Local Audit and Accountability Bill [HL]

Lord Tope Excerpts

Monday 24th June 2013 Grand Committee

[Lord Tope]

My Lords, I express my appreciation to the noble Lord, Lord McKenzie, for raising this issue, because I know it is one of concern. Indeed, it was one of the concerns, as I think he mentioned, expressed by the Chartered Institute of Public Finance and Accountancy, best known to us all as CIPFA. One of the concerns that it raised in its Second Reading briefing was that the wider scope of public audit has not been fully embedded in the Bill. This is perhaps an example of that. CIPFA makes the point, which those of us familiar with local government will understand very well, that public audit is a good deal wider than private sector audit. I do not think I need to labour the point. We are looking forward to the Minister’s response, which I see she is eager to give us.

[Baroness Hanham]

Too eager, perhaps. I say at the outset that we are absolutely clear that the auditors must be competent, appropriate and steeped in local government finance. We should start there, with that as the interest common to us all, to make sure that any changes are made in the most appropriate way so that we can be sure of getting the same high standards of auditing that taxpayers expect and to which they have been accustomed.

The Bill sets out a pretty robust regulatory regime. The National Audit Office will have to develop the underpinning code of audit practice and produce supporting guidance that will set out how auditors perform their role. What this means, essentially, is that the boards going for public audit will not change. In addition, the future local audit framework will require all auditors to be suitably qualified and competent to carry out local audits.

The Bill requires auditors to hold an appropriate qualification. This is either a qualification recognised under Part 42 of the Companies Act 2006, for a statutory audit, or another qualification recognised under this Bill. The Secretary of State will be able to make regulations setting out the minimum requirements that other qualifications will need to meet in order to be recognised for the purposes of local audit.

It is clearly crucial that local auditors are, as I have said, suitably qualified, that they attain an appropriate qualification and that that demonstrates that an individual understands, among other things, auditing standards, accounting standards and audit procedures. These standards and skills must be applied to audit assignments regardless of whether they are in the public or private sector.

However, while holding an appropriate audit qualification is necessary, it is not sufficient in itself for those individuals within firms assigned responsibility for signing audit reports of local bodies. What is important for local audit is that auditors have the skill and experience of local audit, which includes understanding the wider scope of public audit. As such, we believe that the amendment is unnecessary as the Bill requires all individuals to have this appropriate level of competence to carry out local audits, regardless of whether they hold a qualification under Part 42 of the Companies Act 2006 or another one recognised under the Bill. This critical requirement regarding competence is set out in paragraph 27 of Schedule 5. The amendment would apply only to the other qualifications recognised under the Bill, and not those recognised under Part 42 of the Companies Act.

It maybe helpful for me to outline briefly how the framework works for the companies sector and then explain how the framework for local audit will ensure that all local auditors understand the wider scope of public audit, thus removing the need for this amendment. Under the Companies Act, it is for the recognised supervisory body to set out the requirements for approving those individuals who will be responsible for signing audit reports for companies. The requirements established by the recognised supervisory bodies are subject to agreement and oversight by the Financial Reporting Council. Once an individual has been approved to sign an audit report of a company, it does not follow that they could sign such a report for any company. That individual would need to be competent to sign the audit report of the specialism of that particular company; they would need to have the relevant skills, experience and knowledge of the relevant subject matter of the company or industry in which they work.

We are replicating this framework for local audit. The recognised supervisory bodies for local audit will have responsibility for approving the individuals nominated by its member firms for signing the audit reports of local bodies. This will also be overseen by the Financial Reporting Council. Under rules that it will agree with the Financial Reporting Council, a recognised supervisory body will approve an individual to take a key responsibility in the audit of a local body only if that individual has an appropriate level of competence to carry out local audits. A firm that cannot demonstrate that a nominated person has recent experience of auditing a local body and understands the wider scope of local audit will not be considered competent and therefore cannot be approved by the recognised supervisory body.

To provide further assurance on this issue, I should also say that there are established standards and professional obligations with which firms must comply regardless of whether they are appointed to a company or a local public body. In particular, the international standard on quality control requires all firms to have policies and procedures that ensure that individuals have the right knowledge and experience to undertake a specific engagement. For local audit, this would mean that a firm could not put forward an individual to be responsible for a local audit if that individual did not understand the wider scope of public audit. If it did so, it would be in breach of its obligations and would risk breaching the terms of its registration with the recognised body.

The noble Lord, Lord Tope, raised the question of CIPFA and the discussions that have taken place. It may be helpful for noble Lords to know that I recently saw and had discussions with CIPFA about this, and it is being closely involved in discussions that are going ahead with the council, so its views are well taken into account. We recognise that it is probably one of the very few bodies with qualifications that continue to exist for auditors who will be required to do this work.

The register will be published when we see the draft regulations, which will be available at the next stage in the Commons. The register will be published in 2016, in time for the local appointment of auditors. We have discussed the question of how many firms will be able to do this, and I remember saying earlier that we hope and anticipate that smaller local firms will be able to get their staff qualified, if they do not have that qualification, so that they can bid for contracts. We expect that the smaller, new contracts will open up the market to smaller firms. We are anticipating that this will not just be the big four or the bigger four and three bidding—which I think got us to seven before—and that there will be increasing competition. We believe that there should be plenty of smaller companies available, once local authorities start to appoint their own auditors.

I hope that has picked up the points on the register and those made by CIPFA. I know that it is involved in what is going on to ensure that these regulations and qualifications are satisfactory.