veritable layer cake of qualifications and eligibility criteria that already applies to audit and to auditors, to which the Bill in this respect risks adding further complexity. I relate to the points made by the noble Baroness, Lady Eaton, about the independence and objectivity of auditors as professional people embedded in their culture, training and ability to retain their professional status. As a member of another profession altogether, I very much relate to that. Ultimately, it is the auditor who is doing the scrutiny, not the committee or panel. They are there simply to select—if selection be needed; we will get to that later. If the auditor is given the proper tools and the freedom to act and attacks it with the independence of mind necessary, that is the fundamental safeguard sought by the Bill.

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[Lord True]

My Lords, I do not wish to detain the Committee. I just hope to have a response in writing before Report. My point about paragraph 2(2)(b) to Schedule 4 was simply whether it meant that,

“the panel member has not been an officer or employee”,

within the past five years,

“of an entity connected with the authority within”,

the past five years, rather than, as it reads,

“the panel member has not been an officer or employee of an entity connected with the authority within”,

the past five years: namely, that he could never have worked for that authority at any time in his life. That is the point that I was hoping to clarify, but it can be clarified in writing.

[Baroness Eaton]

Perhaps I may raise one small issue about the independent members of an audit panel. I do not see, unless I have missed it, how the process is expected to take place, and I have some concerns about the clarity of the job description and expectations. In some local authorities, particularly in the appointment of people such as coroners, these have not always been as transparent as they should be. It would be helpful if we knew what process is expected for authorities to achieve the genuine independence and quality suitable for the needs of the panel.

[Lord Beecham]

Perhaps I may add some more questions. I am sorry that they come so late. While paragraph 2 of Schedule 4 deals with a number of issues, it helpfully defines what is meant by a “relative”. Although seven categories of relative are referred to at page 40 of the Bill, there is no definition of the words “close friend”, which appear in paragraph 2(2)(c). Is it possible to define what is meant by “close friend”? If it is not, I suggest that the words should be taken out of the Bill, because this could lead to a ridiculous situation.

What is the rationale for dealing with health service bodies in a different way under paragraph 3 of Schedule 4? It seems to be a parallel process, and I wonder why it is regarded as separate. Why is the process not the same for the two bodies? In particular—I should know, but I do not—what are the current audit arrangements in health service bodies? We know what they are in councils—they either do or do not have an audit committee—but I do not know whether, at the moment, health bodies have audit committees as such. If they have, just as many of those who argued for the panel concept to be incorporated in the audit committee would argue for the same in health. At least my noble friend and I think that these two bodies are one more than is necessary, and if that is true for local government it is also true for health bodies. I am slightly puzzled by the potential parallel structure here.