Baroness Hanham
Main Page: Baroness Hanham (Conservative - Life peer)Local Audit and Accountability Bill [HL]
Baroness Hanham Excerpts
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham)
My Lords, the local Audit and Accountability Bill is another important step in our plans to strengthen local democracy and transparency. It is the final step in a programme of reforms to local audit that will secure millions in savings, protect important local freedoms and further increase the localism agenda in three specific ways.
First, it will allow local bodies to take control of their own audit arrangements, and replace the Audit Commission with a new framework for local audit that is robust and retains a focus on value for money. Secondly, it safeguards the contribution that our independent local press makes to local democracy. Thirdly, it protects the taxpayer against excessive increases set by the levying bodies.
I should like to focus on each of these in turn but, before doing so, let me rehearse the context of the Bill. The Government are doing everything we can to bring down our inherited deficit, achieve sensible savings for the taxpayer and give local people greater say in decision-making. As part of this, the coalition agreement pledged to reduce the cost and number of quangos. It also pledged to end the era of top-down government by giving new powers to local councils, communities, neighbourhoods and individuals. We have already ended assessment and inspection of local authorities—that is, comprehensive area assessments and local area agreements—freeing local authorities from centrally imposed targets and £25 million in annual compliance costs. Currently, the Audit Commission appoints auditors for nearly 11,000 local public bodies, which are responsible for some £200 billion of public expenditure. It is however no longer fit for purpose, its remit and functions having expanded significantly beyond their original intention. It has become unnecessarily centralist and bureaucratic.
Local independent audit is essential to ensure that those who handle public money spend it in the public interest, but there is no reason why local authorities should not be able to appoint their own auditors—something the private sector, charities, foundation trusts and academies do as a matter of course. We have been open about our plans to abolish the Audit Commission and replace it with a local regime. The Government consulted extensively on the proposals, including publishing a draft Bill for pre-legislative scrutiny. Over the past two years, we have stopped the Audit Commission exercising many of its functions, privatised its in-house audit practice—resulting in a 40% reduction in audit fees for local bodies—scaled back its other activities and cut overhead costs. The Bill is the final piece in the jigsaw and it will now abolish the Audit Commission completely. It will bring down the curtain on the centralised arrangements for the audit of local bodies and replace them with a new framework.
Local bodies will be firmly in the driving seat. Under the Bill’s provisions, they will appoint auditors of their own from an open and competitive market. They will have to publish information about the appointment of an auditor within 28 days of that appointment being made. To safeguard the integrity of this process, they will need to consult and take into account the advice of an independent auditor panel. We know, because we have been told so, that local government has concerns about these auditor panels but the Bill provides a flexible approach. These local bodies will be able to use an existing committee, if it meets the independence requirements, establish a small new panel or combine with other public bodies to appoint auditors collectively.
After listening to views, we will be retaining a limited audit regime for smaller authorities: that is, those with a turnover below £6.5 million. Local bodies with an annual turnover below £25,000 will be exempted from automatic external audit altogether, although a mechanism will be retained for auditor-led scrutiny if problems are perceived to have arisen. New transparency requirements for smaller authorities will enable electors to access the information about accounts and governance that they need to hold the authority to account.
I have heard the arguments that this Bill will affect the independence and quality of the audit process, so it is important to underline that we are strenuously safeguarding the integrity of the local audit system. The scope of that system will broadly remain the same: auditors will look not just at the accuracy of the financial statements but at value for money. Auditors will continue to be required to comply with a code of audit practice and have regard to accompanying guidance, which will be set by the independent and impartial National Audit Office. Parliament will retain its oversight role by approving this code.
The National Audit Office will also slightly increase the number of value-for-money studies it carries out to enable it to undertake examinations that take account of local delivery. This will enable a wider view to be taken on the use of public money. There will continue to be a statutory duty on auditors to make public interest reports, and they will be able to recover their costs from the audited body for undertaking an investigation. There will also be a new requirement on local bodies to publish any public interest reports and their response.
The Financial Reporting Council will oversee the monitoring of the quality of audits, as it already does for the private sector. This will align the regulatory system for local public audit more closely with the private sector and remove unnecessary duplication. Recognised supervisory bodies—professional accountancy bodies—will register audit firms and assess those individuals responsible for signing audit reports. We are working very closely with these professional organisations to develop the detailed arrangements and ensure a smooth transition to the new regulatory framework.
Meanwhile, the Bill also protects the rights of local taxpayers to inspect a local authority’s accounts and to raise concerns with the auditor, who may report on these matters if necessary. Whistleblowers will also be protected by amending the relevant whistleblowing legislation so that they can raise matters of concern confidentially with the auditor or the Comptroller and Auditor-General, without prejudicing their employment. The Government also recognise the value of the national fraud initiative. The Bill transfers the Audit Commission’s data-matching powers to the Secretary of State, the Minister for the Cabinet Office or another authorised Minister, so that the work to prevent and detect fraud at local level can continue.
The local audit system we are proposing to put in place will maintain, we believe, a high quality of audit. It will also be markedly improved in terms of efficiency and cost effectiveness. Overall, these reforms will deliver estimated savings of £1.2 billion over 10 years, which is rather more than originally anticipated. Authorities will not just have greater control over how much they pay for the services; they will have greater incentives to keep their costs down, since they will no longer have to fund the Audit Commission’s overheads and other activities.
I know that consultation respondents and Select Committees have raised a question about the current lack of competition in the audit market. However, the outsourcing of the Audit Commission’s in-house audit practice has already increased the number of suppliers in the market from five to seven, with at least a dozen firms passing the pre-qualification questionnaire. We expect a greater number of smaller contracts to be available once local bodies start to appoint their own auditors. This will open up much more opportunity for smaller firms.
The other provisions covered in the Bill include those relating to local authority publicity. We have made it clear all the way through that we expect local authorities to conform to the publicity code. Many are not doing that at the moment; councils such as Tower Hamlets and Greenwich are not. We are therefore taking powers in this Bill to make that code something that local authorities will have to apply.
The final matter here is the question of levying bodies. We have been conscious that levying bodies are not part of the council tax system or the referendums, while they can have an enormous effect on council tax bills. In some areas, levies account for over half of the local council tax requirements. In Liverpool they account for 56%—a very high percentage, which is not given any democratic oversight. Percentage increases in levies year-on-year have consistently outstripped the increase in council tax as a whole. In 2011-12, levies in England increased by 4.1% at a time when Band D bills were frozen, and this year authorities in Greater Manchester have increased their bills by more than the 2% referendum threshold set. Without the Bill, any tax increases by levying bodies effectively mean that large elements of council tax demands remain beyond direct democratic control. Local taxpayers must have the right to approve or veto all council tax increases above the approved amount, without having to worry that some elements of that increase are beyond their control.
The provisions contained in this Bill will strengthen localism and democracy. They will put local bodies in charge of their own audit arrangements, help save council tax payers money and ensure that elected representatives can continue to be held to account. I commend this Bill to the House.
Baroness Hanham
My Lords, I will follow what the noble Lord said about the Yeoman Usher. We do not like losing senior members of staff in this House. We always like them and he has been no exception. We, too, wish him well. I thank the noble Lord for giving the background to his appointment and time here. It saves me from having to do so, but I certainly endorse what he said and wish the Yeoman Usher well as he leaves this House. We will remember him fondly and affectionately for his time here.
The noble Lord, Lord Beecham, is looking slightly sceptical. He is always very kind, although there is usually a sting in the tail. I do not I accuse him of being a scorpion—
Baroness Hanham
That was a lucky hit.
We have had a long debate on three matters within one Bill. That was most unusual. Usually we have many more and we have managed to spend nearly two hours on these three matters. Noble Lords have raised a number of points and clearly we will come back to all of them. I hope that the noble Lords who spoke today will take part in Committee, because sometimes there is a tendency for people to come and deliver their thoughts but not carry them forward in Committee. I hope as many noble Lords as possible will do that.
I have no doubt that the noble Lords, Lord McKenzie and Lord Beecham, will be in their seats in Committee, and we will pick up many of the remarks and comments that have been made about the detail of what happens with the abolition of the Audit Commission. I did not get a sense of any great exasperation—except perhaps from the noble Lord, Lord Christopher—that the Audit Commission was coming to the end of its days. However, I understand that there are questions to be asked about how the process will go forward to ensure that local government has in place a proper system and that the integrity of the process of auditing is maintained.
I have sheaves of answers to questions and I do not want to go through all of them. Because of the time, everybody will want to go. I will deal with just one or two areas. The question was raised about the training and supervision of auditors. The noble Lord, Lord McKenzie, raised this point. Recognised supervisory bodies are being put into place and they will lay down the rules and the training that must be implicit in auditors applying to do work for local authorities. We can discuss this further, but we can be sure that there is an understanding that auditors must first understand local government finance, apart from anything else; that seems pretty basic. They will also have to be independent from the authority. This point was made by the noble Lord, Lord Palmer. There should be absolutely clear independence between the audit committee and the auditors. I think we shall be able to satisfy the noble Lord that this is what will happen.
A number of noble Lords raised the question of whether just four companies would bid for this audit. I said in my opening remarks that we expected considerably more than those four. Thirteen fulfilled the pre-qualification when it was put out. With the expectation that local authorities will seek auditors independently, or perhaps come together in a small cohort, there will be a requirement for more local auditors who are smaller companies. They will have to be properly qualified and be able to do their job, and while the suggestion is that for safety’s sake everybody will go for the big four, I hope and believe that there is an opening for others to take part.
The noble Lord, Lord McKenzie, asked about the difference between the auditor panel and audit committees. The noble Lord, Lord Palmer, was also interested in this aspect. The audit committees were clearly the supervisory committees of the councils’ own accounts and finance; they were in-house. The auditor panel will be there to ensure that auditors are selected and chosen properly against proper backgrounds. They will also be there to ensure that the external auditors carry out their role.
It is important to take a step away and have independent members in the majority. These committees do not have to be big. I should think that most authorities would be able to find two or three people who will fulfil the role of being independent and who have some idea of what it is all about. It is not unusual for local authorities to have to find independent members; they do it for standards boards and other things, and many of them have them on their pension fund committees as well. It is not beyond the wit of local authorities to find suitable people to sit on these committees to ensure the integrity of what is being done.
The internal audit is not in the Bill because it deals only with external audit arrangements. The requirements for local authorities to maintain effective internal audit has been included in the accounts regulations since 1974. A point was made by the noble Lord, Lord Palmer, who is obviously very experienced, and he will recognise that that is the situation. The regulations are made under the Audit Commission Act but we intend that those regulations made under Clause 31 will make similar provision in the future. The requirement for health service bodies to maintain the internal audit is dealt with separately under the National Health Service Acts.
The noble Lord, Lord McKenzie, asked about the national fraud investigation and what will happen when the Audit Commission is abolished. A final decision has not been made on where it will be placed but it is extremely important that it carries on the work that it is doing, so we will consider it very carefully. I am sure that we can discuss that.
The noble Lord, Lord Tope, asked why the opportunity to broaden the scope of the audit was not taken. We understand that the audit of public funds needs a broader scope than the audit of companies. After consultation we decided that the same scope of the audit provides a good balance between maintaining the high quality of audit and audit fees. The noble Lord, Lord Palmer, again with his experience, suggested that auditors will be reluctant to criticise that appointment for fear of not being reappointed. They have statutory duties to consider whether they need to make public interest reports; so they cannot be so biased in favour of the local authority that they do not do that. Local people have a right to appeal and they will have to deal with that as well. I do not think that they will be in a position to be reluctant; it will be part of their duties to ensure that they take those up.
We have dealt with the big four. The noble Lords, Lord Tope and Lord True, and the noble Baroness, Lady Eaton, asked how we would prevent mission creep in the National Audit Office’s role and said that it should not undertake studies that are not required. The National Audit Office already does studies on government spending. We expect it to add no more than about six to that, which will include local government on a wider scale rather than individual local authorities.
I shall turn to the other two areas on which we received some comments. On levying by external authorities, there are examples where those levies are a very substantial part of the council tax bill. Often, very little consideration is given by those bodies to what those levels are. It is important that they are taken account of.
On the question of retrospection and whether anything this year will be taken into account for next year, no decision has been taken at all about referendums yet. The principles for 2014 will be set out by the Secretary of State later on when he has taken into account all relevant factors, including the position of levies, in due course.
The issue of the principles that might trigger council referendums has long since passed; it was dealt with in previous legislation.
The noble Lord, Lord McKenzie, asked about levies and city deals, particularly with Manchester. Again, the Secretary of State can take account of this when he is looking at the principles that might trigger a referendum, but we intend that local people should have a say before any excessive bills are imposed upon them—in other words, with a referendum.
On publicity, there have been a number of triggers. One of them is that there has been pressure on the local press from local authority newspapers; the other is that some of them have been overtly political. There are examples of where local government publications are still within the political area, and also where they are being issued so often that they are becoming a pressure on the local press. We all agree that the local press is a very important part of being able to inform local people of what is going on, and what the councils are doing. It is worth pointing out that taking action about these papers was not only in the coalition agreement but was a pledge in the general manifestos of both the coalition partners. There is a publicity code already, as noble Lords know, and it will just be a question of giving the Secretary of State powers of direction where he thinks there is an overenthusiasm on the part of local authorities undertaking these publications.
The noble Earl, Lord Lytton, described the direction requiring compliance with the code as being nebulous. I am sure that we will have an opportunity to discuss that further in due course.
Finally, the noble Lord, Lord Tope, asked about statutory notices. We are aware of the burden that placing statutory notices in newspapers has on local authorities. The Secretary of State has stated that,
“in the internet age … commercial newspapers should expect that over time there will be less state advertising”.—[Official Report, Commons, Seventh Delegated Legislation Committee, 23/3/11; col. 18.]
That would imply that they can be carried out in other ways.
I know we are going to come back to many of these points. Noble Lords must forgive me if I have not specifically picked up any of the points that they have made. If they think that it would be helpful to have a reply before we go into Committee where I have not answered them I will make sure that happens. Otherwise, I look forward—
Lord True
Before my noble friend sits down, she has not responded—I understand why and I do not complain about it—to the gravamen of my speech, which related to the ability of certain local bodies, in this case, an NHS body, to evade accountability and proper response to a report from an auditor. Will she undertake to hold discussions about that before Committee?
Baroness Hanham
My Lords, I certainly will. I apologise to my noble friend. It would perhaps be better if we discussed that before we take it on. The noble Earl, Lord Lytton, asked me whether we could discuss the audit for small authorities. Of course, I am delighted to do that as well; we will make arrangements for that, once we have all had a good Recess and time to put these things behind us for a day or two.