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]
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Lord McKenzie of Luton
My Lords, in moving the amendment, I will speak to the other amendments in this group as well. As noble Lords will doubtless recognise, Amendment 1 is a paving amendment and the substance is in Amendments 6 and 9. Amendment 9 is consequential on Amendment 6.
The proposition is straightforward, and we had understood there was consensus. Notwithstanding this, we have not seen a government amendment to give it effect. The amendments provide a route to securing a central procurement of auditors in the future. As we discussed on the first day in Committee, by the time the key provisions of this Bill come into force, it is expected that all the audit contracts with principal local bodies will be undertaken by private sector firms, under arrangements entered into with the Audit Commission. This will comprise some 800 principal authorities, including local authorities, NHS and police bodies, and so on.
The contracts—I think that there are 10 of them—run to March 2017, but can be extended for three years. When these contracts have run their course, the authorities will make their separate appointments, although there is flexibility for authorities to jointly procure, together with other bodies. It is generally accepted that the central procurement exercise undertaken by the Audit Commission has generated substantial savings for local bodies—some 40% reduction in fees—and had some, albeit limited, impact on broadening the diversification of provision in the audit market.
The Government’s own impact assessment has recognised that individual audit procurement is unlikely to match central procurement in generating reduced fee levels. Research shows that market concentration in audit services leads to higher audit fees, and while there is a credible argument that individual procurement will act against market concentration, major providers in the market are large, economically powerful entities with resources to invest in tackling the new opportunities.
One risk is that the larger authorities will fare well in this, because they will be more attractive clients to the big firms. In practice, smaller authorities will end up with less choice, being the junior partners in joint appointments and perhaps missing out on the services of the larger firms or being unable to afford them. The Government will doubtless remind us that authorities can group together. They can, but there is no clear framework to support this. Indeed, there is no explanation, for example, of what happens if there is joint provision when a conflict develops between one of the authorities and the firm involved.
The amendments, particularly Amendment 9, which is at the core of it, adopts the approach already included in the Bill for potential central procurement for smaller authorities. It enables regulations to specify a person to appoint auditors with relevant powers relating to fees, et cetera. It especially encompasses the prospect of authorities being able to opt either in or out of the arrangements, which we know is a key requirement of the Minister. The Minister has expressed an appetite for facilitating ongoing central procurement, provided that it is not mandatory, and a hope to be able to return on Report with some ideas. Perhaps we can now hear what they are. We know that the Minister and officials have been having discussions with the LGA, but we do not necessarily think that arrangements run by it are the only, or, indeed, the best approach. If we are to preserve central procurement, we need the legislative basis to do that. That is what the amendments provide. I beg to move.
Lord Palmer of Childs Hill
My Lords, in Committee, my noble friend said that the Government would commit to amend the legislation to create a framework to support a voluntary national procurement exercise. When she replies, I would appreciate it if she could put some meat on that earlier commitment.
Dealing with the point made by the noble Lord, Lord McKenzie, if one was always looking in terms of cost savings, which seemed to be the main thrust of his speech, we would have almost the demise of all local authorities. It would be a case of, “Let us have it all done nationally and then we would save some money”. We as a Government are committed to localisation. The idea that local authorities should be to a degree able to choose their auditor is part of that localisation. There was a feeling of despair in the noble Lord’s comment about how local authorities would be less hard negotiators than the Audit Commission. I doubt whether that will be the case. Many local authorities would be very hard negotiators on their own behalf in fixing the audit fees, the level of audit taking place and how it will dovetail with the internal audit systems of the local authority. A local authority that has a good local internal audit system can probably negotiate much harder with the external auditors, because of its knowledge of its internal audit system, than the Audit Commission has in the past.
I believe that the amendments are unnecessary, and I would welcome and wait for my noble friend’s comments on how the Government will keep the commitment that she made at an earlier stage of the Bill.
Lord McKenzie of Luton
My Lords, I thank the Minister for her reply and the noble Lord, Lord Palmer, for his contribution to this short debate. I say to the noble Lord that I do not advance the proposition that all local authorities will not be hard negotiators. My point was that there could be a differentiation between the smaller authorities and the larger authorities. I am sure that the larger authorities will be well capable of looking after themselves—they prove that on a daily basis.
Localism and audit appointments within a regulatory framework are more complex issues than localism generally in the context of provision of services. Cost savings is one feature, but it seems to me, particularly in the current climate, that it is a very important feature of what we should be helping local authorities to achieve.
The Minister has in a sense reiterated what she said before. I do not honestly believe that that takes us any further forward. We have accepted that there should be a permissive, not a mandatory, regime. If that is where the Government are, I am not sure what is in this that cannot be accepted because it provides a route to set up exactly that sort of regime.
The Minister said that there was an intention to bring forward an amendment in the Commons. With respect, however, in the next breath—as I understood it—she said that that was not certain. I do not know whether the noble Baroness might be able to clarify that point for me before I conclude—it is fairly critical.
Baroness Hanham
My Lords, I want to make it clear that it is the Government’s intention to see that the proposed arrangement is fulfilled, so that there might be wider procurement than there is at present. In order to do that, I am unable to say today that it will follow exactly these provisions because discussions need to take place. The Local Government Association in its briefing, as I am sure the noble Lord will have seen, is happy that that should be the situation. It is content to have those discussions and to see that an appropriate amendment is put forward in the Commons.
As a politician, one should never hedge. What I am told is that there will be an amendment. I should never have put any doubt in the noble Lord’s mind about that. I hope that will help to clarify the situation and prevent the noble Lord feeling that he has to press this amendment, when I suggest that it is completely unnecessary.
Lord McKenzie of Luton
My Lords, again, I thank the Minister for that. Indeed, I was tempted to press this amendment but I take her assurance that an amendment will be brought forward in the Commons that will enable central procurement, but not on a mandatory basis. If that is the proposition we can take from this discussion, that is as far as I can take this amendment today and accordingly I beg leave to withdraw.
“(6) Before the commencement of this section, the Secretary of State must be satisfied that effective successor arrangements are in place or achievable for—
(a) the management of existing audit contracts entered into with the Audit Commission;(b) the maintenance and updating of Value for Money profiles; and(c) certification functions currently undertaken by the Audit Commission.”
Lord McKenzie of Luton
My Lords, I will speak also to Amendment 3. The more we delve into this Bill, the clearer it becomes that the decision to close the Audit Commission was taken without a clue as to how some of its functions were to be carried out in the future or how some of the savings that it has driven could be maintained.
We have just discussed how a central procurement function might be preserved, and we will come on to discuss how the commission’s efforts to prevent and detect maladministration and error can be carried out in the future. Amendment 2 focuses on three specific areas, which are,
“the management of existing audit contracts … the maintenance and updating of Value for Money profiles; and … certification functions currently undertaken by the Audit Commission”.
It requires that robust processes are in place for these before the Audit Commission is closed. We have discussed these before and received assurance that the Government have these matters in their sights, but we are again sadly lacking in detail as to what is proposed.
As we discussed in Committee, the management of ongoing audit contracts is not a straightforward, passive matter. It requires the availability of certain powers that are currently available to the Audit Commission; for example, in relation to fee setting. Given the public interest in local public audit, any successor arrangements will need to ensure transparency in audit quality monitoring. The FRC is to monitor major audits and it is unclear what public reporting there will be on this. All other audits can be subject to cyclical monitoring by the supervisory bodies but there is no commitment yet to any public reporting on the results of this monitoring. Perhaps the Minister will tell us now what is proposed in this regard.
In Committee, the Minister told us that,
“we are giving consideration to the transfer of current Audit Commission tasks, including the value-for-money profiles”.—[Official Report, 17/6/13; cols. GC 25-26.]
Now is the chance for the Minister to be a little more specific. The value-for-money profiles are widely used; there were some 9,000 visitors to the commission’s website in the past financial year. They bring together data about the costs, performance and activity of local councils and fire authorities. The profiles show how organisations are spending resources, what services they perform and how these cost and performance levels compare between organisations and over time. The commission is enhancing the visibility of these profiles by presenting information about how spending and activity have changed over time, how councils’ performance differs, and factors affecting variation in activity and cost. Can we be very clear on this: are these profiles to be maintained and, if so, how?
It is accepted that certification processes may diminish as grant funding streams are reformed and phased out but there will certainly be the need to deal with housing benefit funding before this is absorbed fully into universal credit. Can the Minister give us some assurance on just this one matter, if not the generality of the replaced certification regime?
We have so little hard information on these areas and the Bill is about to leave your Lordships’ House. We should remember that it is actually three years since the decision to close the commission was announced. In these circumstances, requiring these matters to have been satisfactorily dealt with before the Audit Commission is closed seems the very least that we can do.
The same applies to being satisfied as to how the new audit regime is to be co-ordinated across government and how accounting officers will be entitled to obtain assurances on the effectiveness of financial management arrangements. There will be no organisation to publish the outputs from the audits of over £200 billion of public money. Accounting officers will need to continue to have access to analyse the outcomes of local work, and individual government departments will need arrangements to receive the outcome of audits. We are entitled to be assured that this is all in place before the commission disappears.
That is all that this amendment seeks to achieve, but it is very important. I beg to move.
Lord Palmer of Childs Hill
My Lords, the purpose of Amendments 2 and 6 is clearly to try to improve the transitional arrangements. It seems to be felt that we need a certain overprotection for transitional arrangements, but when private corporate bodies change their auditors and way of management, some transitional arrangement always has to take place. It works in a natural way, without the Secretary of State being involved in every item.
Amendment 2 inserts three paragraphs. The first deals with,
“the management of existing audit contracts entered into with the Audit Commission”.
One of the main purposes of the Bill is to make the audits of the various local authorities much more the responsibility of the local authority. Its appointment of the auditor and dealings with the auditor, and the auditor’s dealings with the authority, will become a more localised matter. However, because there are a limited number of audit firms, there will be a consistency in the types of audit operated.
The main point that the noble Lord spoke about was,
“the maintenance and updating of Value for Money profiles”.
Value for money in the external audits of local authorities has been a very important and costly factor in terms of the time that the Audit Commission and private firms of auditors have spent on those activities and how much they have charged for them. Two or three years ago, the value-for-money audits carried out by external auditors were more limited. There was no large-scale review of the use of reserves, assets and finance. Under the current arrangements, external auditors do not have to carry out a prescribed list of value-for-money exercises.
Currently, before the Bill, that situation is very much localised. There is a virtue in that localisation. Different firms of auditors will possibly take a different view on what is needed within that particular local authority, and that view will have an effect on the fees charged to that authority and on how much work needs to be done. As the years progress, it will be interesting to see how different local authorities have their value-for-money details published. We hope that all local authorities will publish these, and there may need to be some national gathering of that information for comparison purposes. However, that does not necessarily need to be in the Bill. Although I understand where the noble Lord is coming from on this, I think that it amounts to a little too much control which is not needed.
Baroness Hanham
My Lords, the current contracts are due to last until 2017, and there will then be an interim arrangement between 2015 and 2017, as I have described. After 2017, unless for some reason it is decided universally to extend the contracts again en bloc—which is completely outside what we are talking about today, and it is probably unlikely—it is for the local authorities to make their own decisions about the contracts: where they want them to be, and with whom. Following 2017, within that interim period between 2015 and 2017, local authorities will have to decide what they will do and how to manage it.
Lord McKenzie of Luton
Again, I am grateful to the Minister for her response and to the noble Lord, Lord Palmer, for his challenges. I will start with the noble Lord. I sought to focus on the contracts that are in existence, not the subsequent regime, in which local authorities may or may not appoint their own auditors. However, there is a bundle of contracts, to which my noble friend Lord Christopher referred, which are ongoing at the moment but which will need management. That management is more than just a passive affair, so it needs to be put in place.
I thought that the arrangement about extension was that it would ultimately be a decision for the DCLG about its 10 bundles of different contracts—you do not necessarily have to make the same decision in respect of each of them. I say to the noble Lord, Lord Palmer, that I did not say that there should be some standardised approach to value-for-money issues. I sought to ensure that there was security of the value-for-money profiles that the Audit Commission currently produces—data that are available to all authorities and others as well—so that authorities are able to make their own judgments and undertake their own exercises, whatever they may be. After the Minister’s response, this is the area I feel less confident about. We do not know from the reply whether they will be maintained, even broadly, in their current form, or whether they will be available as a valuable tool for local authorities and health bodies in the future.
It was not my intent to get the Secretary of State involved in all things. The purpose of the amendment is to require the Secretary of State to be assured that these matters are in place—not that the Secretary of State is operating them—by the time the Audit Commission closes. Once the Audit Commission goes, that will be a very clear break with the current situation. So far as the role of the FRC and supervisory bodies is concerned, I understand their role in that, but the key issue is on how transparent the result of their work will be. We do not yet have clarity on what will be the consequences of their auditing of audit work and what will happen to that. That was part of what I was inquiring about.
Perhaps the noble Baroness can first deal with that point about transparency of the FRC’s supervisory activities or the supervisory bodies: what is likely to be in the public domain as a consequence of their work? It would be helpful if we could have an answer on that. I should also like some clarity on the value-for-money profiles. Is it intended that the data will still be collected, maintained and available to relevant bodies—whether in precisely the same form as now, or not? Is it intended that these profiles be available in the future, once the Audit Commission has closed? This is an important issue, so could the Minister give some further clarity on it?
Baroness Hanham
My Lords, I may need to write to the noble Lord on the detail of this. However, our understanding is that clarity and transparency will remain as they are at present, so that the Financial Reporting Council will have much the same monitoring role. Anything that it does in relation to councils and local audit will have to be as transparent as is necessary. I would prefer to write to the noble Lord, particularly on this issue, and to make sure that the information is put into the Library of the House.
Lord McKenzie of Luton
I am grateful to the Minister for that but perhaps it is time we stretched our legs. I beg leave to test the opinion of the House.
“(7) Before promulgating a statutory instrument containing regulations or an order which would fall within section 40(7), the Secretary of State shall publish and consult with relevant persons on a draft thereof.”
Lord McKenzie of Luton
My Lords, this is a rerun of the amendment we moved in Committee concerning hybridity. It was prompted by the report of the Delegated Powers and Regulatory Reform Committee which drew attention to Clause 47 of the Bill relating to regulations under Clause 2. Clause 2 enables the Secretary of State, by affirmative resolution, to include someone as a relevant authority and to make provisions about how the Bill affects them. This is the case even though the regulations might be a hybrid instrument, although Clause 47 requires it to be treated as not being a hybrid instrument. The Delegated Powers and Regulatory Reform Committee made it clear that if the hybrid instrument procedure is not to afford protection in cases of hybridity, there should be another form of protection—hence our amendment concerning publication and consultation.
In Committee, the Minister told us that instances of hybridity will be rare. Indeed, I do not think that we have yet had an example of one. There was, however, acknowledgment that, where they arose, there would be an especially compelling reason for the Government to consult. In response to the Delegated Powers and Regulatory Reform Committee, the Minister reiterated the Government’s acceptance of the need to consult and promised an announcement on Report. We look forward to that announcement and, specifically, to hearing why the commitment should not be carried in the Bill. I beg to move.
Baroness Hanham
My Lords, as the noble Lord said, I was sympathetic about his amendment in Committee. It would ensure that if the Government were to bring forward what might amount to a hybrid instrument under the powers in Clause 2, the bodies affected would be consulted before regulations were laid. This, indeed, would need to be through regulations. We do not expect that the need to bring forward regulations would be anything less than rare.
As I said in Committee, we recognise that in these cases there would be especially compelling reasons for the Government to consult. In our previous discussion I referred the noble Lord to our forthcoming response to the DPRRC’s report. We have accepted the committee’s point and informed it that we would announce our commitment, which I am doing, and consult affected bodies at Report. We confirmed that this will not entail the need for any amendment to the Bill. I am happy to give that commitment today, and to consult relevant persons on a draft of any statutory instrument containing regulations or an order falling under Clause 40(7) of the Bill. Any such regulation would be subject to the affirmative process, so Parliament would have the opportunity to scrutinise it. In the light of that commitment, I hope that the noble Lord will feel that we have satisfied his requirements.
Lord McKenzie of Luton
I am grateful to the Minister for that commitment which is very clear. I would still prefer to see it in the Bill, but I will not press that point. The answer is clear and I beg leave to withdraw the amendment.
Lord McKenzie of Luton
This is a return, briefly I expect, to a drafting point. Under Clause 4 there is a requirement that,
“a relevant authority … must be audited … in accordance with this Act and … by an auditor appointed by that authority in accordance with this Act”.
The second requirement cannot be met before 2017 at the earliest when the appointments made by the Audit Commission come to an end. It could be three years later if any of these contracts are extended.
The concern is how the general requirements for audit provided for in the Bill can operate before local appointments are operative. I believe that we see eye to eye with the Government on the issue. The Minister’s letter of 25 June states:
“Officials believe that when the provisions are commenced, we will be able to commence different provisions for different purposes and as a result, we will be able to avoid any of the unintended consequences you highlight”.
I accept that there is flexibility on commencement of provisions but remain unclear as to how this would operate in the circumstances highlighted. Is it being contended, for example, that Clause 4(1)(a) could be commenced before Clause 4(1)(b)? It would be good to have some clarity on this issue before the Bill leaves your Lordships’ House. I beg to move.
Lord Palmer of Childs Hill
My Lords, I would also welcome the Minister clarifying some issues, particularly if there is, indeed, a problem of a practical nature. At present, most local authorities are audited by a professional firm. A fairly small proportion is audited by the commission. Those audited by professional firms will be audited under the continuing contracts until 2017. The local authority will then have the ability to appoint a new auditor. This is what happens in the commercial world. One has an auditor, the auditor audits for a period—generally for the year, in this case for slightly longer—and then there is a new appointment. This is quite the natural way of things. I am not sure—and I hope that the Minister and the noble Lord, Lord McKenzie, will clarify this—why we need to have this because, in a practical sense of the word, auditors are there for a period, they finish their term of office and then they, or another auditor, are appointed. That is the natural way of things whatever we decide or do not decide in your Lordships’ House.
Baroness Hanham
My Lords, first, I confirm that it is possible to introduce different parts of the Bill at different stages, and the order in the Bill can be switched around. I think the noble Lord asked whether Clause 4(2) could be introduced before Clause 4(1) and the answer is that it could—it is a case of whatever is convenient. The Bill introduces powers to commence different parts of the Bill at different times and to make savings on provisions relating to the Audit Commission Act 1998. Therefore, we would expect to commence this reference in line with the introduction of the local appointment, which I think we were discussing when the noble Lord, Lord Christopher, was here.
If the noble Lord wants to know our wider intention of how to manage the overall transition to the new audit framework, it may be helpful if I say a bit more about that. Our intent remains, as I said, to close the commission in spring 2015. The existing audit contracts will continue to run until 2017, but management of those will transfer to an interim body. We have discussed these over the three previous amendments. As the contracts will run until 2017, authorities will not need to make their own appointments until that stage, but they will have to have made those appointments so that there is a smooth transition between the contracts currently managed by the Audit Commission and whoever manages them subsequently, into the local authority’s own regime. We therefore expect that much of Part 3 of the Bill, which deals with local appointment, will not be commenced until closer to 2016, which then gives them a year to do that. It will be 2016 when procurement of auditors for 2017 is likely to begin.
The current intention is that the new eligibility and regulatory framework and provisions on the conduct of audit will come into effect immediately following the closure of the commission in 2015. It is our intention to make arrangements to enable us to do this under the powers in the Bill, subject to analysis of the transitional arrangements—again as we have discussed, there have to be transitional arrangements—that may arise.
Lord McKenzie of Luton
I missed the Minister’s first point. Would she mind repeating the beginning of that sentence?
Baroness Hanham
It is our intention to make arrangements to enable us to do this under the powers in the Bill. Our current intention is that the new eligibility and regulatory framework and provisions on the conduct of audit will come into effect immediately following the closure of the commission in 2015. The provisions will then relate to whatever interim arrangements for the body are in place. I hope that that is sufficient clarification for the noble Lord to withdraw his amendment.
Lord McKenzie of Luton
I thank the Minister for her reply and the noble Lord, Lord Palmer, for his contribution. I say to the noble Lord, Lord Palmer, that my point was not about auditors and succession of auditors but on quite a narrow drafting point. One of the requirements in Clause 4 is that the audit must be undertaken,
“in accordance with this Act … by an auditor appointed by that authority”.
Obviously, until 2017, the auditors will have been appointed by the Audit Commission, and the question is how the system works under those circumstances. I accept the broad point that matters can be introduced at different stages but I am still a little mystified as to how the new framework is to operate from 2015, so long as Clause 4(1)(b) is there—unless that is simply excluded from what is introduced in 2015. Perhaps I should read the record and we might have a further discussion on this in due course if necessary.
Lord Palmer of Childs Hill
Before the noble Lord, Lord McKenzie, sits down, I will just comment on the point about the appointment of the auditor by the Audit Commission. In practical terms, the Audit Commission currently suggests who the auditor should be—for example PricewaterhouseCoopers, or Grant Thornton, which has a large number of these audits. The local authority is the one that appoints the auditor, under its own constitution, although it accepts in practice the auditor that has been put forward by the Audit Commission—whether it is the Audit Commission itself or a professional firm. I would have to go back to the constitution but, as I understand it, the local authority has a constitutional duty to appoint an auditor, which it currently does on “the instructions” of the Audit Commission. However, the appointment cannot be foisted on a local authority, because it is a legal body in itself.
Lord McKenzie of Luton
My Lords, the noble Lord makes an interesting point but my understanding is that the contracts for the audits are with the Audit Commission not with the local authority. If the noble Lord is right, that in fact unlocks this particular conundrum: although it is not a contract organised by the Audit Commission, if it is nevertheless an appointment by the authority, then I think the problem goes away. With respect to the noble Lord, I do not think that is the position but we might just follow up on that. Having said all that, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, obviously we are content with these amendments, and I thank the noble Baroness for taking forward this issue. We did retable our original amendment as Amendment 21, but that was simply to make sure that something was on the agenda. Clearly, I will not move it when we reach that stage.
“(10) Such regulations shall in particular provide that an individual shall be ineligible to act as a member of an audit panel if that individual has any disqualifying interest.”
Lord McKenzie of Luton
My Lords, the purpose of the amendment is to test the scope of the term “independence”, although it is written in terms of an audit committee rather than an audit panel. I regret not having been able to attend the meeting which the noble Baroness, Lady Hanham, kindly organised to consider these issues, but I am grateful for the note which was provided.
We have reflected on the proposition that all principal authorities must have an audit committee whose functions include those required of an audit panel, and we see some merit in the Government’s argument that this could be too restrictive. We consider that all principal authorities should have an audit committee to undertake the range of functions with which we are familiar. Given that the appointment of auditors is a new function, the audit committee would be a natural place to provide the appropriate scrutiny and oversight of the relationship with the external auditor.
However, given the importance to that scrutiny and oversight role of the independence requirements, we think these should be paramount. These independence requirements are not mirrored in audit committee arrangements, and the CIPFA guidance is more focused on the separation of engagements of executive and scrutiny members. That guidance does not require a minimum number of independent, non-councillor members. So if we insist on audit committees to carry out the auditor panel role, and on the independence requirements to be satisfied, it seems to be the case that many local authorities would have to substantially restructure their arrangements. We encourage them to do so, but to require them to do so where audit committees are currently functioning well is perhaps against the spirit of localism.
The suggestion that the auditor panel might be a small sub-committee of an existing audit committee almost gets the best of both worlds, and may at least provide a transitional solution. However, the primary purpose of the amendment was to address the definition of independence. For this purpose, the Bill requires members of the audit panel to be independent of the authority for which the auditor is to be appointed. In the Bill independence is defined in terms of individual positions; that is, membership and relationships—so parent or grandparent. It does not cover influential business relationships, for example. The amendment is intended to open up this possibility.
It seems from the briefing note received just last week that it is intended for these other matters to be covered through a combination of regulation and guidance. This is welcome, but we should at least ask when we might see a draft of this. When will it be ready for colleagues in the Commons to consider, if not for ourselves? The Bill has spelled out in some detail the membership and personal relationships components of a definition of independence, but we have little or no information on these other components. I would be grateful to hear further from the Minister. I beg to move.
Lord Palmer of Childs Hill
My Lords, the amendment of the noble Lords, Lord McKenzie and Lord Beecham, says that an individual will be ineligible if that individual has a disqualifying interest. Yet it seems, by all the purposes of any law there is, that if you have a disqualifying interest you are by nature ineligible. I listened to the noble Lord, Lord McKenzie, and I still struggle to see why one needs to clarify and why one needs the amendment, because if one has a disqualifying interest one would be ineligible. I raised this matter at early stages of the Bill. As for who should sit on these panels, yes, the members of the local authority who are qualified may sit on the panel, and there then seems to be a great emphasis on independent members.
At this stage I declare an interest, and I probably should have done so earlier in the course of this debate. I am currently a chairman of a local authority audit committee. I do not think that this disqualifies me, and perhaps it qualifies me particularly to comment on this. One of the interesting things which I hope the Minister will address in her answer is that it is currently quite the custom in many local authorities, including my own, for a member of that local authority who is of a different political party from the ruling party to be the chair of the audit committee. That very often provides a very independent chairman or chairwoman of that committee.
I am worried that if we change that and require an independent committee chair, will that chair be as independent as an opposition chair? By the nature and appointment of audit committees, when looking for people who will be independent, particularly in the case of chairs, there is in some cases a possibility that those appointing will look among people they know who may have political sympathy with the ruling administration. The current arrangements seem to give chairs greater independence. This is probably wider than the amendment of the noble Lord, Lord McKenzie, but it seems to me to follow on from what is a disqualifying interest. I think we are giving that too much concentration, rather than the actual and real independence of the person who chairs that committee.
Lord McKenzie of Luton
I thank the Minister for her reply. The noble Lord, Lord Palmer, criticised the drafting of the amendment. I should explain that its purpose was simply to put down a mechanism which could be used to address wider issues of independence. We had in mind, specifically, significant business relationships. The Bill defines independence in terms of personal relationships; it should cover as well, for example, significant business relationships, which was the purpose of the amendment.
I was comforted by the briefing note that was produced following the meeting. It states:
“Through this combination of regulations and statutory guidance the Government intends to address other important aspects of independence for an auditor panel. We intend to work with interested parties and the sector to develop the detail of these, but as an example they might cover … the necessary skills and experience of panel members … specifying that certain persons are not independent where they have … significant commercial relationships with the authority or audit firm … the process through which independent members should be appointed … considerations around political balance, where the panel includes elected members … the conduct of members and, for example, how declarations of interest are managed on an ongoing basis”.
Each of those points, or at least some of them, were touched on by us in Committee. I took comfort from that. In a sense, that was the issue or the focus that my—clearly inappropriately drafted—amendment was seeking to address.
I reiterate where we are on the issue of audit committees or auditor panels. I think that, because there is in some instances a potential conflict between wanting to fulfil the independence requirements and the broader role of the audit committee, the best solution where they cannot be aligned is the sub-committee approach. I am not quite sure who at the meeting raised that, but the briefing note again confirms that the auditor panel could simply be a sub-committee of the audit committee. As long as that auditor panel fulfils the independence requirement, honour and justice are satisfied. That seems to us to be a helpful way forward which still encourages local authorities all to have audit committees and to move to greater independence relating thereto.
Baroness Hanham
Although I do not think that I mentioned sub-committees, I think that I made it clear that where there are audit committees, the membership could be drawn from the independent members of that committee, with possibly a local councillor. The implication is that audit committees are meant to be there and could form the basis of the auditor panel.
Lord McKenzie of Luton
My Lords, I am grateful for that and beg leave to withdraw the amendment.
Lord Wallace of Saltaire
My Lords, this group of amendments deals with amending the scope of the auditors’ work. Amendment 12, which amends Clause 19, puts into the Bill a requirement for auditors of relevant authorities, other than health service bodies, to satisfy themselves that the statement of accounts presents a true and fair view. This requirement for health bodies is already in Clause 20.
The noble Lord, Lord McKenzie, moved a similar amendment in Grand Committee. In response, we provided assurance that it is indeed the Government’s intention to require larger relevant authorities to produce statements of accounts which are “true and fair” and for local auditors to give an opinion on whether this is achieved. We explained that this is not included in the Bill, but the same outcome will be achieved through a combination of the Bill and the regulations to be made under Clause 31, mirroring the same approach that is currently used.
We have reflected on this and other related discussions since Grand Committee, and consider that there are benefits to placing an explicit requirement in the Bill for auditors to give an opinion on whether the statement of accounts is “true and fair”, rather than retaining the current approach. The key benefit, of course, is alignment within the Bill between the audit requirements for health bodies in Clause 20, and those for local government bodies in Clause 19. Furthermore, presenting accounts that are “true and fair” is an established accounting and audit concept which is also used in legislation governing the audit of central government and companies.
The amendment will make clear that the accounts of the larger relevant authorities must meet the same high standards. However, because Clause 19 applies to all non-health bodies subject to audit under this Bill, this amendment will apply the “true and fair” standard to the audit of all relevant authorities. As we said in Grand Committee, the Government do not consider it appropriate that the “true and fair” standard should apply to smaller authorities. Smaller authorities are required to ensure that their accounts “present fairly” or “properly present”, which are briefer and more proportionate forms of accounting.
It will therefore be necessary to modify these requirements for smaller bodies, which the Government intend to do through the regulations under Clause 5. The modifications will retain the audit requirements on smaller bodies so that auditors of smaller bodies are required to continue to satisfy themselves that the accounts “present fairly” or “properly present”.
We are not planning to make the other amendment to Clause 3 that the noble Lord, Lord McKenzie, moved in Grand Committee, which would require relevant authorities to prepare statements of accounts which are true and fair. We believe that the amendment to Clause 19 achieves all that is needed. The duty on auditors in Clause 19 will effectively require the authority to prepare to true and fair standards. We will confirm that requirement in the regulations that will be made under Clause 31, by requiring the chief finance officer of larger relevant authorities to certify that the accounts show as true and fair. This is similar to the approach for health service bodies—which are required to keep proper accounts showing a true and fair view—and the Companies Act which says that the directors must not approve the accounts unless they are satisfied that they give a true and fair view.
Amendments 13 to 17 amend Clause 20, which sets out the general duties of auditors of health service bodies. These are needed to provide that the auditor of the accounts of special trustees is not required to give a regularity opinion. Clinical commissioning groups—which are covered by Clause 20—are funded by Parliament to commission healthcare services. As such, they are accountable to Parliament for how they utilise these resources. Clause 20 therefore requires the auditor to give an opinion on whether the CCG has used these resources as Parliament intended and in accordance with guidance covering financial transactions.
However, this clause currently requires auditors of the accounts of special trustees to provide a regularity opinion of these accounts. Special trustees are appointed by university or teaching hospitals under Section 212 of the National Health Service Act 2006 to hold property on their behalf. There are currently only three boards of special trustees in existence: for Great Ormond Street Hospital in London, the Royal Orthopaedic Hospital and Moorfields Eye Hospital. As these bodies do not receive funds voted by Parliament, there is no need for a regularity opinion by the auditor on their accounts. The general duties of the auditor of a special trustee are otherwise the same as for a CCG.
Finally, Amendment 65 is consequential to the amendments made to Clause 20 and technical in nature. It is required to enable Clause 20 to apply to audit of the accounts of NHS trusts and the trustees of NHS trusts in the same way as it applies to special trustees. I beg to move.
Lord McKenzie of Luton
My Lords, I thank the noble Lord, Lord Wallace, for introducing these amendments. We are happy with them. I will speak first to Amendment 12. We debated this issue of accounts being required to show a “true and fair” view in Committee, as the noble Lord said. We had drawn attention to the disparity of wording in the Bill between the general duties of auditors of relevant bodies which are health service bodies and those which are not. The requirements for local authority accounts to show a true and fair view was part of the process towards full GAAP compliance in the whole of government accounts.
In response to our amendment, the Minister, the noble Baroness, Lady Hanham, reassured us that it was a requirement for larger relevant authorities to present accounts that were true and fair and this was achieved through the interaction of primary and secondary legislation—the Audit Commission Act 1998 and the Accounts and Audit (England) Regulations 2011. The Minister said in Committee:
“We intend to mirror this requirement in the regulations to be made under Clause 31”.—[Official Report, 17/7/13; col. GC 30.]
However, the Minister went on to say:
“This approach is less complex than specifying ‘true and fair’ requirements in the Bill, because further amendments would be required to disapply these provisions … for smaller authorities, which, as the Bill makes clear, are not required to ensure that their statement of accounts are true and fair”.—[Official Report, 17/7/13; GC 31.]
As I said, we support the government amendment. I was going to inquire about how that latter point would be dealt with, but the noble Lord covered that in his presentation.
Before commenting on Amendments 13 to 17, I take the opportunity to thank the Minister and the Bill team for facilitating a meeting about the differing effects of the Bill on local authorities and health service bodies, and for the helpful follow-up tabulation. That tabulation presaged the amendment in noting that a regularity of opinion was necessary in respect of clinical commissioning groups, because they were funded by Parliament to commission healthcare services. This is not the case for NHS trusts which receive income from contracts.
The Bill already disapplies the regularity requirements for NHS trusts in Schedule 13 and, under this group of amendments, does so for special trustees. The amendment specifically restores the other requirements of Clause 20(1) in paragraphs (a) to (c) for special trustees. However, it is not immediately clear how those provisions are reinstated in respect of NHS trusts—that is, those which are not special trustees. I think that the clue to that is in Amendment 65, to which the noble Lord referred, but it would be helpful to have clarification on that point. Subject to that, we are happy with the amendments.
Lord McKenzie of Luton
My Lords, we are sympathetic to my noble friend’s amendments and supportive of the intention behind them, which is to improve transparency in the new arrangements for local government. As I said in Committee, these open up a very important area of discussion.
Freedom of information legislation has played an important part in opening up government to the public. With some local authorities now outsourcing large portions of their services to firms such as Capita, questions must be asked about how to hold such firms accountable, given the significant amounts of public money that they now manage; for example, some councils will be handing over control of critical council services such as planning, licensing and environmental health to private, for-profit companies. This will make it harder for local residents to get answers and action on issues affecting them. It will also make it harder for elected councillors to monitor and scrutinise these services on behalf of local people. It will make it almost impossible to change services if councillors and residents decide that they want things done differently. My noble friend and others have mentioned the G4S and Serco revelations of last week, which have rightly caused much outrage. We have called for freedom of information legislation to be extended to the delivery of public services by the private sector in order to give greater accountability and transparency.
Lord Wallace of Saltaire
My Lords, this amendment makes a small change to paragraph 1 of Schedule 7. It slightly changes the requirements on a local auditor when issuing a public interest report. The Bill currently places a duty on local auditors to inform the auditor panel before making a public interest report. The amendment changes that duty to a duty to inform the panel,
“as soon as is reasonably practical after”
making a public interest report. The noble Lord, Lord McKenzie, moved a very similar amendment in Grand Committee. At that time we agreed with the intent of the amendment that the auditor panel should not influence the auditor’s decision as to whether to issue a public interest report. After further reflection, we consider that such an amendment would be a helpful clarification and would reduce the risk that the auditor panel could be perceived to be influencing the auditor’s judgment. I beg to move.
Lord McKenzie of Luton
My Lords, we have Amendment 20 in this group. Obviously, we support the government amendment because it is in keeping with the amendment that we moved in Committee. In Committee we sought to strengthen independent around the process of an auditor issuing a public interest report, and without sight of the government amendment we have retabled our Amendment 20. The sequence has been: in the draft Bill, a requirement to consult with the audit panel; in the current Bill, a requirement to notify the panel before the public interest report is issued; in our amendment, a requirement to notify when it is issued; and now, in the government amendment, to notify as soon as is reasonably practical. This is a progression with which we could not possibly disagree, and we thank the Government for accommodating this point.
“(d) to assist in the prevention and detection of maladministration and error.”
Lord McKenzie of Luton
My Lords, this, too, is a re-run of the amendment moved in Committee, which we consider is unresolved business. Its intent is to add to the purposes for which data matching can be used the prevention and detection of maladministration and error. At present, data matching can be used for the prevention and detection of fraud. The relevant Minister can add certain specified purposes by regulation, but only after a consultation exercise. The prevention and detection of maladministration and error is not currently one of these additional purposes. Accepting the amendment would not immediately bring this purpose within the scope of data matching but would allow it to be included in future after due process.
The Audit Commission currently undertakes data-matching exercises for the purpose of the prevention and detection of maladministration and error but does so under its audit powers. I refer again to the national duplicate registration initiative relating to GP lists and the role played by data matching. When we asked about how this would proceed in future, we did not receive an answer. Perhaps we can have an answer today. How would that initiative go forward with the Audit Commission having been abolished?
The amendment is only about preserving opportunities for tackling maladministration and error, not extending them, a matter on which I would assume we had common cause. In Committee on 26 June, the noble Lord, Lord Wallace, said:
“I understand that the Audit Commission has already run exercises looking at error rather than fraud, using its other powers and that furthermore, following the abolition of the commission, such exercises might not be possible. I am, therefore, interested in better understanding the outcome of such exercises … and … the risks and benefits of including a power such as that proposed”.—[Official Report, 26/6/13; col. GC 223.]
Will the Minister share with us the conclusions of the further deliberations and discussions with the Audit Commission on this point? I remind him that the amendment enables only the introduction of a power. Further steps would have to be taken before it could become effective.
Lord Wallace of Saltaire
My Lords, I begin by informing the House that, following careful consideration of all options, the Cabinet Office will assume responsibility for the national fraud initiative, subject to the passage of this Bill. The transfer to the Cabinet Office will allow the national fraud initiative to continue and develop its effective and important work to complement wider government activities to tackle fraud.
Officials are continuing to discuss transitional issues over the coming months to ensure a smooth handover once the legislation is in place. Perhaps it would be appropriate to remind noble Lords that I am the Lords spokesman on the Cabinet Office. I was indeed being briefed by the Cabinet Office fraud and error team some weeks ago. We are considering whether or not to draft a data-sharing and data-matching Bill for the consideration of the House. We face some very large issues at national as well as at local level, which involve issues of data privacy and identity assurance, all of which we need to discuss within the wider framework of national and international consideration of this as well as consideration by local authorities. Noble Lords may remember that in Committee I expressed some surprise at just how far local authorities and the Audit Commission had gone in this direction when the national Government were being very hesitant about how far it would be appropriate to go in some of these areas.
On this Bill, it is the Government’s intention that the data-matching clauses should, before we move towards discussing the much larger issues in the changing digital revolution that we are concerned with at present, remain consistent with the provisions in the Audit Commission Act 1998 to ensure continuity and stability on its transfer to its new home. Amendment 22 would insert a fourth potential purpose for data-matching exercises: to assist in the prevention and detection of maladministration and error. The noble Lord, Lord McKenzie, made a very persuasive case for this amendment in Committee and provided some helpful examples of the types of exercises that the Audit Commission had already run, looking at error rather than fraud, using its other powers.
My noble friend Lord Palmer of Childs Hill rightly highlighted the issue of function creep in relation to data-matching exercises. In doing so, he brought to the House’s attention the need for very careful consideration of these matters, Perhaps I should say that as a liberal in every sense, I am battered on both sides on the question of the convenience that the digital revolution provides us with but also the enormous threats that it offers to individual privacy if we are not careful about how we manage data holding, data sharing, data matching and data mining. I am sure that all noble Lords are aware of the distinctions between all of those. This is a very difficult area, and while the detection of error as well as of fraud is inherently valuable, it would allow the new owner of the national fraud initiative to continue the Audit Commission’s work. Any amplification of ministerial powers in this area therefore requires careful consideration. I assure the noble Lord that my officials are working with a range of interested parties to gain an in-depth understanding of past and potential future uses of this power. This includes representatives from the Information Commissioner’s Office, and I will be meeting the Information Commissioner before the summer on this matter.
My officials are also seeking further advice from the Audit Commission about exercises it has carried out using its other powers and the risks and benefits that such an extension might entail. I look forward to meeting the noble Lord in due course to update him on progress in this area, recognising that we are tip-toeing around the edges of one of the major issues that any future Government will be facing in the next three to five years: how we cope with the explosion of digital information available on cloud computing. I hope with those assurances that the amendment can now be withdrawn.
Lord McKenzie of Luton
My Lords, I must express some disappointment with the Minister’s response. I am grateful for the information on the transfer of the NFI to the Cabinet Office and I am reassured that it will be in the safe hands of the noble Lord as the Minister in your Lordships’ House. I share the concern about the enormity of some of the data holding, data sharing and data mining privacy issues. I took it, perhaps from what the Minister said, that there was the prospect of some broader legislation not too far down the track. However, I hang on to my point that this amendment would not extend one little bit what happens at the moment. In fact, the amendment would not even take us as far as we are today with the Audit Commission because it would need those further processes before it came into being. Whatever else is going on and whatever the scale of these other issues—I share the noble Lord’s concerns over those—I fail to see why this provision cannot be taken forward. It seems to me that there is a diminution in the Government’s task of tackling maladministration and error without these powers being available. I do not think the noble Lord explained how they would be dealt with differently once the Audit Commission goes out of existence and how this range of opportunities would be replicated under the new arrangement. I do not know whether the noble Lord would like another go at trying to convince me on that, but it would be helpful if he could. What will happen to the Audit Commission’s current audit powers to deal with maladministration and error? What will replace those just to have an equivalent process when the Audit Commission goes?
Lord Wallace of Saltaire
The Cabinet Office is looking at the issue of fraud and error in government as a whole in a wider context and would like to examine the experience of the Audit Commission further and to feed that into our wider discussion about the future of data sharing, data mining, data matching and that whole area. We do not intend to leave a long-term hole but to treat this within the broader context of what is happening. Some of us have been concerned in rather a different context with the shift from household electoral registration to individual electoral registration, where, as it happens, some of the same issues arise.
Lord McKenzie of Luton
I am grateful for that further explanation. I take the point that this will not just be left lying fallow but that there will be some active consideration of it. I still hang on to my point that the active consideration could take place without implementation by having the amendment in the Bill. If not, we will need primary legislation of some sort in the future to bring it into being as part of the data-matching process, if that is what the conclusion is on further analysis. Having the amendment in the Bill does not mean that it has to be activated, because the Minister has to go through a consultation process to do that. As there is going to be this broader look, it seems to me that the Government have reached the wrong conclusion. They could have adapted the Bill to include this amendment even if they never implemented it. I think we have probably been around this enough, unless the Minister wants to say something further.
Lord Wallace of Saltaire
I note the noble Lord’s preference for belt and braces. I have some doubts about how many pieces of legislation we have passed that have not been commenced, so perhaps I am slightly in the other area on this. However, I promise to write to the noble Lord further about how the Government intend to take this forward.
Lord McKenzie of Luton
I am grateful for that. I recognise that the Minister sees this as extremely poor, as, indeed, do the Government. I beg leave to withdraw the amendment.