Local Audit (Auditor Panel Independence) Regulations 2014

Lord McKenzie of Luton Excerpts

Monday 28th July 2014 Grand Committee

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for his very full introduction of these regulations, which we will not oppose. It seems a long time ago that we debated the issues of auditor panels when we were considering the Local Audit and Accountability Bill, as it then was. Like the Minister, I do not propose to revisit some of the debates we had at that time, and certainly not at this hour. The Minister was right to focus on a sentence in the Explanatory Memorandum about local government containing,

“an extremely complex set of interrelations and personal interests”,

and on the importance, therefore, of these regulations containing independent definitions. Some of our discussions have been around the need for audit powers for authorities that had audit committees and around how the two would work together. We certainly accept that the audit committee could be the audit panel if it satisfied the independence rules, but many audit committees would not satisfy them because it is not uncommon for the chair to be an opposition member. Perhaps the Minister can say whether there has as yet—it is, of course, early days in this area—been any evidence of audit committees being reconfigured so that they could satisfy the audit panel requirement.

We discussed at the time the prospect of the audit panel being a sub-committee of an audit committee, again on the basis that its members would satisfy the independence requirements. Nothing in these regulations would appear to prevent this, and perhaps the Minister can confirm that. It was acknowledged that the definition of “independence” was incomplete when we debated the Bill, and was still incomplete when the legislation passed to the other place. The additions made by these regulations, as has been explained, amend the definition of independence to exclude someone with commercial links to the authority or prospective auditing firm, someone who is or has been a member of a connected authority, and persons who have been members or officers of the GLA or a functional body of the GLA. We support these changes to the independence requirements.

I have some questions for the Minister, and I promise that I will not press the matter of the definition of a “close friend”, which featured previously. I am sure that the Minister will have much more comforting views on that than the Secretary of State, who we teased at the time. None of these regulations precludes individual members having to identify an interest that may crop up. What is their obligation in this regard, in the event that there may be an issue before the audit panel of which an individual member would have to recognise a potential conflict of interest, as would happen in relation to any other committee of a local authority? Can we be clear on members’ obligations to declare an interest and where that leaves them in terms of their ability to vote on the business before the audit panel at the time? What is the position for non-elected members who might find themselves in the same position? What is the position when a majority of members of the panel satisfy the independence requirements, but one or more independent panel members are absent from a meeting? Can the meeting still proceed with its business?

Taken together, these changes produce robust criteria for independence, which are to be welcomed. Whether this is sufficient to ensure that a diverse range of audit providers will ensue from the whole process, I am not sure. Whether it adds to a sense that there is an appropriate level of expertise available to audit panels and local authorities remains to be seen. However, I should like to focus on something that is as much a drafting point as anything. As the Minister said, someone cannot be treated as independent when they have been an employee or partner of a current auditing firm. The same rules apply for a prospective auditor of the authority, who is defined as,

“a person who has made a bid, which has not been declined or withdrawn, for a contract of appointment as the authority’s local auditor”.

I can see that on day one, if you have been a member or a partner of firm A, you cannot be on a particular audit panel if firm A is auditing the local authority until five years have elapsed. It is the prospective bit which is more difficult because you would not necessarily know at the point of appointment whether or not somebody is going to bid to be an auditor. I am not quite sure how that works. Indeed, I am not quite sure about the concept of somebody making a bid to be an auditor which is then not declined or withdrawn. I am a bit out of date on these things but I think that is not how the process of appointing auditors generally works. Invitations are generally issued to a range of firms. I do not necessarily oppose the point, but I would welcome an explanation of how it will work in practice. Those are the only questions I have for the Minister.

[Lord Ahmad of Wimbledon]

I thank the noble Lord, Lord McKenzie, for his broad support for these measures. I am getting into a bit of a habit of saying that to the noble Lord across the Chamber or, indeed, the Committee. He raised some pertinent points, and he will appreciate that the effects will become much clearer as these changes bed down.

The noble Lord rightly commented on audit committees. Many councils have audit committees, but, conversely, not all local authorities have them. It is up to them whether they do so and we do not require them to have audit committees. However, the Act allows bodies to use the existing audit committee as their auditor panel provided—this is the key point—that it is independently chaired and has a majority of independent members. Where the audit committee does not have a majority of independent members, the body will be able to set up a small independent panel. We know that 31% of existing council audit committees include an independent member—indeed, 15% have two or more.

The noble Lord asked about conflicts of interest as regards an auditor panel. This will be detailed in the guidance which will be issued. He also asked how these committees are configured. It is too early for me to comment on that but we know that many committees already have independent members under the existing set-up. The noble Lord asked various questions about conflicts of interest and about what happens when an independent member is not present, even though he or she is a nominated member of the committee. As he knows as well as I do, the same rules apply to any council committee—namely, if it is inquorate, a decision could not be taken. The key issue here is that of independence. If the independent member is not present, the committee would not fulfil the criteria which have been laid down, and it would be inquorate.

[Lord McKenzie of Luton]

Can I just clarify that to make sure I understand? I think that I do. The Minister is defining “quorate” for these purposes in terms of a committee having the requisite number of independent members present.

[Lord Ahmad of Wimbledon]

That is exactly what I was stating. On the more general issues about conflicts of interest, the individual member has a responsibility in this regard. In both local government and the national Parliament, where there may be a conflict of interest there is a responsibility on the individual to reflect whether that conflict of interest has occurred.

The noble Lord asked a specific question about the auditors to be appointed. That is something that I need to think through. I will write to him with the details of that point. I hope that I have dealt with the questions that he raised.