Local Audit and Accountability Bill [HL]

Earl of Lytton Excerpts

Wednesday 19th June 2013 Grand Committee

[Lord McKenzie of Luton]

In speaking to Amendment 14ZA, I shall speak also to Amendment 14ZC. These amendments take us back to the debate at the start of our proceedings on Monday. When speaking to Amendment 1, I indicated that we had tabled a further amendment covering the same essential point: that of retaining the capability of enabling national or central procurement. These two amendments adopt an equivalent formulation to that provided for in Clause 5 relating to smaller authorities. It provides the Secretary of State with the opportunity to specify a person to appoint auditors for relevant authorities, and potentially provides relevant authorities with the opportunity to opt into or out of such arrangements. Absent the activation of such a capacity, the provisions on a local appointment would run. The amendment is not prescriptive of the person or persons whom the Secretary of State can designate to undertake these appointments.

I do not propose to restate in detail the arguments in favour of retaining a bulk purchase capacity. These were well aired on Monday and, I believe, well supported. In fact, I think it is fair to say that they found favour with the Minister, who said:

“It has been made clear that there is some appetite for developing this national procurement arrangement. If such arrangements for this national procurement maintained choice for local bodies—which is effectively what I have said—and allowed them to take part or appoint locally then we would be willing consider the scope for allowing it under the Bill”.—[Official Report, 17/6/13; col. GC5.]

We entirely accept that the Government would need to be assured about how such arrangements would work and be effective. However, these amendments offer a framework for this, and indeed the framework on which the Government are themselves seeking to rely in relation to smaller authorities. I look forward to a favourable reply, again, from the Minister.

I will wait for the noble Earl, Lord Lytton, and the noble Lord, Lord Tope, to speak to their amendments, the thrust of which I understand. However, for the idea to be credible it would presumably require the other body appointed to be subject to the rigours of this Bill. I am sure that was the intention. I beg to move.

[The Earl of Lytton]

My Lords, I shall speak to Amendment 14ZAA and its co-runner Amendment 14BZA, both of which are in my name and that of the noble Lord, Lord Tope.

The principle behind these two amendments is relatively simple; they seek to allow for a measure of delegation of the duty to appoint an auditor so that the actual procurement of auditors and their formal appointment can be made by another body on behalf of the authority. The issue arises by virtue of Clause 7(1), which states:

“A relevant authority must appoint an auditor”.

This, if taken literally, could be taken to mean the direct appointment of a named auditor in person on an exclusive and non-transferrable basis. I am sure that it is not intended to be quite as tight as that. It is certainly felt by the LGA, and others who have briefed me on this matter, that this might prevent any appointment as authorised proxy by an external person or body.

In reality, a firm is appointed to the task and nominates one of its number, often a partner or director, to head up a small team to handle the matter. The appointment of an auditor, to use that singular term of art, and as a specific named individual, is in any event customarily carried out per pro the authority by this means. For instance, most small charities and similar bodies appoint a firm rather than an individual. In the realms of a collective appointment via a national or sector-led service, this becomes more important. A large consultancy firm bidding for a sector-led contract will ultimately make an appointment itself of the named auditor as overseer and signatory to the auditor’s report

The gist of Amendment 14ZAA is quite simply to provide for the procurement of an auditor by way of a duly authorised proxy, including a large firm, a sector body or other similar large concern dealing with possibly several authorities. It does not make this mandatory, simply an option.

Amendment 14BZA follows from this. If the procurement is by way of another body charged with meeting the requirements of the Bill and thus delegated from the authority, it is unnecessary, or should be unnecessary, to have an audit panel, because the oversight of the auditor is carried out in accordance with the relevant rules of engagement via the proxy. The authority always remains responsible for whatever measures it has put in place. The appointed procurer of the audit service must observe all the criteria in the Bill for that activity.

The LGA, as I said, provided a useful brief on this and it is worth picking out a few salient points. The amendments would be consonant with the authorities’ need to have flexibility to procure their audit nationally, or in some form of grouped manner. It would make collaborative audit procurement more attractive and produce, as we heard on the previous day of this Committee, the potential for significant savings. That would be to the direct benefit of local finance. Some of the reasons why this is so have already been rehearsed, including the Audit Commission’s own modelling and its calculated saving of between £205 million and £250 million over a five-year period.

The Government’s own impact assessment does not refute this. Indeed, it concedes that local appointment may not procure the level of savings secured by the Audit Commission during its last procurement round. It seems obvious to me that each authority procuring its own auditors on a recurring basis replicates a cost base. There is an opportunity to save money here.

I will not go into the other details that have been discussed before, save to say that I agree that local appointment does not necessarily increase competition or cut costs. I have no proof of this, but my hunch is probably that not many firms would undertake a municipal audit in the first place. In reality one is probably looking at one of the larger firms, a point that we have heard before. I register the point made by the Minister on Monday. A paraphrase of her words is that there will be no recreation of the Audit Commission by the back door, but if the reality of this Bill’s proposals is to create some form of suboptimal procurement with waste by duplication, I have to say that I am against that as a principle. I hope the Minister will feel that subject to any safeguards that might be necessary to eliminate the risk of a “son of” Audit Commission coming about, the principle is acceptable, in which case we can work out the detail as we go forward. I beg to move.

[Lord Palmer of Childs Hill]

My Lords, I will speak to these amendments, although sitting next to me is my noble friend Lord Tope, in whose name Amendment 14ZA stands. I hope the noble Lord, Lord McKenzie, will confirm that we have already dealt with the collaborative basis and the fact of buying centrally. Even I was a late adherent to this, but I think we agree that in one form or another that is the way to go forward, however it can be arranged, although there were numerous alternatives. As the noble Earl, Lord Lytton, has said, there are going to be significant savings, which is something that we cannot ignore.

I have one question about a sentence in Amendment 14ZA on the appointment of a new auditor, or the re-appointment of an existing auditor, to,

“audit its accounts for a financial year not later than 31 December in the preceding financial year”.

Both the Bill and the amendment say that that appointment should be made not later than 31 December in the preceding year. I cannot work this out in practical terms. Let us say that KPMG is the auditor of a local authority or group of local authorities; it has not finished its accounts and the accounts will not be signed off until, at the earliest, the end of January the following year. That company could be under notice, according to the amendments, that it may not be, or could not be, the auditor for the ensuing year. While KMPG is finishing off its audit—the accounts will not have been finished and signed off by the relevant person in the local authority, who in my local authority is me, so I am told; I have done it three years in a row—a new auditor, PricewaterhouseCoopers, perhaps, will have been appointed.

I worry about how that will affect the mindset of the auditor who is being replaced. Enshrining within the Bill that the auditor has to be appointed by 31 December within that year will cause moral, and sometimes practical, difficulties. Perhaps the Minister will take this issue back and consider whether the wording should be “could be appointed by 31 December” or “as soon as possible by that date”. I worry how the changeover, if there be a changeover, will affect the performance of the outgoing auditor.

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Tabled by

[The Earl of Lytton]

14ZAA*: Clause 7, page 5, line 31, at end insert—
“(1A) A relevant authority may appoint another body to procure the appointment of auditors for purposes of meeting the requirements of this part of the Bill.”

[The Earl of Lytton]

First, I thank the Minister very much for her comments. Secondly, as I understood her, Amendment 14BZA might be acceptable with modifications. I appreciate that, but obviously, pending such modification, I shall not move that amendment at this juncture. I hope that at some juncture the noble Lord, Lord Palmer of Childs Hill, will explain to a mere ignoramus like me what the arrangements are when one auditor hands over to another. It is certainly something that I had not considered at all.

Amendment 14ZAA not moved.

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[Baroness Eaton]

My Lords, I failed to declare that I am also a member of the audit committee of my council.

[The Earl of Lytton]

My Lords, I have an amendment coming up, Amendment 14BBA, but had I known how the discussion on this amendment moved by the noble Lord, Lord McKenzie, would proceed, I would have asked for it to be grouped with these amendments, so it is possibly better that I make my comments now and consolidate the entire process somewhat. Otherwise, I fear that Amendment 14BB will have stolen a large part of my thunder, apart from anything else.

I queried the majority of independent members issue on Second Reading. I am mindful of what the Minister said on Monday: that the panel would not need to be large but that independence was important. I can certainly relate to the question of whether you have a committee and a panel as a term of art, with the duplication that that involves, to which I referred earlier. I think that the principle of an independent chairman is a given, but it appears to me from my much lesser knowledge of these procedures than that of other noble Lords that some councils might have few politically independent members. I do not know how many would have none at all, but there must be some. Even political independence, it seems to me, is no guarantee of freedom from bias, if that is the point that the Bill is intended to address. The subtitle of my amendment would be, “Precisely what do we mean by independent in this context?”. That ought to be explained.

Picking up on the point made by the noble Baroness, Lady Eaton, it seems to me that objectivity and competence, rather than independence, would be a better test for this purpose. I am bound to admit that I am at a loss to know which would be the more readily capable of definition and, if necessary, enforcement, so to some extent I can see it from the Government’s side. I think we are all agreed that we are trying to get a true and fair picture of an authority’s financial affairs. Up to a point, that works back to the basis of oversight from within the council.

Apart from asking the Minister whether she can enlighten the Committee on the question of independence, I remind your Lordships, who all know it far better than I do, of the veritable layer cake of qualifications and eligibility criteria that already applies to audit and to auditors, to which the Bill in this respect risks adding further complexity. I relate to the points made by the noble Baroness, Lady Eaton, about the independence and objectivity of auditors as professional people embedded in their culture, training and ability to retain their professional status. As a member of another profession altogether, I very much relate to that. Ultimately, it is the auditor who is doing the scrutiny, not the committee or panel. They are there simply to select—if selection be needed; we will get to that later. If the auditor is given the proper tools and the freedom to act and attacks it with the independence of mind necessary, that is the fundamental safeguard sought by the Bill.

[Lord True]

My Lords, I declare an interest myself, as leader of a local authority, and apologise for not being able to take part in these proceedings before. I shall make a very small point, which need not be clarified now but perhaps could be before Report.

I have a great deal of sympathy with the tenor of comments being made universally around the Committee about the risks of overlapping. I strongly follow the noble Earl’s comments about the importance of the integrity and role of audit as it is practised by local authority officers at the moment. I was going to raise my query later, but I shall follow the noble Earl, because it affects independence, which is the subject of this amendment. Paragraph 2(2)(b) of Schedule 4 would not disqualify somebody from being a member if,

“the panel member has not been an officer or employee of an entity connected with the authority within that period”—

that is, for five years.

The only thing that needs to be made clear and perhaps can be made clear on Report is whether that means the authority or the individual. Let us posit a case of somebody who has been an officer of a body and has gained a great deal of lifetime experience, and has retired early, perhaps eight years ago—we do not want any age complication, so let us just say that he no longer works for that authority. After his departure, some years later, that body becomes a connected authority, whereas he has had no connection with it for some time. His experience might be useful, and one does not want to exclude potential individuals by idle wording. I take it that the Bill means that somebody who has been working for, or connected with, the authority in the past five years should be excluded. However, the way in which it is written could mean that if you have worked at any time for a body that becomes connected in the previous five years, you would be excluded. I think that the second category might be considered, as somebody could be useful in pursuing this role.

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Tabled by

[The Earl of Lytton]

14BBA*: Schedule 4, page 40, line 8, leave out paragraph (a)

[The Earl of Lytton]

My Lords, I am going to be incredibly brief and thank the Minister for his reply in the previous debate, as well as for his comments on the bit that I did not actually ask about, which were very informative. Secondly, I apologise to the noble Lord, Lord Tope, for lifting this amendment from where it was and sticking it three groups further forward. Thirdly, I apologise to the Committee for my confusion on the definition of independence. I see that the jury is out on that. On that basis, I do not propose to move the amendment.

Amendment 14BBA not moved.