Local Audit and Accountability Bill [HL]

Lord McKenzie of Luton Excerpts

Wednesday 22nd May 2013 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I thank the noble Baroness, Lady Hanham, for introducing the Bill and for yesterday’s briefing. As we have heard, the Bill introduces a new audit regime for local authorities and health bodies, although the Government have not been able to resist tagging on two largely unrelated matters: amendments to the council tax referendum rules and draconian powers concerning observance of the code on local authority publicity. My noble friend Lord Beecham will deal with each of these in detail in Committee, but I shall make a few comments before moving on to the meat of the audit proposals.

Clause 39 revisits the council tax referendum provisions, which we discussed a couple of years ago in what was then the Localism Bill. The effect of this clause is to include in the definition of a relevant amount of council tax certain levies and these have hitherto, as we have heard, been excluded in the calculation, such that any increase in council tax resulting from an increase in the levy would not of itself cause a determination that any level of council tax would be excessive or trigger the requirement for a referendum. In future, levies will be included so that a disproportionate levy increase could trigger a referendum requirement by the local authority or, more likely, the local authority will seek to absorb a sufficient part of that increase within its budget to avoid a referendum, a potentially awful dilemma given the precarious state of the finances of most local authorities.

The legislation allows calculations of future limits to reflect circumstances where local authorities would have breached the council tax threshold in the current year if the new rules had applied to it. This has the whiff of retrospection and perhaps the Minister would say in what circumstances the Government would use Clause 39 to penalise local authorities which had complied in every way with the rules as they stood when their council tax levels were set. Can the Minister say how many and which authorities would be caught by this retrospection?

We have particular concerns with this provision where local authorities have entered into arrangements predicated on a certain increasing levy stream. It is understood that the city deal with Leeds, for example, has been promised an investment fund partly financed by an increased levy from the integrated transport authority. In these circumstances, where arrangements have been put in hand for vital infrastructure based on the existing law and with the specific agreement of the Government, there is a strong case for some transitional protection. We will press this case in Committee.

We support the code of recommended practice on local authority publicity as being broadly sensible but the Government have yet to produce any evidence about widespread breaches of the code to justify giving the Secretary of State such widespread powers as are contained in Clause 38. Once again, the declared localist is determined to micromanage from the centre but I will leave our detailed critique to the tender mercies of my noble friend Lord Beecham.

It looks as though it has taken three years for the Secretary of State to get round finally to abolishing the Audit Commission. We are not campaigning for its retention but we need to be reassured that new arrangements maintain auditor independence, encourage probity and make appropriate provision for whistleblowers. We also need to examine the gaps which potentially arise from the demise of the commission, which means that no single body will have overall responsibility for supervising and co-ordinating local public audit. We also need clarity on the costs as well as the benefits that might accrue from this. This will be a major part of our task in Committee.

One of the hopes for the Bill is that by transferring the commissioning of local audits to local public bodies and by the provision of audit to be transferred to private sector audit firms, there will be a strengthening and growth of an open and competitive audit market. We think the jury is very much out on whether this will be the case with the risk that, over time, the big four will come to dominate the market, certainly among larger authorities, as they do in the private sector. They earn some 99% of audit fees paid by FTSE 100 companies at present. It is understood that there were only some 13 audit firms—I think the noble Baroness mentioned 12—which pre-qualified when the Audit Commission was going through the process of outsourcing 70% of its audit practice. That is an advance on four but still only a fraction of the audit firms in the market. For the year ended 31 March 2013, of the nearly 800 local authorities, health bodies, fire and rescue authorities and so on audited by private sector firms, only seven different firms were appointed, as we have heard, but more than 90% of these bodies were audited by just five different firms—the big four plus Grant Thornton.

CIPFA has expressed concerns in particular about the need to recognise the wider scope of public audit which is conducted in the public interest. Its briefing says:

“This wider scope goes further than private sector audit in requiring regularity, propriety, probity and value for money to be considered”—

rather than solely—

“providing an audit opinion on financial statements”.

It also states that these additional responsibilities should be reflected in a number of areas including the arrangements for the appropriate training and supervision of registered local auditors where the Bill is currently silent.

We agree with this approach. There is a need also to ensure that the Financial Reporting Council is up to speed on the wider scope of public sector audit, a point raised by the pre-legislative scrutiny committee, and that the arrangements for assuring the quality of audits—major and others—are sound. Whether all of this leads to lower audit fees remains to be seen. What seems clear is that foregoing the prospect of a single buyer means that the huge savings which the commission was able to generate—a quarter of a billion pounds over five years—will not be available in the future. The savings will endure for a few more years because I believe that the contracts run to 2017, although they can be extended to 2020. But if there is market concentration over time, this will eventually lead to higher, not lower, fees, although joint procurement and framework agreements will be one route to counteract this.

We want to see a timely process whereby Parliament can assess what is happening to the cost of audits, particularly for smaller authorities, and in Committee we will test the practicalities of retention of some central procurement capability. It would seem that the Government are warming to the NALC/SLCC's proposal for bulk procurement for its sector and look forward to the Minister’s comments on that. We will also wish to be reassured on the rules that will govern auditors selling other services to their audit clients and what safeguards should be in place to prevent conflicts of interest.

As a means of safeguarding auditor independence the Bill requires relevant authorities to have an independent panel to provide advice on the appointment of auditors. Other than for health bodies, the panels must have a majority of independent members and an independent chair. As the Minister indicated, she is aware of concerns which have been expressed about the capacity of all authorities to set up such a panel, although the prospect of sharing is permitted. The possibility of having overlap and confusion between an independent panel and an audit committee has also been raised. Can the Minister say how that will be handled where the two exist side by side, if they do?

Conclusions have not yet been reached over the final destination of the National Fraud Initiative, although it is understood from our discussions with the Minister yesterday that this is under active consideration. Are these deliberations likely to be concluded by the time we reach Committee stage?

Schedule 9 to the Bill covers data matching and includes provision for the possible extension of the purposes for which data matching might be deployed. Can the Minister say whether there are specific plans and a timescale for this extension to be undertaken? The Audit Commission suggests that a further purpose might be added covering the prevention and detection of maladministration and error, which might assist in identifying overseas patients who are not entitled to free NHS treatment. Would the Government support that?

We welcome the requirement placed on the NAO to consult with representatives of relevant authorities in the planning of its examinations into the economy, efficiency and effectiveness of how such authorities use their resources. It is important that the NAO is properly resourced to carry out its expanded role and we would not wish to see some formal limit placed on the number of studies it can undertake. At present, of course, the Audit Commission acts as an intermediary between government departments, the NAO and auditors. How does the Minister see alternative arrangements developing in the future?

There is much else to pursue in Committee. Audit may be a bit of a dry subject that does not arouse the passions of many of our colleagues but it is a vital part of our democracy that underpins accountability. Done properly, it is an independent assurance of how public resources have been spent and how services are being delivered on our behalf. Maintenance of its integrity is fundamental. We will approach this Bill constructively to this end.