Local Audit (Appointing Person) Regulations 2015

Lord McKenzie of Luton Excerpts

Tuesday 27th January 2015 Grand Committee

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for introducing these two sets of regulations. As she will have gathered from the debate in the other place, although we have some questions of detail, we will not seek to oppose these regulations.

I agree with much of what the noble Lord, Lord Palmer, and my noble friend Lord Beecham said, and I will come on to some of those points in a moment. However, on the issue of internal audit, I had no doubt that the noble Lord would raise it because he was very strong on this issue when we were discussing the Bill. My question is how under this regime the strength of internal audit is going to be reflected in the setting of fees. That was not clear from my reading of the regulations.

We are pleased that during the passage of the Local Audit and Accountability Bill, which is now an Act, the Government accepted the argument in favour of preserving some opportunity for ongoing collective procurement of audit services for those who wished to avail themselves of the opportunity, which is what these regulations cover. Although we were not supportive of retaining the Audit Commission with all its former powers, its precipitate demise forgoes the opportunity; we should have used it in some of the roles that are promulgated in these regulations. It is a pity that that decision was taken without thinking through the consequences.

The LGA has created Public Sector Audit Appointments Ltd which is due to manage ongoing audit arrangements. Until April 2015, it is the responsibility of the Audit Commission. It will use staff transferred from the commission, so we are getting rid of the commission and transferring some of the staff into this new body to carry out some of the activities that it was already carrying out in managing those existing contracts. How many staff are to be transferred under these arrangements and what are the expected ongoing annual costs of the new entity through to 2017?

My noble friend Lord Beecham touched upon the best value profiles and the ability of individual authorities to benchmark themselves against others. I understand from what I have read that the profiles will not be preserved in their previous form and therefore will not be available under the new regime.

Both the appointing person regulations and the smaller authorities regulations provide for the Secretary of State to specify the person or persons to appoint a person to appoint a local auditor. For principal authorities and smaller authorities the Secretary of State can specify different persons in relation to different classes of authorities. Will the Minister say a little more about what the Government have in mind in terms of these appointments, whether they will seek to appoint for different classes of authority, what experience they will look for in the person they appoint, how they propose to monitor the performance of such persons and by reference to what criteria?

The noble Baroness referred to the LGA. I do not know whether it is proposed that the existing LGA entity will become involved, whether there will be a new entity, or whether that will be part of the provision. Is it the intention that Public Sector Audit Appointments Ltd will be an appointee? It is noted that no appointment can be made for a financial year before 1 April 2017, but does this imply that the existing contracts will not be extended beyond their current term? I think that they can be extended to 2020. What is the earliest date that the run-on of existing arrangements can be triggered? If there is a desire to run them on to 2020, what is the earliest date when the decision is needed in respect of that?

The noble Lord, Lord Palmer, and my noble friend Lord Beecham touched on capacity. When outsourcing its audit contracts to the private sector the Audit Commission sought, although with limited success, some diversity of providers. My recollection is that most of the contracts went to the big four accounting firms. I think there were a few others, and Grant Thornton featured among them. I cannot remember how many other firms were sought, but there were precious few.

[Lord Palmer of Childs Hill]

Perhaps I may add that Grant Thornton did not mop up a large number of the contracts.

[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.