Local Audit (Appointing Person) Regulations 2015

Lord Beecham Excerpts

Tuesday 27th January 2015 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank my noble friend the Minister for that detailed exposition. I need to declare—especially given her last comment—that I am a chartered accountant and that I was, until May, the chairman of a local authority audit committee. I think that is probably enough in that respect.

I see my role as being to pick holes, if there are any, in what I see in front of me. The main thing that I am looking at is the draft guide which my noble friend referred to. On page 3 of that guide, there is the comment that the annual accounts are subject to a limited assurance review. Within audit committees, internal audit teams have a way of classifying the work of each department or service area, and when they audit that service area, they deem its performance to have been satisfactory, limited or poor respectively. It is generally done with a traffic lights system. The term “limited assurance” has a specific connotation within the audit field, and by referring in the guide to a limited assurance review there is the complication that it will be viewed as part of what I call the traffic lights system in local authorities. It is a slightly careless use of words that are used within the realm of audit. Could my noble friend think about that and the confusion that it might cause?

There seems to be a very light mention within the paper of internal audits, which I mentioned in an earlier discussion on the Bill. Good local authorities rely very much on their internal audit teams. External auditors also rely on the internal audit to a large degree, although it depends very much on the firm and the internal audit. The idea is that you do not do the job if it has already been done. However, internal audit is hardly mentioned. It is mentioned on page 5 of the paper that there should be an internal control, but there does not then seem to be a relationship in terms of what regard external auditors can take of that internal audit. If we are aiming to drive down costs for local authorities and the like, there ought to be an acknowledgment of what good internal audits can achieve. I did this when I was chairman of an audit committee—internal audits tore the living daylights out of service areas, and if they did not perform better, they had to come back and explain why. That is what internal audits do, but there does not seem to be much mention of it here.

Annual appointments are complicated, as very few accountancy firms are deemed by the Institute of Chartered Accountants in England and Wales—I presume this is the case in Scotland as well—to have the stature, knowledge and capability of doing this. I cannot remember what the figure was—I am sure other noble Lords will—but it was no more than eight, and probably about five. There were about 10 firms that had the capability but only about eight were deemed to be able to do it. So there will be a very limited market for these firms. I do not know whether the Minister has inquired with the professional bodies as to whether they see any problem.

My last comment on this is about very small authorities. My understanding of the paper is that very small authorities—those with a turnover under £25,000—will not need to appoint an external auditor, unless someone raises a query. In practice, if a small authority that needs a set of accounts, and thus an audit, has a turnover of £25,000 or less, and somebody raises an accounting query, that local authority or body will then have to appoint an external auditor to deal with that query from a member of the public. I may have this wrong, and my noble friend will correct me, but my reading says that that is what needs to happen. Therefore, in practical terms, if Mr or Mrs Vexatious raises a problem with the accounts of a local body with a turnover of £25,000 or less, it has to appoint an external—not internal—auditor, whose fees will start, say, at £1,000 and may be a lot more. My noble friend should know that that is impractical. I hope that these points are addressed before the regulations are put on a firm basis.

[Lord Beecham (Lab)]

My Lords, I declare an interest as a member of Newcastle City Council and of its independently chaired audit committee.

My noble friend Lord McKenzie and I whiled away a happy hour or three, as I recall, on these issues when the Bill was going through. Some of the reservations that we had then would apply also to the proposals before us, and my noble friend will enlarge on them. I concur with some of the questions raised by the noble Lord, Lord Palmer. In particular, he is right in his recollection that there are, apparently, eight firms—a couple of which are actually connected to the big five; so there is generally little choice in this field. One of the questions is whether that is acceptable to the Government or whether there should not be an attempt to encourage other, perhaps smaller, firms to develop an expertise, make more of an impact on the market and recognise that, in fact, the high cost of employing the major firms—the Deloittes, the PwCs and so on—is justified in the context of even a joint appointment. The fact that there is a joint appointment will not necessarily reduce the cost of an individual audit exercise, although perhaps the Government have done some work on that and can enlighten us.

One of the points that I, and I think my noble friend, raised was the desirability of positively promoting a change of auditor after a period of time, because there is a danger that the auditor and the local authority get too close together. The Minister has a long experience—although not quite as long as mine—in local government and as a council leader, and will therefore be familiar with these issues. A turnover is desirable, and perhaps the noble Baroness can indicate whether the Government might be prepared to facilitate that in this context.

One of the other issues facing all local authorities is, given the effective demise of the Audit Commission, the difficulty of comparing what goes on within one’s own authority with other authorities. The Audit Commission had its virtues and some problems from time to time, but at least it often provided information across the piece that one could look at and with which one could compare what one’s own authority was doing. I know that that is the view not just of political members of the audit committee in Newcastle but very much of the independent chair and independent members, and they miss such a basis for comparison. Given what I guess is the slightly smaller degree of experience in these matters among the smaller councils that we are talking about, have the Government any proposals to remedy this information gap? While all authorities can benefit from that kind of comparative information, it is probably more important, in some respects, for smaller authorities—particularly if independent members serve on them. It would be very much welcome to hear the Government’s position on that process.

The Audit Commission is not officially dead and buried but that part of its work regarding local authorities is effectively gone as far as local authorities are concerned. That is unfortunate and we have to live with it—at any rate, for the time being—but, given these new proposals, I hope that something will be done to assist members of smaller authorities, their officers, in so far as they have any, and those who ultimately do their accounts to be able to look at what comparable authorities are doing. That would certainly be a much more useful process for the audit committee’s oversight, or that of the local authority, of what is going on in their local patch.