Local Audit and Accountability Bill [HL] Debate
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Lord McKenzie of Luton
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Local Audit and Accountability Bill [HL]
Lord McKenzie of Luton Excerpts(11 years, 4 months ago)
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“(1) Unless regulations that apply to a relevant authority have been made by the Secretary of State under subsection (9), a relevant authority shall appoint an auditor (a “local auditor”) to audit its accounts for a financial year not later than 31 December in the preceding financial year in accordance with subsections (2) to (8).”
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 McKenzie of Luton
My Lords, again, I am grateful to the Minister for a very clear steer on where the Government are on this. I hope that by the time we get to Report we can make progress on seeing how it is working out in practice, particularly if there is a provision in the legislation to take it forward once the Bill is enacted.
The noble Lord, Lord Palmer, made an interesting point about the handover arrangements between auditors. I am sure that it does happen. I read the other day that Land Securities changed auditors for the first time in 60-odd years. I think that PricewaterhouseCoopers went out, but I cannot remember who went in. However, it does happen, and I think that the professional arrangements of the bodies that supervise these organisations include a code of conduct that covers that. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, this is a very straightforward amendment, which is intended to ensure that the Secretary of State will consult before producing regulations under paragraph 4 of Schedule 3. Perhaps the Minister will take the opportunity to share with us what the broad content of the regulations will cover, or say when we might expect to receive a draft. I beg to move.
Lord Wallace of Saltaire
Here I am acting as the Minister, jumping to my fifth subject today, although I am happy to do so. As has just been explained, Amendment 14ZD would require the Secretary of State to consult relevant authorities and representatives of local government before exercising powers as set out in Schedule 3 to make further provision about the appointment of an auditor to certain bodies.
We are sympathetic to the concerns behind the amendment, which we understand are to ensure that bodies are suitably consulted before further provision is made on auditor appointment. Perhaps it would be helpful if I clarify the scope and purpose of this power, which I understand to be the purpose of this probing amendment. The power is limited to bodies not covered by paragraphs 1 to 3 of Schedule 3. It therefore does not apply to local authorities, police bodies, or the GLA.
Schedule 3 already makes provision in relation to these bodies to ensure that the appointment process reflects their specific governance arrangements. In the case of local authorities, it prevents the delegation of the appointment decision below full council. This ensures that the appointment of the auditor is made in a transparent manner and with proper accountability. The power at paragraph 4 is simply intended to allow the Secretary of State to make similar minor provisions for other bodies covered by the Bill to support accountability. This might mean preventing the delegation of the appointment decision for other bodies as set out, as the noble Lord will know, in Schedule 2.
As set out in the statement of intent that the Government laid earlier this week, we will work with delivery partners and interested parties to consider what specific provisions are needed. With these reassurances on the scope and purpose of the clause, and on our intent to consult affected bodies, I hope that this provides sufficient additional information for the noble Lord to be able to withdraw his amendment.
Lord McKenzie of Luton
I am grateful to the noble Lord for that response. I certainly intend to withdraw the amendment. However, perhaps he could be a little more specific about the other bodies covered by this. I am not sure that I fully grasped his point about particular bodies. Does he have an example?
Lord Wallace of Saltaire
Schedule 2 sets out a range of other bodies. The minor bodies that are set out range from waste management boards to drainage boards to parish councils and to others but do not include the major local authorities or the GLA et cetera. Schedule 4 relates to Schedule 2. I hope that is clear.
Lord McKenzie of Luton
I am grateful for that further exemplary clarification. I have not had a chance to read the statement of intent in detail yet, which came on Monday when we were in Committee. In the mean time, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, the procedure for the appointment of auditors provided for in Clause 8 seems overly bureaucratic, but if that is the Government’s approach, I suppose this amendment simply adds to that bureaucracy. Amendment 14ZF would require that the term of the appointment be part of the notification. Indeed, it might specifically cover the point probed by my noble friend Lord Beecham as to whether it is a reappointment.
Amendment 14ZE would require that the appointment process be set down. Transparency on this matter is for the Government, not unreasonably, of high importance, and we agree. The process will have an impact on competition and pricing, so making the interviewing process clear, assuming there was one, and what firms were involved would be an indication of the relevant authority’s commitment to these issues. It might also provide an indication of the commitment to trying to open up the market, an indicator of whether local or regional firms have been included.
Doubtless the Minister will tell us that this amendment is unnecessary and will flow from the process set down. That is fine, but it would be good to have an idea of the Government’s expectations over these areas.
Lord Tope
My Lords, the noble Lord, Lord McKenzie, began by describing this process as overly bureaucratic, but then I think he went on to say that, since it is overbureaucratic, let us have an amendment that makes it even more bureaucratic. That is not the most compelling argument that I have ever heard from the noble Lord, Lord McKenzie, as I suspect he knows very well.
The amendment certainly seems to describe what is good practice and what I hope would happen in practice. I am moderately confident that that is what would happen, certainly with any good authority. Whether we need to have an even more bureaucratic process to enshrine all this in legislation, I am very doubtful, and whichever Minister is replying they will no doubt tell us that we do not want to make it too bureaucratic.
Lord Wallace of Saltaire
The Government understand and support the intentions behind the amendment—to ensure that there is transparency over the appointment of the auditor—but they are not convinced that this is the sort of thing that needs to be in the Bill. The Bill already includes a requirement for the notice to include the advice of the auditor panel, which is required to advise on the selection and appointment of the auditor. This might cover issues such as the length of the appointment and the process for appointment. Under the Bill, auditor panels must have regard to guidance issued by the Secretary of State on their functions. We expect that such statutory guidance, or wider guidance on best practice, might cover the sorts of issues that should be included in any advice from the panel.
With those reassurances, I hope that the noble Lord will be willing to withdraw the amendment.
Lord McKenzie of Luton
I am grateful to the Minister. I certainly do not intend to press the amendment. I say to the noble Lord, Lord Tope, that I did not honestly expect the Minister to rush to accept the wording; it was a mechanism to open up a debate, particularly about the process and there being transparency in the extent to which other firms are invited in—in a beauty parade or whatever the mechanism is. That may be some measure of the determination of the local authority, if it has one, to broaden and open up the market. However, I entirely accept that that will be the expectation and that it will be set down in some of the guidance that will flow from this Bill. Accordingly, I beg leave to withdraw the amendment.
“(1) Each relevant authority shall have an audit committee to exercise the functions conferred on audit committees by or under this Act.”
Lord McKenzie of Luton
My Lords, this group of amendments would in essence delete the requirement to have an auditor panel and require that each relevant authority had an audit committee. The audit committee would undertake the role envisaged for the audit panel under the Bill. Other amendments in the group are consequential, substituting “audit committee” for “audit panel”, although I acknowledge that more of these would be necessary in practice. Our following amendment, Amendment 14BB, would require that any audit committee must have a majority of independent members and be chaired by an independent member.
The role of audit committees in the public and private sectors is well understood. It would be good to hear from the noble Lord, Lord Palmer of Childs Hill, who has particular experience in chairing his local audit committee. In the private sector, the audit committee has become one of the main pillars of corporate governance. Its aim is enhancing confidence in the integrity of processes and procedures relating to internal control and corporate reporting, and it has a key role in providing oversight of the work of the external auditor.
Equally, in the public sector, audit committees are an essential element of good governance. They help to raise the profile of internal control, risk management and financial reporting, as well as providing a forum for the discussion of issues raised by internal and external auditors. They can enhance public trust and confidence in the financial governance of an organisation.
The CIPFA guidance is that audit committees should be chaired independently of executive and scrutiny functions. CIPFA has issued non-statutory guidance that draws on best practice, including that issued by the FRC. That practice makes clear that audit committees should consider the effectiveness of the auditor’s risk-management arrangements, the control environment, and associated anti-fraud and anti-corruption arrangements. They should seek assurances that action is being taken on risk-related issues identified by auditors and inspectors. They should be satisfied that the authority’s assurance statements properly reflect the risk environment and any actions required to improve it. They should approve internal audit strategy, and plan and monitor performance. They should review summary internal audit reports and receive the annual report of the head of internal audit. They should consider the reports of external audit and inspection agencies. They should ensure that there are effective relationships between external and internal audit, inspection agencies and other relevant bodies, and that the value of the audit process is actively promoted. They should also review the financial statements, external auditor’s opinion and reports to members, and monitor management action in response to the issues raised by external audit.
We will discuss the matter of audit committees for health bodies in our debate on a subsequent amendment, but the Government’s intent, in paragraph 32 of the Explanatory Notes to the Bill, seems to be that the existing audit committees of health service bodies, which already satisfy the independence requirements, will be the auditor panels for a health service body; so we are half way there. Audit committees in local government are not currently mandatory, although most authorities have one, or an equivalent.
This would seem an ideal opportunity to rationalise matters by requiring all local authorities, certainly principal ones, to have independent audit committees and to subsume the proposed narrower role of audit panels within this. Although the Bill allows for an audit committee to act as a local audit panel, the position could end up with an authority that has an auditor panel and an audit committee, just an auditor panel, or an audit committee that is properly constituted. This is a recipe for overlap and confusion. Has the time not come when we should require principal bodies at least to have a proper audit committee independently organised, following CIPFA guidance? I beg to move.
Lord Palmer of Childs Hill
Since we are not sure which amendment it is, perhaps the Committee will forgive me if I say just a word, having come in late on this section. I hope it will. I want to pick up on what the noble Lord, Lord Beecham, said about close friends. I feel that whatever legislation these Houses of Parliament pass should not be capable of ridicule. That must surely be paramount in people’s minds. Can one imagine the situation in which people vehemently deny that they are a close friend: “I am not a close friend, let me on it.”? It is quite nonsense. The idea of having to justify not being a close friend is capable of being ridiculed.
We are not putting these words into the Bill; we are trying to say that the relationship of someone in this position should not be such that they could influence the person on the panel. Imagine a court trying to decide whether this person was a close friend when they were denying it. Mr Saatchi and his wife might have problems saying whether they were close friends, given that he put his hands around her throat—he has been cautioned, so I think I can say that. It really is a worry. As I say, I understand what the Bill is trying to do and it is absolutely right to do so. However, to pick up on what the noble Lord, Lord Beecham, has said, the words are unfortunate.
Lord McKenzie of Luton
My Lords, I thank all noble Lords who have contributed to what was a wide-ranging debate in the event. I also thank the Minister for his reply, but I am bound to say that I do not feel reassured by it. There are two sorts of issues flowing through this debate. One is whether, as the amendment proposes, the audit committee could not take unto itself the role of the auditor panel. Then there is the separate but obviously related issue of composition, whether it is of the audit committee or the auditor panel, and whether that should be independent as defined, quite apart from the definition.
The noble Lord, Lord Wallace, asserted that 80% of local authorities have audit committees. I accept that. I know that it is not currently mandatory, but it is certainly encouraged and there has been a substantial development of them. Their role is not limited to internal audit, controls and processes. That is part of their role, but the CIPFA guidance makes clear that part of their role is reviewing the financial statements, the external auditor’s opinion, and reports to members, so they should already have an engagement with the external auditors and be able to take a view on how they should proceed.
“(1) A relevant authority, other than a health service body, shall determine the membership of its audit committee, provided the committee—
(a) consist of a majority of independent members (or wholly of independent members), and(b) must be chaired by an independent member;subject to sub-paragraphs (1A) and (1B).
(1A) An individual shall be ineligible to act as a member of an audit committee if that individual has any disqualifying interest.
(1B) The Secretary of State may by regulation determine interests that would disqualify an individual under sub-paragraph (1A).”
Lord McKenzie of Luton
My Lords, the purpose of this amendment is to introduce arrangements to prevent individuals with a disqualifying interest from sitting on an audit committee. In this context, the term “audit committee” is being used but, if we reverted to the context in the Bill, it would be the “auditor panel”. We have just discussed the fact that there is a requirement for the auditor panel, or auditor committee, to be independently chaired and, as we have also discussed, for there to be a majority of independent members.
However, as the Bill is currently drafted, whether somebody is independent for the purpose of being able to serve is determined broadly by whether they have been a member, officer or employee of the authority, a connected entity or, indeed, a close friend, whatever that may mean. These relationships which preclude someone from serving on the committee or panel do not appear to encompass a person with a significant business relationship with the relevant authority. This might be someone who is a major supplier to the authority—a significant landlord, for example—or a major client of one of the audit firms being considered for appointment.
We have not attempted here to define these disqualifying attributes exhaustively because it seems to me that that is a job for parliamentary counsel. However, another issue is raised about the obligation, if any, on audit panel or audit committee members, whether or not they are members of the authority, to declare any interest which, if prejudicial, would require them to withdraw from any meeting if they were a member of the authority. Obviously that could upset the balance of dependent and/or independent members. It may be that this is all closed off through other regulations but perhaps the Minister will put it on the record.
In summary, the question is whether a business relationship between an individual and a local authority could be deemed to make them not independent of the authority and how that is encompassed within the Bill? Also, what guides the activities of such members when they serve on one of these bodies and might have a conflict of interest arising from something that is on the agenda of the meeting? I beg to move.
Lord Wallace of Saltaire
My Lords, I am very happy to look at this again between Committee and Report and make sure that the definition is as clear as it can be.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for that response and for the undertaking to look at this again. The points that have been made around the Committee today emphasise that there is less clarity than there should be on how this is all meant to operate and some of the nuances that could flow from just a strict reading of the legislation as it is.
I understand the point about making a judgment about whether someone was independent from an authority because of a business relationship. As the Minister said, you would seek to deal with that through guidance and it would be an issue as to whether they should be appointed to serve on the committee or the panel. In a sense, we are differentiating between someone who is not independent in that category and someone who is a relative, where they are not precluded from being appointed to the panel or committee. However, there cannot be too many of them or the requirement for a majority to be independent would break down. I am not quite sure of the logic in that. However, rather than stretch the debate this afternoon, I ask the Minister to look at that as part of the broader discussion. Maybe we could have a meeting of all noble Lords who have contributed before we get to Report because it would be difficult to repeat this discussion at Report without some interim deliberations. Having said that, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, this amendment touches on something that my noble friend began to address in an earlier debate. It addresses paragraph 3 of Schedule 4, and the making of regulations about a health service bodies auditor panel. These regulations would enable the Secretary of State to determine whether any of the members of the health service bodies auditor panel must be independent and, if so, what proportion must be independent, as well as the definition of independent.
A health service body means a clinical commissioning group and special trustees for a hospital. These powers are subject to the negative procedure. The amendment would require there to be consultation with representatives of health service bodies before regulations are produced. This seems to be a significant paragraph to be dealt with by the negative procedure, particularly given the prescriptive nature of the constitution of auditor panels for other relevant authorities.
The Explanatory Note to the Bill, to which I referred earlier, states:
“The intention is that these panels will be the existing audit committees of health service bodies which will meet the independence requirements of best practice for central government audit committees”.
I took the opportunity to raise this in advance with the Bill team, and I had a helpful reply, which I have not had a chance to get my mind fully around yet. Perhaps the Minister might take the opportunity to put something on the record. If I understand the position, it is accepted that the audit committees of health service bodies, as currently constituted, which they are required to have under legislation, will serve as the auditor panels. In a sense, we have achieved for health service bodies what we have been seeking to achieve for local authorities. Therefore, it should not be too great a step to complete the journey. I should be grateful if the Minister would put something on the record generally about why there is this differentiation between health service bodies and local authorities. I beg to move.
Baroness Hanham
My Lords, the direct answer to the noble Lord is that there are different arrangements in the various bits of legislation. As he has said, the clinical commissioning groups have governance arrangements that say that their audit committees can carry out this duty. That is how it has been set up in the health service. The composition of the clinical commissioning groups and local authorities’ arrangements are different. I want to make it clear that where local authorities have audit committees with independent members on them, it is possible for them to appoint the panel from the audit committee as long as they use the independent members. The arrangements are not and do not have to be totally different from those available as regards the health service.
I have pages of response to a question that the noble Lord has not asked. Is he reasonably happy that I have addressed the amendment? If not, I will give him the reams of pages that I have in response.
Lord McKenzie of Luton
Will the noble Baroness remind me of the question which I have not asked?
Baroness Hanham
I am tempted but I will not rise to that. If the noble Lord does not know what question he has not asked, I am not about to tell him what he might have asked.
Lord McKenzie of Luton
I shall ponder that response but I think that I would hang on to the basic point. It seems to me that the regulations that will flow from this provision will be, as has been said, a creation of the audit committees as the auditor panels. There will be only one body for health service bodies, which, in a sense, is the clarification that I was seeking as to what would flow from the broad powers set out in that paragraph. Obviously, there is a broader issue to which we will return about why that cannot be replicated for local authorities.
I am struggling to remember the question that I should have asked. Perhaps in the interim, I should beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I shall speak also to the other amendments in this group. The amendment would remove the requirement on the auditor panel to advise on the maintenance of an independent relationship with the local auditor. Indeed, it makes it discretionary. When I prepared for this debate, I could not for the life of me immediately recall why we tabled it. Obviously, the circumstances where a relevant authority ends up with an auditor panel and an audit committee, as we have discussed, would give rise to overlap and confusion, and possibly conflicting advice.
However, on reflection, we tabled it as a probe to establish a definition of “an independent relationship”. The Bill defines who is independent in establishing eligibility to serve on an audit panel and/or committee, but this definition does not appear to help in defining the parameters of an independent relationship between the relevant authority and its auditor. Is it proposed that guidance will be available, or is it expected that audit panels or audit committees will work that out for themselves? This issue is of particular relevance to the provision of other services by audit firms and how this is to be managed.
Amendment 14BJ would make a minor wording adjustment to advice related to liability limitation agreements. By referring to proposals for an authority to enter into such an agreement, it implies not that the proposal must have originated from the relevant authority but that it is more likely to have come from the audit firm.
Amendment 14BK would remove subsection (7), which seems superfluous. If subsection (6) requires the panel to advise on proposals for liability limitation agreements, why must there be the extra stricture for it to respond to requests for advice? It is not clear to me. I beg to move.
Baroness Hanham
My Lords, perhaps I may first deal with the description of “independent” which, I understand, will be a matter of consultation. There will be consultation on what “independent” means in health bodies and how it should be defined. We all need to be clear about what “independent” means, a point raised by the noble Lord, Lord Palmer, and others. This is in relation to health bodies, not local government bodies, but that consultation will be carried out. I hope that that is helpful.
On the main question about the auditor panel’s duty to advise on a proposal for an audit authority to enter into a liability limitation agreement, Amendment 14BJ would require that the panel should advise where there is a proposal for the authority to enter into such an agreement, rather than a proposal by the authority to do so. Amendment 14BK would remove the requirement that a panel must give advice on such a proposal if the authority asks for it. Amendment 14BE would require that an auditor panel “may” advise on auditor independence whereas the Bill currently states that a panel “must” advise on it.
The intention behind the amendments, to remind the noble Lord, relates to separate amendments that we had proposed to allow for a central body to appoint auditors on behalf of any relevant authority which had opted in to this structure. Where such arrangements applied, it would not be necessary for—I am sorry, something seems to have gone seriously wrong with my notes.
I will reply on the basis of the independent relationship but I am afraid that I am going to have to ask the noble Lord to come back on Report on this so that can I fulfil his right to a proper reply.
As to advising on the maintenance of the independent relationship, it is important that the panel maintains an ongoing oversight of the auditor’s relationship with the relevant local body. As in the company sector, this might include, for example, an annual assessment of the independence and objectivity of the auditor and setting policies for the provision of non-audit services.
The noble Lord asked about limited liability agreements. I ask him to raise the issue again. I shall certainly write to give him an answer. I apologise.
Lord McKenzie of Luton
I am grateful to the Minister for that response and am happy to follow up on those points. They were quite narrow points concerning the wording; they were not substantive points of principle. I am happy to send the noble Baroness an e-mail or drop her a line. I am sure that we can deal with that before we get to Report.
In relation to the definition of an “independent relationship” with a local auditor, I obviously accept the importance of the maintenance of such a relationship—I think that we would broadly understand what that means—but, as I said, I could not find a definition of it anywhere in the Bill. I think that the noble Baroness said that, certainly in relation to health bodies, that issue was going to be the subject of consultation, and presumably that would give some guidance on the definitions that would apply for the purposes of local authorities. If there is anything further that on reflection the noble Baroness wishes to follow up on, perhaps she can write to me. Accordingly, I beg leave to withdraw the amendment.
Lord True
My Lords, I need not speak at length on this because I made a relatively lengthy intervention at Second Reading setting out the reasons for my concern about the need to be assured of proper public accountability for the actions of NHS bodies. I think that public accountability is important, and there is material in the Bill about what should be done with reports, but it is essential that a body cannot just receive a report and sit on it.
Reference has been made to a case in which a primary care trust lost £28 million. At Second Reading, I described to noble Lords what happened. A supervisory body called in an auditor but the audit report was not ultimately published. Instead, a commentary was published with various recommendations—some good and some bad—but it was written on the basis that, as no one had really lost any money, we could all proceed and other bodies would make up the money. It was entirely unsatisfactory.
Since speaking at Second Reading, I have been contacted by the leader of another local authority, who thought that I was rather mild in what I said and felt that I should probably have named some names in connection with this affair. I have reflected on that. I think that my decision not to do that at Second Reading was right, and I maintain that position. Since Second Reading, I am very grateful to have had the opportunity to meet with my noble friend Lady Hanham and with officials from the Department of Health. My noble friend had very kindly drawn the attention of her colleagues in the Department of Health to this issue.
We have a fast-evolving world in health and local government, and these worlds are now encouraged to overlap. Indeed, my own authority, along with another local authority, is currently negotiating with clinical commissioning groups and, we hope, a foundation trust to set up an integrated commissioning organisation. That is the way in which the Government wish everyone to go within eight years. Alongside that, other elements of the health service will continue.
I believe that we now have the very odd situation where there is one strand of law which is semi-engaged in this legislation and which derives from the National Health Service Act 2006, as amended in 2012, and a whole strand of local authority-related legislation concerning audit and accountability. As the two empires come together, so should those two worlds come together. In my judgment, they need not necessarily be identical, but the noble Lord, Lord McKenzie, made a fair point when he said that the clinical commissioning group is being treated very differently in this Act from the way in which local authorities are treated. I do not make a case for identity but I do for accountability.
Local authorities have a public responsibility to ensure that what is done in their area is done for the good of their local populations, and that it is done effectively and openly, as we would expect it to be done ourselves. I made the point at Second Reading that there were various issues relating not only to audit but to scrutiny and its important role. I would like to think that while it may not be possible to achieve it in the short term, as I understand it from my discussions so far with my noble friend, in the time that this Bill is before Parliament—perhaps even when it is in the other place—it might be possible to think with a little more foresight about how we are going to adjust to this world and ensure full accountability. It is simply not acceptable that a body existing in an area and other parts of the health service, as happened in the case that I reported to noble Lords at Second Reading, should simply refuse to respond to questions from a public authority about the use of resources, certainly considering the scale involved.
We have to find a method somehow, whether or not it is through guidance—and there is existing guidance—although I would perhaps prefer it to be stronger than that. This Bill should provide us with opportunities, as local accountability is not just about local authorities and neither is this legislation. I am encouraged by what my noble friend has said so far. We may be able to find some improved structures, which may be simplified in some respects, as other noble Lords have said in Committee. They should be structures which ensure proper behaviour in the first place, effective independent audit and effective and open accountability. All those strands need to be addressed. If an internal audit document is published with a commentary and then scrutiny is refused, it is not a satisfactory outcome where there is evidence of large-scale ineptitude. That is a kind way of putting it regarding the use of £28 million of public resources. I am sure that there are other examples.
I am not going to repeat all the circumstances of the case but I urge the Committee to see those great public entities of local government and the National Health Service as two great elements of the state, providing vital services to our country and overlapping in many ways. We should therefore find the opportunity to construct an architecture that meets those three strands: effective and proper governance; effective and ultimately independent audit, although internal audit is vital in all those things and I do not denigrate it; and the strand of openness and, ultimately, scrutiny. This is really a probing amendment although my noble friend encouraged me to think that were this to be laid, she might perhaps be able to give some encouragement to me and to the Committee that the Government would be prepared to look at these matters in the months ahead. I beg to move.
Lord McKenzie of Luton
I would simply urge the Minister to give some encouragement to the noble Lord, Lord True, who has raised a very important point, as he did at earlier stages in our deliberations. I hope that the Minister can help him at least a bit.
Baroness Hanham
My Lords, I thank my noble friend for having introduced this amendment because it opens up the relationship that exists between local authorities and health authorities, particularly in relation to what is required of scrutiny. As my noble friend has said, the primary care trusts and the clinical commissioning groups have now come into being, while the local authorities still have a health scrutiny role since that changeover. If I may, I will refer to the duties in the health scrutiny regulations as I go through what I have got to say.
Failure to comply with a duty under the health regulations will place the relevant body in breach of its statutory duty and render it at risk of a legal challenge. The regulations provide that the local authority can require attendance of a member or employee of a relevant health service provider or commissioner to answer such questions as appear to the authority to be necessary for discharging its health scrutiny functions. It is the duty of that member or employee to comply. The regulations also require a health service commissioner or provider to provide a local authority with such information about the planning, provision and operation of health services in the area of the authority as the authority reasonably requires in order to discharge its health scrutiny functions. To focus particularly on attendance, if a local authority was to require the attendance of members of a clinical commissioning group, it could do so under the health scrutiny regulations.
On employers’ actions, we would expect employers to take the appropriate steps to ensure that the relevant member or employee complied with the local authority’s requirements. It would be highly unlikely that an NHS body, as a public authority, would refuse to take action to ensure that its members or employees complied with a request from a local authority. I think that these provisions are part and parcel of the health service legislation which recently passed through Parliament. The emphasis put on this since the noble Lord’s problem arose may have changed.
Any refusal would not be in line with the duty of co-operation that applies as between the National Health Service and local authorities. Section 82 of the National Health Service Act 2006 imposes a duty of co-operation between National Health Service bodies and local authorities and requires them, in exercising their respective functions, to co-operate with one another in order to secure and advance the health and welfare of the people of England and Wales.
As regards the attendance of particular individuals, identification of the appropriate member or employee to attend may depend on the type of scrutiny review being undertaken and its aims. To take a theoretical case, where the local authority has required attendance of a particular individual—let us say the accountable officer of a clinical commissioning group—and it is not practical for that individual to attend, or if that individual is not the most suitable person to attend, we would expect the clinical commissioning group to suggest another relevant individual. In such situations, both the local authority and the commissioning group or provider, as the case may be, will be expected to co-operate with each other to agree on a suitable person for attendance and, in doing so, to act reasonably.
Therefore, in the interpretation of the health scrutiny regulations and on the basis of the duty of co-operation contained in the National Health Service Act 2006, there are existing principles that guide how the National Health Service and local authorities conduct themselves in relation to the discharge of the local authority’s health scrutiny function.
We share my noble friend’s desire to ensure that everything works as it should in the future and, although we feel that the duties and powers already in place are correct, we believe that we can take further action to ensure that the responsibilities on NHS organisations and local authorities are clear. We shall shortly be publishing updated guidance to support the health scrutiny regulations and to emphasise these responsibilities. If my noble friend would find it helpful, I know that the Department of Health would be happy to work with him on the development of this guidance.
I appreciate that this was very much an individual case to which my noble friend brought our attention, but it flows widely across the health scrutiny role. I hope that I have reassured my noble friend that there are requirements on people to come, that the health authority can require them to come and that they are truly expected to appear. I know that that was not the situation that he described but the regulations are there. If my noble friend is willing to give his experience and help to the Department of Health, I know that it will be very willing to take it up. With that, I hope that he may feel that he has enough to enable him to withdraw the amendment.
Lord McKenzie of Luton
My Lords, this was a very straightforward amendment, which probes the difference between deadlines in relation to the appointment of auditors to health bodies and local authorities. One is set at 25 March and the other, as we touched on earlier—or the noble Lord, Lord Palmer, did—at 31 December. Perhaps the Minister can just give us an explanation for that difference in approach.
Baroness Hanham
My Lords, I have misled the Committee, for which I apologise. As the noble Lord said, it is the preceding year. If the clinical commissioning group fails to appoint an auditor in the preceding year at the end of March, the Commissioning Board will have to notify the Secretary of State. This gives time for an auditor to put in place the provisions for the following year. The Secretary of State has to be notified by the commissioning board by 25 March that the clinical commissioning group has failed to appoint an auditor. The provisions are intended to ensure that a clinical commissioning group has a local auditor in place in a way that is consistent with their respective roles. I agree with the noble Lord that nine months seems a long time to get someone in place.
Lord McKenzie of Luton
I thank the Minister. I am going to have to read the record on that. The potential discrepancy that I was probing was the difference between using the 25 March and the financial year preceding it. As I understand it, if the financial year ends 31 December 2014, it would be the 25 March 2013 that would count. However, the difference is between the 25 March for the clinical commissioning groups and 31 December for the relevant authority’s appointment date. Why is it 31 December in the preceding year for the relevant authority and 25 March for clinical commissioning groups? I am happy to receive a follow-up letter if that is easier. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, in seeking that Clause 14 should not stand part of the Bill, I should say that this is a probing measure to seek government assurances about the appropriateness of facilitating the limitation of local auditor liability arrangements. The impact assessment and other documentation records that the Audit Commission currently provides an indemnity to audit firms for certain aspects of their work. This is, presumably, their statutory audit function. It also appears that it covers irrecoverable legal costs. We are told that the indemnity has been used only twice over the past five years and that auditors have faced legal action four times over a five-year period. Perhaps the Minister will let us know the amounts involved in the use of the indemnity and how much was paid.
What benefits ensue from limited liability arrangements which relieve auditors of liability in respect of negligence, default or breach of trust when conducting an audit? What are the benefits of that? The limitation of auditors’ liability has been permitted under the Companies Acts since 2008, although reports suggest that there has been little take-up. I am indebted in this regard to a Mr James Herbert, who is a corporate partner in a law firm who wrote an interesting article in Accountancy Age back in 2009. I took the opportunity of speaking to him to see whether the view he expressed then had changed. It had not.
Part of the reason for little take-up of those arrangements is attributed to issues with the SEC prohibiting UK companies registered with them from entering into those arrangements. Under the Companies Acts, any limitation must be fair and reasonable. A separate agreement is reached for each year and each agreement must be approved by shareholders. On the face of it, there is no reason why auditors should be protected from the consequences of their negligence or default in the public or private sectors. However, one of the public policy objectives was to enhance competition in the UK audit market and to address concerns about auditor concentration. As we have discussed before, the big four have deep pockets, are better able to bear the risks and have more clout with professional indemnity insurers. There are concerns that the smaller and mid-tier firms have been least able to benefit from the agreements.
Another reason for allowing such agreements might be its impact on the price of an audit. If the risk on the audit firm is less, the cost of the audit should go down. However, it is difficult to gauge whether there will be any real downward pressure on fees in the public sector, particularly given the infrequent calls on the commission’s indemnity. We can see some merit in allowing limitation of liability agreements if tightly regulated and if they can be demonstrated to help to open up the markets and put downward pressure on fees. However, we are sceptical that they will deliver that outcome. Perhaps the Minister can say when we might see a draft of the proposed regulations referred to in Clause 14 or what else might be provided in the key elements in the regulations. How do the Government propose to monitor and assess the effects of the clause?
I emphasise that in my discussions with that particular lawyer, it appeared that limitation of liability agreements have simply not taken off, certainly not in the private sector, so one wonders about the merits of introducing them to the public sector.
We might wish to return to the matter on Report, but it seems to me that, at the very least, there may be an argument for a sunset clause on the provisions, or at least a very clear process of assessment so that one can see whether what should be the benefits—downward pressure on audit fees and an opening up of the market to smaller firms—is actually achieved. We remain sceptical.
Lord Palmer of Childs Hill
We have already mentioned that the number of accountancy firms capable of carrying out these audits is quite small—five to seven, probably. The maximum would be 13, and most of those would probably not achieve those audits. All of those in the top echelon of firms of audits are now limited liability partnerships. The days of my times in practice when we were personally liable have, for the large firms that we are considering, long departed.
I ask my noble friend: if there is a liability, where should it rest? Should it rest at the end with the Government as a short-stop? Should we say, at the end of the day, if things go sour, the Government will pick up the liability? Bearing in mind that no partner of one of those firms would be personally liable, and that they are firms of great size with considerable power, I wonder whether they should not bear that liability.
We had the example within the corporate sector of Arthur Andersen, which messed up on an audit—not a local authority audit but a public audit—and that ended with the demise of that firm. Are we trying to say that, in terms of local or public health authorities, these firms should have this protection, or are we saying that these are the professionals and they must do their audits, work correctly and cover themselves? We are not talking about anyone being responsible for fraud or errors within local authorities or the health service; we are talking about them not having carried out their work properly to an extent where they can cover themselves. I ask the Minister to reconsider whether the liability should ultimately rest with the Government, or whether it should rest with these five to seven very large limited liability concerns.
Baroness Hanham
My Lords, perhaps I can pick up the questions as I go along. However, it would probably be helpful if I gave the justification for the clause and then we could look at the impact.
As in the companies sector, auditors appointed under the Bill will, by agreement with the audited authority, be able to limit the extent of their liability to the body in relation to negligence or breach of duty or trust. This clause gives the Secretary of State powers to place restrictions on such agreements to ensure that they are reasonable and proportionate.
The decision to allow liability limitation agreements in the companies sector was made following extensive consultation. Such agreements aim to ensure that auditors are not held liable for consequences beyond their control and responsibility. Under the joint and several liability principle in UK law, auditors may be held liable for damages beyond that for which they are directly responsible. The Financial Reporting Council has welcomed provision for such agreements.
Clause 14 mirrors the Companies Act 2006 by providing that any such “liability limitation agreement” must comply with certain conditions. The purpose of this clause is to ensure that the agreements do not unreasonably limit the auditor’s liability and are entered into transparently. Without such a provision, there would be no limits on an auditor limiting their liability and nothing to stop them removing all liability completely. As I said, it is right that auditors are held responsible for their actions in a fair way.
Subsection (2) requires that:
“A liability limitation agreement must comply with regulations made by the Secretary of State”.
Such regulations may address the duration of an agreement or the amount to which it may limit the auditor’s liability, or require it to contain, or not contain, certain provisions. Under subsection (5), regulations may provide that any limited liability agreement not complying with regulations is void or has effect only in so far as it complies with them. In the interests of transparency, subsection (6) allows the Secretary of State to make regulations requiring the disclosure of any such agreement. Subsection (7) excludes compliant agreements from wider provisions in the Unfair Contract Terms Act 1977, which set out similar but more general provision and conditions around limitation of liability.
With regard to the amounts of money involved, perhaps I may write to the noble Lord. I think that the amounts are very small but I will provide them to the noble Lord. As the Bill proceeds, there will be further details on the various matters that have been raised. We will, as with all new legislation, be undertaking a review of monitoring to see what the situation is.
With regard to the point raised by the noble Lord, Lord Palmer, about who should pick up the liability, the Bill includes provisions that enable auditors to recover the costs of their time in exercising their functions from the body being audited. It does not replicate the Audit Commission’s indemnity scheme, which covers the costs of auditors taking or defending legal action. We believe that it is appropriate for private companies to bear the risks and costs of that. We do not believe that it would unduly deter auditors from exercising their functions. The Audit Commission has rarely indemnified its suppliers. On the noble Lord’s question as to whether the Government should pick up liability, the answer would be no. With that, I urge that the clause remains part of the Bill.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for that response. I think that we understand a bit better that the regulations will broadly follow the Companies Acts requirements and what flows from that. I found her response confusing in some respects. We are talking about something that is not beyond the control of the auditors. These arrangements are predicated on a breach in respect of any negligence, default, breach of duty or breach of trust occurring in the course of the audit of accounts, so it is a failure of an audit firm which triggers them. The noble Lord, Lord Palmer, raised a very important point. If there is a breach or damages and if that is not to be visited on the auditor, or what is to be visited on them is restricted, who bears the cost of the rest? I do not think we understand that from the Minister’s response.
I thought that the public policy issue about this was partly to do with making sure that another big four company did not go under. The ramifications of those four big beasts going down to three would be significant over a whole range of areas, as we learnt from the demise of Arthur Andersen because of Enron. I thought that a key point was to make it easier for smaller firms to enter the market because their risks were, in a sense, capped. There is no great evidence to suggest that that has happened in the private sector. We do not yet know whether it will happen in the public sector, but if it does not, that raises the question: why have these agreements in the first place? All they do is to protect audit firms. Why? These are sophisticated organisations. They have excellent training programmes, generally recruit very good staff and have been around the block a few times. If they mess up, should they not bear the consequences? If not, the question of the noble Lord, Lord Palmer, is absolutely right: who should? Part of the rationale may be that it would produce downward pressure on audit fees, but that is difficult to justify, particularly if the use of the commission’s indemnity was pretty restricted.
We may return to that issue, perhaps in terms of a sunset clause, if these things are to continue. I hope that the same arrangements as in the private sector, where I think they have to be annual contracts, will persist in the public sector in so far as they are used at all. I hope that guidance is given to firms when faced with such a request from their auditors as to how they should respond. We have probably taken this as far as we can this afternoon, but for us it is an outstanding issue to which, one way or another, we will wish to return.
“( ) the right of the local auditor to make representations to the authority’s auditor panel or supervisory body”
Lord McKenzie of Luton
My Lords, Clause 16 concerns the resignation and removal of the local auditor, and the amendment refers in particular to circumstances relating to the removal of a local auditor, although on reflection it could refer equally well to circumstances in which a local auditor resigns.
The purpose is to ensure that the procedure specifically encompasses the right of a local auditor to make representations to the auditor panel or supervisory body, or the audit committee, if that is what is in place, and that might encompass a right to make representation to members. The removal or resignation of an auditor is a serious business. Under the Companies Act 2006, an extensive process is set down where somebody is removed or resigns. These include, in the first case, the right to make representations to members when removed and a statement of circumstances when resigning. It is these Companies Act processes which the Government are seeking to import into the Bill, and we support that.
Under the current regime, there is no need for regulation on the removal or resignation of local public auditors because it is the Audit Commission that appoints and removes them. However, a change in auditor could be straightforward—arising, say, from a new potential conflict of interest—or it might be indicative of a fundamental difference of view as to the accounts, where an auditor feels that they can no longer carry out the audit effectively because of concerns over the governance of the body or a fundamental breakdown in the relationship. Ensuring that there is a right for auditors to make their case at an appropriate level is therefore very important.
The Bill includes, at Clause 16, regulation-making powers which cover a range of issues. Doubtless, the Minister will say that they are broad enough to cover the thrust of this amendment. So be it, but perhaps we can hear from the Minister what the plans are in respect of resignation and removal to cover circumstances where the appointment has been made by the local body, jointly with another body, or in transition by the Audit Commission. I beg to move.
Lord True
My Lords, the noble Lord makes an extremely important point which in certain circumstances could touch on issues of public accountability, although referred to on another matter. It may well be that he could be satisfied in that Clause 16(3)(d), at the top of page 12, allows a regulation-making power in relation to,
“the role of the relevant authority’s auditor panel or … supervisory body”.
On this issue of a right of audience, or a right to make representations, my noble friend might well be able in discussion to consider including the point which the noble Lord has raised. It is a significant one and he is right to refer to Companies Act procedures. Perhaps it could be clarified whether it is potentially encompassed in that area, which might help some of us on the Committee.
Lord McKenzie of Luton
I thank the Minister for that reply. I did not assume that she would accept the wording, but I wanted to get something on the record. I am grateful to the noble Lord, Lord True, for his acknowledgment of this issue. The Minister has dealt with it wholly satisfactorily. I beg leave to withdraw.
The Deputy Chairman of Committees
The question is that Clause 17 stand part of the Bill.
Lord McKenzie of Luton
My Lords, I think that we agreed to draw stumps at the end of Clause 16. We will get on to Clause 17 next week.