Local Audit (Appointing Person) Regulations 2015

Baroness Williams of Trafford Excerpts

Tuesday 27th January 2015 Grand Committee

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[Baroness Williams of Trafford]

That the Grand Committee do consider the Local Audit (Appointing Person) Regulations 2015.

Relevant document: 17th Report from the Joint Committee on Statutory Instruments

[Baroness Williams of Trafford (Con)]

These regulations are among a number necessary for local public audit in the new regime introduced by the Local Audit and Accountability Act 2014. That Act abolishes the Audit Commission and gives greater responsibility for auditor appointment to local public bodies. I will not take up the Committee’s valuable time by repeating the arguments put forward during the passage of the 2014 Act in this debate. There was broad support across the House for making the collective procurement of audit services available to local public bodies, and these regulations deliver on the commitment that we made then.

We recently updated our impact assessment: this is saving £759 million over the five years between 2012 and 2017—the duration of the outsourced audit contracts—and an estimated £1.35 billion over 10 years. As a direct result of this work being done by the private sector, the cost of external audit for local bodies will reduce by £30 million per annum.

Before getting into the detail of these regulations, I will explain the background. From 2017, a local public body will have to appoint its own auditor unless it chooses to opt in to the collective procurement arrangements we are providing for with these regulations. The Local Audit and Accountability Act 2014 already allows local public bodies to get together to jointly procure audit services. During its passage through Parliament, we amended the Bill to make broader collective procurement arrangements available in light of an appetite in the sector for this. In particular, the noble Baroness, Lady Hanham, worked with the noble Earl, Lord Lytton, to address and resolve concerns so that legislative provisions for collective procurement for smaller authorities would be suitable for the needs of that sector.

I will deal with the appointing person regulations first. As I said, we made provision for collective audit procurement in the Local Audit and Accountability Act in response to demand within the sector. We also consulted on a draft of these regulations. Responses were broadly content with these provisions, including those that we asked specific questions about: that the decision by local bodies to opt in must be taken at full council, and that the maximum period of the appointing body’s responsibility should be set at five years.

This is a lengthy set of regulations, so noble Lords will understand if I do not discuss them in detail. They make the collective procurement of audit services available to the sector while meeting objectives of accountability, transparency, continued auditor independence and audit quality. To achieve this, they: provide for the Secretary of State to specify an appointing body in a transparent manner; allow more than one appointing body to be specified, enabling specialisation in audit procurement for different groups of authorities; set out how authorities can opt in to, and later opt out from, the appointing body’s arrangements; require the appointing body to consult authorities on audit fee scales; define the appointing body’s roles in relation to auditor appointment, resignation or removal; require the appointing body to monitor auditor independence and compliance with contractual obligations, and deal with any disputes or complaints relating to audit work or audit contracts; and provide that an authority which has opted in to these arrangements will not be required to have an independent auditor panel. The regulations also provide that the appointing body’s services will be available as an additional option to the Secretary of State if an authority which has not opted in to collective procurement arrangements also fails to appoint its own auditor.

The smaller authorities regulations have a similar objective to the set of regulations I have just spoken about, but for smaller local public bodies. They provide for the collective procurement of audit services for smaller bodies, with the same guiding principles as for principal authorities. Those are transparency and accountability in decisions taken about how a body’s auditor is appointed, and continued effective, independent assessment of the accounts of authorities subject to that audit.

As with an appointing body for principal authorities, the body’s remit is clearly defined and will be focused on achieving good value for money in audit procurements. If it does not, smaller authorities are unlikely to use its services.

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[Lord McKenzie of Luton]

I think that it was the fifth firm. I cannot remember whether there were any beyond that, but there may have been changes in the interim.

What requirements, if any, will be placed upon appointed persons in this regard to seek to bring diversity of providers to the market? The regulations cover the obligation of appointing persons to oversee issues of independence. Generally, this should cover the independence of the auditor from the authority being audited as well as the independence of the auditor from the appointing person. As the Minister said, there has been extensive consultation around these proposals, but significant and authoritative concerns still appear to have been raised in some quarters. I refer first to comments made by the Audit Commission, which chime with those made by the noble Lord, Lord Palmer. How does the Minister respond to the comments made by the Audit Commission in its letter to all noble Lords written in September 2014? I refer to two paragraphs in particular. The first says:

“Currently all local authorities have their financial documents subjected to review by an external auditor. This is at no cost to most councils spending less than £25,000 a year and has a maximum cost to them of £100 a year. Under the current government’s proposals, external checks will not happen routinely for local authorities spending less than £25,000 a year. However these bodies will have to appoint an auditor for when local people wish to contact one with formal questions or objections. Additionally, these parishes and other bodies will have to publish specified information on their website or, if they don’t have one, on the website of the district council. This will inevitably cost more than the current arrangements”.

That is precisely the point the noble Lord made. The commission goes on to say:

“The regulations making provision for all procurement possibilities (exempt opted-out authorities, exempt opted-in authorities, non-exempt opted-in authorities, and non-exempt opted-out authorities) are close to impenetrable. Administering these complex new arrangements will also require any collective procurement body to hold and keep up to date large amounts of information about all 10,000 or so small bodies across the country. This will include contact details, whether they want to be part of the body or not, all the audit appointments the body has made, and all the bodies where auditors have used their statutory powers. This will add to its costs and therefore increase audit fees”.

How do the Government respond to that?

Moving on briefly to the position of the Institute of Chartered Accountants in England and Wales, I should declare my interest as a fellow of the institute, although it is a long time since I practised to earn a crust. A key part of the new arrangements will be the NAO’s proposed Code of Audit Practice. The Minister will be aware of the responses to the draft code as well as the smaller authorities regulations, in particular that of the ICAEW. Although broadly supportive of the code, the institute has expressed some reservations about smaller authority assurance arrangements. It expresses these in two paragraphs in particular, and as an aside I should say that it also refers to the issue of value for money in arrangements going forward:

“We have noted the statement in paragraph 3.6”—

of the consultation document—

“‘should evidence of poor value for money become apparent during the course of the audit, the auditor should consider the implications of this for their work.’ It would be helpful to clarify that this does not require auditors to search for evidence of poor value for money, but rather consider the underlying arrangements where a significant situation might arise which identifies that value for money is not being achieved”.

Is that right and are the Government happy that that is the position?

I now move on to small authority assurance engagements, to which the noble Lord, Lord Palmer, also referred. The institute states:

“As you know, ICAEW has had significant concerns about the government’s proposals in relation to smaller authority assurance engagements. In particular, our concerns have centred around the mis- understanding of the difference between ‘audit’ and ‘assurance’ engagements”.

It goes on to say:

“ICAEW would not be supportive of a change to the definition of audit as suggested by DCLG and we would strongly urge the NAO to also reject moves to create such confusion and to create a new definition. Indeed, as indicated in our response to government on the smaller bodies’ regulations … we would not recommend that any ICAEW member firm take this work on if significant changes to the regulations are not made and that the definitions of audit and limited assurance continue to be mis-interpreted”.

That is pretty strong language, and stronger than I have read in any representations that it has made before. The Minister said that the Government are still in discussion about that, but can she say something more about whether there is any movement or convergence of views on that with the institute? If the institute is advising its members not to engage, that is a very serious blow indeed. If these issues with the ICAEW have not been resolved, and the institute maintains its stance on discouraging member firms from taking on assignments, there is a major problem. Obviously, there is a little time before we get to 2017, but it would be good to know that there was some progress on that matter.

I have one or two further minor points for the Minister. An opted-in authority will not be required to have an auditor panel, but if it does, that panel must not be consulted on opted-in matters related to the audit or the auditor appointment. Why is that provision there? It is not apparent to me as it stands. For smaller authorities, the exercise of the public right to question and object must in future take place within the 30-day inspection period rather than in the period after it. What is the purpose of that change?

I have one final point. Under the transparency code for smaller authorities, there has to be an explanation of any differences between balances carried forward and total cash and short-term investments. How is that supposed to help? As it stands, it could be interpreted in myriad different ways. These regulations are exceptionally complex. We would not seek to stand in their way, and guidance will obviously help, but we hope that the complexity will not defer the opportunity to use this approach, which is an important strand of our discussions on the Bill.

[Baroness Williams of Trafford]

I thank all noble Lords who have contributed to this debate. Like them, I declare an interest in local government, but I do not declare an interest as an accountant—although I declare an interest as being married to one.

The noble Lord, Lord McKenzie, is quite correct that this is a complex area. The more we look into it, the more we realise how complex it is. I will go through the various points that noble Lords made.

I wonder whether my noble friend Lord Palmer is the same Lord Palmer who was on Barnet Council.

[Lord Palmer of Childs Hill]

I was for 28 years until last May, yes.

[Baroness Williams of Trafford]

I conducted a peer review on Barnet Council some time ago and I wondered whether that was indeed my noble friend.

[Lord Palmer of Childs Hill]

As an opposition councillor, I was chair of the audit committee for four years.

[Baroness Williams of Trafford]

Marvellous, so our paths have crossed. My noble friend asked about the draft guidance on the limited assurance review and whether it was understood by the accountancy profession. It is well understood by the audit and accountancy professions because it is already in use. It is about European standards and defined in the guide, so I hope I can give him comfort on that.

My noble friend also made a point about internal audit and about there not being enough detail in the guide. It may be helpful if I point out that these regulations and the guide are about external auditors and do not really focus on internal audit. However, that is not to say that we do not agree entirely that internal audit is extremely important.

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[Lord Palmer of Childs Hill]

The point is that a very small local authority would not have an auditor and would have to appoint someone if an action took place. If an auditor was in situ, I am sure that they would behave very responsibly—I have seen them do so—but my point concerns when you have to appoint one. I am sorry for interrupting my noble friend.

[Baroness Williams of Trafford]

I totally understand where my noble friend is coming from. If you are a small authority—for example, a parish council—and someone makes a vexatious claim against you, I am making the assumption, although I stand to be corrected if I am wrong, that the appointing body could do that for you. I understand that that is correct. Therefore, the body appointed by the Secretary of State could do that for you—it could take on the role that a larger authority would avail itself of. I hope that that helps my noble friend.

Both my noble friend Lord Palmer and the noble Lord, Lord Beecham, talked about the limited audit market. The Government’s view is that the repackaging of the audit contracts by a sector-led body could in fact open up the market. That is the hope. It may be helpful for noble Lords to know that we are working with the sector to encourage new entrants.

The noble Lord, Lord Beecham, talked about the turnover of auditors. The NAO will have a key role in complaints, similar to that of the current Audit Commission. I am happy to share with him the letter from Kris Hopkins MP and Andy Sawford MP on this very point if that would be helpful.

The noble Lord, Lord McKenzie, asked about the number of staff to be transferred and the cost of the transfer. If it is okay with him, I will write to him about that. He also talked about the specification and who the Government will appoint as the specified persons. Much will depend on what is put forward by the sector, but it is open to the sector to bring forward specialised bodies. In terms of extending the current contracts, as the noble Lord pointed out, we will run them until 2017. We can extend them to 2020, and we will make that decision in the summer of 2015.

The noble Lord also asked about the independence of the auditor from the appointing person. That is a very good point. The auditors’ own codes and proper practices remain in place under the new regime.

The noble Lord also mentioned the concerns raised by the Audit Commission, which we do not agree with because we are of the view that the new system is cheaper. It is true that smaller authorities may pay more due to no longer being cross-subsidised by larger authorities, as is currently the case, but I assume that, in pooling arrangements, they will try to make those processes more efficient.

In terms of the limited assurance engagement, the limited assurance order is already under way. This will not change. Officials understand that firms are eager to engage with limited assurance contracts and will be meeting them on 2 February.

The noble Lord, Lord McKenzie, mentioned that the arrangements are very complex to maintain for smaller authorities. Smaller authorities will all have to self-certify income, and this information will be held on a spreadsheet just as the Audit Commission holds it, so it is not as complicated as it may first seem. The new regime for smaller authorities is proportionate to their size and the amount of public money that they handle.

I hope I have covered most points. If I have not, I shall write to noble Lords. On that note, I commend the order to the Committee.

Motion agreed.